A fun thing about Halloween is the ability to immerse oneself in things that we find scary the rest of the year. We make light of what’s normally seen as spooky and turn it into a celebration.
We like to do the same with stocks now and then. Using our star ratings, fair value estimates and level of uncertainty, let’s dial it to the most spine-chilling settings. We want low Morningstar Star Ratings which indicates the stock is rated as overvalued. We want uncertainty, and we want a price/fair value ratio that’s as high as possible:
|
Name |
Fair Value Uncertainty |
||
|
1.70 |
Very High |
2 |
|
|
1.60 |
Medium |
1 |
|
|
1.56 |
Very High |
2 |
|
|
1.53 |
Medium |
1 |
Morningstar Direct Data as of October 21, 2021
The results this year include many familiar names. But let’s dig deeper into what makes these combinations of ratings so scary.
Shopify
If you’re looking for a thrill ride in Canadian stocks, Shopify (SHOP) should be a top consideration. For the 2nd year in a row, we see the homegrown e-commerce giant as the most expensive stock in our coverage universe. That said, the company’s valuation has improved significantly since last year as it succeeds in democratizing e-commerce, with its price/fair value ratio going from 2.19 to 1.70 and a star added to its Morningstar Star Rating. “We believe the firm has established a narrow moat, as switching critical e-commerce platforms has financial and operational costs for an already resource-constrained SMB. We forecast robust top-line growth benefiting from e-commerce trends over the next several years,” says equity analyst Dan Romanoff.
For the opportunities ahead, there’s an equal amount of hype and uncertainty with Shopify, however, which keeps it at the top of our scary stock list. The expectations for this company are so high that disappointment could be devastating. “Shopify has a very high fair value uncertainty rating. The company generally trades at high multiples relative to peers. While the firm 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,” adds Romanoff.
Waste Connections
Sometimes you can have a stock that isn’t surrounded by much fair value uncertainty, but its valuation is simply so sky-high that the fear of heights is enough to earn it a spot on the list. Trading at a very spooky 64% premium to our fair value estimate, Waste Connections Inc (WCN) is a waste hauler that surprised many investors with its performance through the pandemic, seeing a stock rally earlier this year. “The COVID-19 pandemic threatened to interrupt the firm's strong performance track record. However, Waste Connections persevered, shining a light on the resiliency of the firm's business model. Indeed, 2020 adjusted EBITDA and free cash flow were not far off from the firm's 2019 performance,” says sector Director Brian Bernard. With a wide and stable moat, low ESG risk and steady growth prospects ahead – not to mention a rotation to value stocks – investors have piled into Waste Connections… but they are probably paying way too much for it.
BlackBerry
If a company seemingly rising from the dead isn’t scary enough, consider a 15% surge in a single day potentially based on a single patent. On Oct 19th, an intraday rally helped the smartphone-turned-software security firm’s stock price soar to a 55% premium to our fair value estimate. “The news to initially prompt this price surge, in our view, is a new U.S. patent for BlackBerry for “trailer tracking and inventory management.” BlackBerry has a relatively large retail investor base and is a notable topic on online message boards like WallStreetBets on Reddit, which we think has inflated the effect the news had on the stock,” says analyst William Kerwin. But the recent stock price rally may have been a misunderstanding. “We don’t view the news as materially positive. BlackBerry sells an asset-tracking solution, BlackBerry Radar, and we think the patent is likely a continuation of BlackBerry’s ongoing development activities for its portfolio and one of many patents the firm possesses.”
BlackBerry has had nine straight years of revenue decline until 2020, after which we started to improve the fair value estimate. We view BlackBerry as a long-term play on the growth of autonomous and connected vehicles, and we expect its software and services revenue to grow at a compound rate of 12% over the next 10 years, but the market may be expecting much more.
Gildan Activewear
The market may also be expecting consumer sectors like textiles and famous Canadian t-shirt manufacturers to bounce back in the economic recovery. But that’s hard to do in the way Gildan (GIL)’s stock price suggests without an economic moat. “In our opinion, Gildan Activewear lacks a moat, which has put it in a difficult position as it navigates the coronavirus. While Gildan began a private-label men’s underwear contract with wide-moat Walmart in 2019, we believe this product has largely replaced Gildan-branded underwear and only partially offsets losses in other areas. We think narrow-moat Hanesbrands and Fruit of the Loom have stronger innerwear brands, allowing them to hold significant shelf space at Walmart, no-moat Target, and other critical retailers. Mass retailers reportedly account for more than 60% of total underwear sales in the United States.”
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