With almost seven months in the books in 2016, Canadian stocks are performing better than most developed countries around the world, and that has some experts suggesting our stocks are overvalued.
Add to the mix new reports from the CMHC that the housing bubble is spreading from Vancouver and Toronto to other parts of the country, the combination of overheated real estate and stock prices could be the kiss of death for domestic investors.
If you own a home, there’s not much you can do if house prices fall except sell and move into rental accommodation or find a lower-priced house. On the stock side of the equation, it might be a good time to take some profits.
The iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) currently has a P/E ratio of 16.5. You can argue whether it is or isn’t overvalued, but if a stock trades at 1.5 times the XIC’s current P/E ratio, it might have gotten ahead of itself.
These three TSX stocks all trade for 24 times earnings or higher. I’ll make a quick case why each them might be sold.
Restaurant Brands International Inc. (TSX:QSR)(NYSE:QSR)
There’s no doubt the boys from 3G Capital are making great strides with Tim Hortons and Burger King restaurants around the world. Fool contributor Nelson Smith recently pointed out that it’s growing both brands at impressive rates year over over, and once it’s managed to pay down the debt incurred to acquire Tim Hortons, the dividend will get a nice, swift kick in the pants.
I couldn’t agree more.
However, if the Canadian economy reverses direction, holding $8.5 billion in long-term debt is not going to be a comfortable feeling. Why pay 25 times 2018 earnings (analyst estimate = $2.35) when so much can happen between now and then?
Loblaw Companies Limited (TSX:L)
The grocery store chain currently trades at slightly less than 45 times its 12-month trailing earnings of $1.63 per share; you can buy Metro, Inc. (TSX:MRU) for 21 times earnings or less than half that.
Analyst estimates for 2017 on an adjusted basis put the two valuations much closer—22 times 2017 earnings for Loblaw to 18 for Metro—making it a tough decision indeed.
Sure, Metro isn’t coast to coast, but it’s a well-run business whose stock has run laps around the much larger Weston-controlled operation in recent years. Don’t be surprised if that continues in the future.
Premium Brands Holdings Corp. (TSX:PBH)
Before I became a vegetarian, I can honestly say that many of the B.C.-based company’s products were on my daily menu. Grimm’s, Piller’s, Freybe … I couldn’t get enough of their pepperoni sticks.
It’s grown significantly in recent years. In 2001 it generated EBITDA of $10 million on revenue of $146 million. In the trailing 12 months ended Q1 2016, its EBITDA was 12 times ($117 million) what it was back in 2001 on $1.5 billion in revenue. It’s no wonder its stock’s achieved an annualized total return of 11.4% over the past 15 years.
It’s a great business; that’s for certain. However, like all stocks, valuations sometimes get a little frothy.
In Premium’s case, its current P/E ratio is 32 based on a trailing 12-month earnings per share of $1.76. Analysts estimate that its fiscal 2017 EPS will be $2.14, meaning a buy at current prices would mean paying 26 times 2017 earnings. Up 49% year-to-date through July 27 and working on an eighth consecutive year of gains, it’s time to play it smart and sell.
