As a proud Canadian, it bothers me that Canadian airlines rank last for on-time arrivals in North America. While not surprising, given most Canadians aren’t known for seeking competence from their duopolistic domestic businesses, American investors are wise to put Canadian airline stocks at the top of their list of Canadian stocks to avoid.
Fortunately, WestJet – which came last among large North American airlines for on-time performance, with 29% of scheduled flight arrivals landing more than 15 minutes late – is a privately owned company and can’t catch any flack from investors for such shoddy service. Others aren’t so lucky.
Air Canada (OTCMKTS:ACDVF) came second-last out of 10 large North American airlines, with 28% of flights being more than 15 minutes late. If you own U.S. airline stocks, you can relax; they all have on-time records of over 85%. If you want to invest in airline stocks, start with Delta Air Lines (NYSE:DAL) and go from there.
This negativity about Canadian airlines has me thinking about Canadian stocks to avoid from other industries. Here are my three large-cap picks.
Canadian Stocks to Avoid: Air Canada (ACDVF)
I mentioned Air Canada in the introduction, and it wasn’t for a good reason. Perhaps investors knew something: its stock is down more than 8% in 2023 and nearly 40% over the past five years.
The good news is that Delta, up nearly 13% in 2023, is down about the same amount over the past five years. Air Canada Bulls can look at that and think it’s not so bad.
Morningstar.ca discussed the airline’s Q3 2023 results in mid-November. It has a fair value of 15 Canadian dollars ($11.04) on Air Canada stock, well below where it’s currently trading.
It said that while Air Canada beat earnings and revenue expectations for the third quarter because of high volume and prices over the summer, its profitability can’t compare to its competitors due mainly to the airline’s inability to control its costs.
“Our average forecast operating margin for Air Canada is approximately 7%, 220 basis points below the 2015-19 average. We no longer see evidence that pandemic-related restructuring has generated labor efficiencies at Air Canada, nor do we believe that the airline or its peers will benefit from elevated yields indefinitely,” Morningstar’s Nicolas Owens wrote.
So, maybe, based on Morningstar’s observations, you might want to avoid airline stocks on both sides of the border.
Bank of Nova Scotia (BNS)
Bank of Nova Scotia (NYSE:BNS) shares dived on Nov. 28 after announcing Q4 earnings that included significant bad loan provisions. The bank increased its provision for credit losses in Q4 by 138% to 1.26 billion Canadian dollars ($930 million).
BNS shares fell more than 4% on the news. Fortunately, its stock recovered most of the single-day losses. The problem isn’t so much what happened in the fourth quarter of this year but what happens in the next few quarters that’s worrisome.
To be fair, the Bank of Nova Scotia was the first Canadian bank to report its Q4 earnings. The rest of the big banks will likely report similarly poor quarters, except perhaps Toronto-Dominion Bank (NYSE:TD). I say this because TD has so much business in the U.S., where the economy is doing considerably better.
Part of the bad loan situation has to do with higher interest rates. Over the next 18 months, more than three million Canadians have mortgages up for renewal. If interest rates don’t fall between now and then, there is going to be significant damage done to the housing sector.
While banks should be fine, growth won’t happen in 2024 and possibly beyond.
CI Financial (CIXXF)
It’s been a while since I last discussed CI Financial (OTCMKTS:CIXXF), one of Canada’s largest asset managers and last on the list of Canadian stocks to avoid. As recently as November 2021, CI’s stock traded near $25. It’s lost 56% of its value in the 24 months since.
On Nov. 9, CI reported its Q3 2023 results. They weren’t good. Revenues fell 20.6% over Q2 2023, to 616.5 million Canadian dollars ($453.4 million), with adjusted income of 132.8 million Canadian dollars ($97.7 million), down 2.4% from the second quarter.
In 2020 and 2021, CEO Kurt MacAlpine led the company on a buying binge of U.S. registered investment advisory (RIA) firms. That forced it to sell 20% of its U.S. wealth business, which has been renamed Corient, and to slow the rate of acquisitions.
Barron’s reported in early November that MacAlpine wants to ramp up the M&A machine again. He swears the company won’t pile on the debt as it did previously – its debt is still 3.3x earnings, down from 4.0x at the end of Q3 2022.
McAlpine believes CI shares are undervalued. I wouldn’t be so sure. It has way too much debt for an asset-light asset manager.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
