Plus: It’s time for P/E class June 19, 2023 Sign Up | Made in Canada IN THIS ISSUE 9 min read 🥘 Instapot implosion 📈 P/E performance 🥳 Birthday bash U.S. Fed chair Jerome Powell’s decision to hold interest rates steady but warn of future increases was labeled a “hawkish pause.” But it didn’t look as cool as this. | Getty Images THE WEEK IN MARKETS Left Behind Is it just us, or does it feel like Canada is getting left out? U.S. stocks rallied again last week, pushing the S&P 500 up about 15% for the year. The Canadian TSX index, meanwhile, is up a meh 2.7%. Why such a divergence? One word: tech. We included a chart in last week’s edition that showed how seven big tech companies have basically carried the S&P 500 on their shoulders this year. These companies now make up nearly 30% of the index. Canada has tech companies as well, but they’re small, composing only 6.5% of the TSX. The silver lining? Since investors are less optimistic about Canadian stocks, it would take a not-huge positive surprise (e.g., rising oil prices) to push up Canadian markets. Whether U.S. tech stocks are overpriced is also an open question (see the Big Important Story). And if there’s a shift in expectations (if tech or AI disappoints, say), diversified investors will likely feel fortunate to be holding some Canadian assets. As always, time will tell. THE WEEK IN ONE NUMBER $25M The amount Ottawa pledged last week to create Canada’s first LGBTQ+ entrepreneurship program. It’s a show of support for Pride month that could maybe even have long-term effects on the economy, considering LGBTQ-inclusive companies outperformed the broader stock market by 3.78% between 2010 and 2020. WHAT HAPPENED LAST WEEK IMPORTANT The Fed’s rate-hike streak stops at 10. After 15 months of nudging interest rates up to bring inflation down — and a day after new data showed U.S. inflation falling to 4% — Fed chair Jerome Powell basically hit snooze, holding rates steady but warning of more hikes to come. Whether you call it a skip or a hawkish pause (which sounds cooler), the move confused some people but couldn’t stop the markets. It also reminded everyone that rate hikes are a blunt tool, and there will always be debate about what comes next. One thing that won’t solve Canada’s housing crisis? Building fewer houses. Data released Thursday showed that the number of new single-family homes, apartments, and whatever you call this tiny nightmare dropped by 23% in May. Not great news, considering we already needed an estimated 3.5 million more homes than we were on pace to build. Demand didn’t experience the same collapse; in fact, home sales rose 5% last month, and prices are actually expected to start climbing again. So, just to recap: low interest rates made housing prices go up, and now higher interest rates are … making housing prices go up. Fun. INTERESTING AI makes Larry Ellison the world’s third-richest person. The CEO of software giant Oracle must’ve consulted one, because he doubled down on cloud computing (where all this AI sorcery will be done) this past year, putting Oracle in prime position to benefit from the AI boom. Monday’s earnings call revealed a 45% jump in sales last quarter, sending the stock up by 7.6% by Friday and nearly 50% on the year. The question now — for Oracle, the other companies surfing the AI wave, and any investors looking to drop in — is who will actually profit from AI. The people who built the internet infrastructure in the ’90s aren’t anywhere near as rich as the ones who made the software for it. Canada gives Asia’s largest investment bank the silent treatment. The ongoing financial split between China and the West deepened on Wednesday, at least for the moment. Ottawa halted all business with the Asia Infrastructure Investment Bank — basically China’s version of the World Bank — after its global head of communications, a Canadian citizen, resigned and called the bank “a [People’s Republic of China] instrument,” which is a pretty catchy slogan but probably won’t fit on the pens. Both the bank and China immediately denied the accusations, while the U.S. presumably got really excited to say “told you so.” The Senators got bought by some regular old businessman. Sorry, Snoop, but the new owner of Canada’s second-most-hopeless NHL team is Toronto health-care CEO Michael Andlauer, whose bid of nearly US$1 billion was accepted Tuesday. Sports franchises — even the terrible ones — have become some of the most lucrative investments available, thanks to streaming’s widening of markets, revenue sharing, and basic monopoly status. He’ll also get really good seats. FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT 🚢 Any other port in a storm: Vancouver ranked 347 out of 348 best ports in the world. Source 🌊 Professor who lived underwater for 100 days to study hyperbaric medicine emerges ½” shorter but with the cure for tallness. Source 👔 Helping people actually helped people! Study finds pandemic-era Canada Emergency Response Benefit helped Canadians get better jobs. Source 🤖 Microsoft moves its top AI talent from China to Vancouver, hopefully in exchange for the people who made Teams. Source CRASH & BURN TO THE MOON ☁️ Twitter is refusing to pay its Google Cloud bill and is almost out of free trials. Source 🇸🇪 Beyoncé concerts in Sweden buoyed the country’s inflation. Booking lots of Peter Bjorn and John shows to even things out. Source 🎵 Paul McCartney makes a new Beatles song with AI, which is so much easier to work with than John Lennon. Source 💸 Instapot’s parent company files for bankruptcy. It should only take a fraction of the time of a regular bankruptcy. Source WHO CARES WHAT’S UP THIS WEEK FedEx announces quarterly earnings (Tuesday). It’s a lot harder to make money now that we’ve all stopped ordering harmonicas, trampolines, and every other pandemic whim online. The second season of FX’s The Bear premieres (Thursday). Time to see what Carmy does with that $300K after cleaning off all the tomato sauce. DON’T BE A TLDR HOG 🐷 Like TLDR? The first five million people to click this link can share it with a friend for