Dollarama Stock is down 38%! Is it time to invest in Dollarama?

In today’s post I want to write about Dollarama Inc and how investors can get caught up in high growth stocks. High growth stocks are great till they last. At some point, high growth companies hit a plateau and multiples start to collapse. This is exactly what happened to Dollarama Inc.

About Dollarama
Dollarama Inc. is a Canadian dollar store retail chain headquartered in Montreal. Since 2009, it has been Canada's largest retailer of items for four dollars or less. Dollarama has over 1200 stores and has a presence in every province of Canada; Ontario has the most stores.

Past Performance
For the past decade, Dollarama has been one of the best performing stocks on the TSX. Since 2009, they doubled the number of stores and gradually increased prices from $1 to $4 on some of the items, and their stock price increased tenfold. Investors were so excited about the growth that they were willing to pay a high multiple for the stock. How high? Up to 40 x P/E ratio. But sometimes, a high P/E ratio is not the problem. The problem is when the stock price outperforms earnings growth. That’s why it’s important to pay attention at P/E-to-growth ratio (PEG). In Dollarama’s case, the PEG ratio was too high.

Expensive growth multiple
I believe the stock had an expensive multiple to begin with. When you have a Canadian retailer with over 1,000 stores, how much growth can you expect from it? Not to mention, when prices of some items were increased to $4, consumers started to back off. A price increase from $1 to $2.25 worked very well, but not beyond that.

Domestic growth concerns
I believe with 1,200 locations in Canada, Dollarama’s store growth is pretty much capped. There are 46 Dollarama locations within 10 km radius from where I live. That’s a lot of stores.

What can we learn from Dollarama stock plunge?

When investing in growth stock:

  • Don’t mind the past growth, think of the future, is more growth physically possible
  • Calculate the PEG ratio (PEG below 1 = undervalued, PEG above 1 = overvalued)
  • Every business has different type of customers, study their behavior
  • Know the competitors
  • Compare the growth of similar businesses in other countries

From growth stock to value stock
It’s very possible that Dollarama stock will transition from growth stock to a value stock. In that case the P/E multiples will decline from 25/30 to 15/20. So anybody who wants to invest in Dollarama as a value play, look for prices between $25 and $32 per share.

Your Thoughts
Let me know what you think of Dollarama and its downtrend. Do you think it’s a buying opportunity? Do you think they will be able to grow internationally?

New Milestone and New Stock Purchase

New Milestone 
Hey guys! I finally reached a new milestone. My investment portfolio is now worth over $70,000. This is just an insane number. I never had so much money in my life. When I first started investing in 2010, I had only a $1,000 as my start-up capital. Back then I did not contribute to my portfolio on regular basis. I would put some money here and there and there was a few years when I did not put any money at all.

In 2015 I decided to get serious about investing and contribute on monthly basis. This is when my portfolio started to grow. I was adding money and reinvesting dividends every month. In four years my portfolio grew from $20,000 to $70,000. I will continue to contribute every month for as long as my financial situation allows me.

Stock Purchase - TD Bank (TSE:TD)
On March 21, 2019 I purchased 15 shares of TD Bank for $74.94 per share. TD is the second biggest bank in Canada, serving over 10 million customers through more than 1,100 branches. This purchase adds $44.40 to my yearly dividends and I’m locking in 3.9% yield. Not the highest dividend yield, but TD Bank has the highest dividend growth rate compared to other banks like RY and BNS.

Top reasons why I picked TD over other Banks:
  • Highest Dividend Growth Rate – 11.48% for the last 5 years
  • Highest Compound Annual Growth Rate (CAGR) – 7.4%
  • US exposure
  • I personally do business with TD

My Favorite Banks
TD is not the only bank that I like. I also like Royal Bank because it’s biggest bank in Canada. But since I already have Royal Bank in my portfolio, I decided to start a new position in TD. Also, the TD’s ex-dividend date is sooner than RY, so it makes more sense to buy TD this month and RY next month.

