5 scary Canadian stocks

These are the most overpriced stocks in our coverage universe today

Ruth Saldanha 31 October, 2019 | 12:25AM

Two Carved Pumpkins for Halloween

Today is Halloween, and to celebrate, we are profiling five scary stocks. These are some of the most expensive stocks in our coverage universe based on their price relative to our fair value estimates. Morningstar calculates the fair value estimate of a company based on how much cash we think the company will generate in the future. When determining the fair value estimate, Morningstar also takes into account the predictability of a company's future cash flows--the uncertainty rating. A stock with a higher uncertainty rating requires a larger margin of safety before it earns a 4- or 5-star rating.

“Firms in more economically sensitive industries, including auto manufacturers, retailers, and restaurants, generally carry higher uncertainty ratings. So, too, do companies in highly disruptive sectors such as technology and communication services,” explains Morningstar.com’s director of content, Susan Dziubinski.

Three stocks on our list today carry a medium uncertainty rating. One of them – Shopify – has a very high uncertainty rating, and earns just one star. The others have two stars each. We’ll look at two of the stocks in detail, but first, here’s the whole list:

Name Price / Fair Value Uncertainty Morningstar Rating
Shopify Inc A (SHOP) 1.83 Very High *
West Fraser Timber (WFT) 1.46 High **
Ritchie Bros Auctioneers Inc (RBA) 1.33 Medium **
Thomson Reuters Corp (TRI) 1.32 Medium **
Metro Inc (MRU) 1.31 Medium **


Shopify 
Narrow moat Shopify is the most expensive on our list, trading at close to $420 while our fair value estimate for the stock is around $224.

“We think the Shopify Fulfillment Network will be a hit for the company and help drive strong top-line growth over a decade. We also see room for penetration in payments, shipping, and capital,” points out Morningstar analyst Dan Romanoff.

He assigns Shopify a very high fair value uncertainty rating. “The company generally trades at high multiples relative to peers. While the company is expected to produce revenue growth at the high end of peers and the premium may be justified, higher absolute valuation levels offer less room for missteps and therefore carry greater inherent risks,” he says.

West Fraser Timber
Timber company West Fraser is the second most expensive stock on the list, trading at around $60 against a fair value estimate of $42. The firm carries a high uncertainty rating and has no moat.

“The majority of West Fraser's fortunes are tied to the volatile lumber and panel businesses. With fairly homogeneous capital assets used to produce wood products and unconstrained access to good timber, the lumber business does not lend itself to any form of competitive advantage,” says Charles Gross, Morningstar’s equity analyst.

Though he sees West Fraser as a relatively low-cost producer in the lumber space, lumber markets have fairly flat cost curves at midcycle levels of demand. During housing booms, when producers face stretched operating capacities and are awash in cash, they can add kilns and planers to new or existing mills within three to nine months, and tight capacity can give way to low operating rates and substantial losses.

“As Canada makes its case with the World Trade Organisation and the USMCA, we expect it to successfully argue that the perceived Canadian government subsidies are overstated. In our eyes, this appears even more likely in light of how much capacity has had to close as a result of exceptionally high log costs,” he said.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Metro Inc55.98 CAD1.34
Ritchie Bros Auctioneers Inc55.67 CAD-0.59
Shopify Inc A421.76 CAD0.50
Thomson Reuters Corp95.10 CAD0.19
West Fraser Timber Co.Ltd58.36 CAD-3.17

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca