History repeats itself for Canada’s market stars
The spectacularly bad results from BlackBerry Ltd. last week only served to remind us of the good old days. Remember those? Research in Motion — as it was formerly called — used to sell millions of the little black wonder machines every quarter. Everybody had one — even celebrities. They were so cool.
Investors were addicted to the CrackBerry, too. In 2008, RIM stock sold for $140, making it Canada’s largest company by market capitalization ($83 billion).
Ah, those were the days. Long gone now, apparently.
In its most recently reported quarter, BlackBerry sold a measly 600,000 handsets, down about 15 per cent from the same period in 2015. Clearly, its new Priv machine is not exactly flying off the shelves.
BlackBerry shares now trade at $9.74. Its market cap has fallen by nearly 95 per cent since its heyday.
That doesn’t make the company worthless, of course. CEO John Chen is trying to salvage the handset business while pushing BlackBerry as a software and services provider. He’s had some success: software and licensing revenue has doubled. Meanwhile, Chen has bravely predicted that handsets will become profitable by September. Well, good luck with that. Even if the handset business somehow survives, sales will still be dwarfed by competitors — Apple is expected to have sold about 50 million iPhones in the just-finished quarter.
The most reasonable optimistic expectation is that BlackBerry ends up being a just another software company. That’s fine, I guess, but its days as a phenomenon are long gone.
This is, of course, a familiar story — not just for the troubled smartphone company, but for Canadian market darlings in general. The history of our exchange is littered with one-time giants turned into shadows of their former selves — some walking, some not.
Still among the walking are former commodities stars Potash Corp. of Saskatchewan (now trading at less than a third of its 2008 high) and Encana Corp. (once valued at nearly $95 a share, it’s now at $7.89 as of Friday). Both were once Canada’s largest companies by market cap, but you can’t really fault management at either that much for their descents — the commodities collapse has had more than a little to do with it.
More recently, though, there’s Valeant Pharmaceuticals International Inc., which not so long ago was the biggest company on the TSX. Its shares have fallen 90 per cent in less than a year.
Reaching further back, we run into Nortel, which at one point had a market cap north of $400 billion. We old-timers will also recall BreX, which in the mid-’90s rose from penny stock to being “worth” $280 a share, before it collapsed in 1997.
Somebody could probably write a PhD thesis on the reasons for these spectacular collapses, but they are too variable — or hard to ascertain — to sum up here. As a side note, though, you might want to consider that in three of the six — Bre-X, Nortel and Valeant — the nightmares occurred amid allegations of overly creative bookkeeping or questionable business practices. In Bre-X’s case, the company imploded following the death of one of its geologists — by suicide, accident or murder, nobody knows to this day.
It’s true that Canada does not have a monopoly on hot stocks undermined by alleged malfeasance (Bre-X, Nortel, Valeant), global competition (BlackBerry) or sagging commodities prices (Potash, Encana). But you could easily make the case that for Canadian investors, these implosions occur at a higher frequency than they do in the United States, and they matter more.
One reason is that there are so few world-beaters born and raised in Canada. When one does seem to appear, we have this tendency to jump on the bandwagon. A historical example is Nortel, whose market capitalization once comprised more than a third of the value of the TSE 300. (For you youngsters, that was the precursor to the S&P/TSX composite index.) More recently, the fact that Valeant’s woes have erased tens of billions of dollars in market value shows just how much investors bought into its growth-by-acquisition story.
What can investors do about it (besides, you know, move to another country)? One obvious thing is to not buy into the hype around big hot stocks. If you own one, then that means having a clear and well defined target for returns, and then exercising the discipline to sell when you hit it.
It should be a caution for index investors, too, since Canada’s hot stocks can have such a large footprint. When one company dominates the index, you have to realize that you’re taking on singular risk, which is the opposite of diversification. You could always short the rocket stock, of course, but it might be simpler to seek diversification elsewhere.
After all, the history of fallen Canadian giants, and the fact that one company can be so darned important to the health of our index, should be a reminder of just how small the domestic equity market is (about three per cent of the global marketplace).
Yet Canadian retail investors have long demonstrated a strong domestic bias when it comes to their portfolios, and again, they are not alone in this. Americans hold about the same (majority) proportion of domestic assets in their portfolios, too. But they’re getting better diversification than we are when they do that.
The good news is this isn’t a problem Canadian investors really have to worry about now. Boring old stocks — all banks — now occupy the top three spots on the TSX market cap ranking, and there isn’t another hot stock in sight, at least not of Valeant or BlackBerry proportions. But just wait. There will be another. And a lot of investors will forget history all over again.
There are so few world-beaters born and raised in Canada. When one does seem to appear, we have this tendency to jump on the bandwagon.