How About BNS?
Bank of Nova Scotia or Scotiabank is the third biggest bank in Canada and the most international Canadian bank. BNS is very favored by investors because it has a higher dividend yield. That’s all good. I’m just not excited about Mexico and Latin America exposure. I prefer US exposure of TD Bank instead. BNS has the lowest dividend growth rate among TD and RY. That doesn’t mean that I will never own BNS. Things always change. For the time being, I want to grow my RY and TD positions before investing in BNS.

Next Purchase
I’m thinking to add Royal Bank next month as it will perfectly align with ex-dividend date.

Your Thoughts
That's it for today's update! Let me know what you think of TD and would you buy it for the long-run. Also, let me know what is your favorite bank and why? Take care!

The Cheapest REIT in Canada

At the moment, Morguard REIT (MRT.UN.TO) is the cheapest REIT in Canada. The stock is currently trading at 52% discount to its book value. The current stock price sits at $12.45, but according to their book value calculation, the company is worth $26 per share. Now, it doesn’t mean that you should buy the stock at 12.45 and expect the stock to jump to 26. There must be a reason why this REIT is discounted so much and today I decided to dig in and see what’s going on.

About Morguard
Morguard Real Estate Investment Trust is a closed-end trust listed on the Toronto Stock Exchange (TSX) under the symbol MRT.UN. The Trust had total real estate assets of $3.0 billion as at December 31, 2018.

The mandate of the Trust is to accumulate a Canadian portfolio of high-quality real estate assets – then actively manage the portfolio to generate steady, dependable returns for Unitholders, through a stable and increasing cash flow. This offers the potential for long-term capital appreciation.

As you can see on the graph above, the company is invested in three asset types: Retail, Office, and Industrial. Their properties are spread out across six Canadian provinces. It’s a good strategy to be diversified across the coasts, unfortunately the Alberta exposure did not play in their favor.

Alberta Exposure
We all remember what happened to Alberta economy when oil prices collapsed in 2014/2015. Companies went bankrupt, people lost jobs, home prices collapsed. Morguard REIT was affected as well by losing tenants in office and retail sectors.

But we’re now in 2019, the Alberta economy is slowly stabilizing, oil prices are slowly recovering, and unemployment rate is starting to decline again. Going forward, Morguard should not be affected from economic slowdown.

Retail Exposure
Alberta is not the only reason why the stock is traded at such a huge discount. The other major concern is their exposure to Retail sector. I believe they should evenly diversify their asset class. They should get rid half of their retail portfolio and invest more in Industrial sector. Industrial sector is a lot safer than Retail, in my opinion.

Discount to Book Value
I’m speculating that the market discounts 20% of share price due to their Alberta exposure and 20% due to their Retail exposure. Once Alberta is fully recovered, Morguard should be trading back at 20% discount to book value, meaning that the stock price could be above $20 within the next three to five years. Keep in mind that prior to oil price collapse, the shares of Morguard REIT were trading at par with book value.

Having said all that, should you invest in Morguard REIT today?

Yes IF:

You like to buy stocks at huge discounts, aka “Value Investor”

You like to get paid while you wait

You believe Alberta economy will recover

You like Morguard’s assets

No IF:

You focus on growth stocks

You don’t believe in Alberta economy

You don’t like Morguard’s assets

If you don’t have three to five years of patience

Am I invested in Morguard?
Yes. I bought my first tranche of 70 shares in 2017 for $14.80 per share. I bought my second tranche of 70 shares in 2018 for $13.33 per share. I hold a total of 140 shares or MRT at an average cost of $14.06 per share. 

Am I losing money on this investment?
Yes and No. My position is underwater, but since I didn’t sell my shares, I did not lose money. My current unrealized capital loss on this investment is $225.40. However, the company paid me $190 in dividends in two years for owing the stock. So basically I break even.

Will I buy more shares of Morguard?
Yes, especially if the share price dips below $12. I will take advantage of a huge discount and it will be a great opportunity for me to lower my average cost.

Thank you for reading and if you have any questions, please comment below. Also, let me know if you follow this company and if you are invested in it? What do you think of Alberta economy and the huge discount this stock has?