free. (Don't like TLDR? Afflict it on an enemy! We'll appreciate you either way.) THE BIG IMPORTANT STORY TRADING Are Tech Stocks Overpriced? Underpriced? A Guide to P/E Ratios Silicon Valley chipmaker Nvidia achieved something this year that only five other companies have done: claim a trillion-dollar market cap. In May, $NVDA surged by 24% in a day and is now up by nearly 200% on the year, the sort of bonkers rise usually reserved for penny stocks. Which Nvidia — the maker of chips that power AI — is definitely not. But the wild ride has left investors divided. Some think $NVDA is grossly overpriced based on what’s known as the price-to-earnings (or P/E) ratio — while optimists say the price is reasonable. So who’s right? Well, it depends on what you think the P/E ratio is telling you. Price v. value: Let’s start with something every investor should understand: the P/E ratio. It’s a formula that helps you judge a stock’s value — or even the value of an index, like the S&P 500 — by looking at a company’s stock price in relation to its earnings. You calculate it by dividing the price of a share of stock by the company’s earnings per share (or EPS), which you can find in its earnings reports. And the result helps you decide whether you’re getting a good deal. Think of it like this: $50 is expensive for a bologna sandwich but cheap for a fancy three-course meal. Stocks are similar. If the P/E is high, a stock is expensive for what you’re getting (earnings); if it’s low, it’s perhaps a better bargain (though which is actually better depends on a company’s growth, but we’ll get to that). The average P/E ratio varies by sector (here’s a list). High-growth tech companies tend to have higher P/Es, since they presumably will “grow” into their valuations as they (theoretically) rake in more cash, while lower-growth companies tend to have lower P/Es. (Value investors tend to like P/Es in the neighbourhood of 10; tech investors: 20 to 30 or more.) OK, so back to $NVDA: On Friday, Nvidia’s stock price was US$426, and its EPS is $1.92, so its P/E ratio is 211. But, to get a sense of $NVDA’s value, you need to look at its P/E ratio over time. In January, it was 60. Last summer: around 50. Moreover, two competitors, Intel and TSMC, have P/Es around 17. That means $NVDA is expensive compared to its past value and to its competitors, right? Here’s our best attempt at an M. Night Shyamalan twist: maybe not, actually! The tricky thing about value: The P/E ratio offers an imperfect picture of value. That’s because — and this is crucial — when you buy a stock, you buy a claim to a company’s future profits, which are not reflected in its current or trailing P/E. This is why picking stocks is tough: you have to guess what the company’s earnings will be. And no one knows the future! As a result, whether investors decide to buy a certain stock ultimately comes down to what they believe will happen in the months or years ahead. Nvidia, for instance, has said its revenue could grow by 50% from Q1 to Q2 of this year, which analysts expect could lead to a 2.5x increase in profits by the year’s end. Even if Nvidia grows a more modest 20% to 30% after that, its P/E multiple will look normal-ish, at around 40, by the beginning of 2026. Which would make the price investors paid today look pretty good. But Nvidia’s growth could slow, which would mean today’s investors overpaid. So, what about stocks generally? Right now, P/Es, both broadly and in tech, are below where they were in November 2021, before the stock downturn, yet they’re higher than they’ve been historically. But the next M. Night twist is ... well, we don’t know yet. If you think the P/Es are justified, it’s probably because you think we’re bound for an economic boom or you’re bullish on AI. If you think P/Es are too high, it’s probably because you suspect a recession lies ahead or AI is overhyped. Such uncertainty is why many long-term investors regularly contribute to broad-based index funds rather than try to time the market buying individual stocks. But, whatever you decide to do, it’s good to know what sort of deal you might be getting with the help of the P/E ratio. It’s one important (though not all-revealing) piece of data in the narrative of a stock. —Sarah Rieger THANKS FOR READING! Happy First Birthday to Us! A year ago, a brand-new newsletter magically slid into your inbox: TLDR! And, boy, what a year it has been: Nord Stream exploded, U.S. banks imploded, interest rates rose, home prices fell (a little), SBF flamed out, France nearly froze, inflation got painful, and everyone gagged on Galen Weston. The list goes on and on. We baked a cake in honour of the 1.85 million of you who open up TLDR each week and let us explain it all. In one year of TLDR, you’ve sent us 34,455 ratings, compliments, criticisms, and accidental notes that only included your name. And we hope you’ll keep them coming! It’s hard to pick favourites, but here are some of the most memorable: “I’ve been reading this out to my kids (12 and 14) at breakfast and they think the person/people who write this deserve a raise for making finance interesting. Keep up the great work!” “I have a freaking MBA, and I prefer to get my market news from you than snobby pubs. Thanks, pals!” “I’ve never had so much fun reading about boring stuff before 🤗” “Will this get any better?” (Oh, and in case you’re wondering, TLDR is internet speak for “too long; didn’t read.” A lot of people ask us that.) OTHER VERY GOOD READS 🏠 The End of Homeownership The promise of owning a home was always flawed; now it’s broken | Maclean’s 👩‍🏫 Can Microcredentials Get You a Better Job? Bootcamps try to fill in for on-the-job training | The Walrus 🔥 Untangling Misinformation About Canada’s Wildfires Fact one: it isn’t arson | The Narwhal THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Brennan Doherty (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Nikki Holmes (copy editor), Sara Black McCulloch (fact checker), Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). 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