Posthaste: Five Canadian stocks Charlie Munger would have picked for Warren Buffett

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“Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices” — advice Warren Buffett said Charlie Munger gave him 

The investing world lost one of its greats this year when Charlie Munger died at the age of 99.

Munger is credited with helping Warren Buffett build Berkshire Hathaway Inc into an investment powerhouse by changing its approach from buying “cheap” stocks to buying quality stocks with protective moats at reasonable prices like Costco Wholesale Corp, Coca-Cola Co., American Express Co and Burlington North Santa Fe railway.

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But what if Munger had been Canadian, drawing from a different pool of equities? In honour of the investing legend, a team of analysts at CIBC Capital Markets set out to determine if there are “Munger-like investments under our noses, in Canada.”

They applied Munger’s “down-to-earth” investment approach to Canadian stocks by looking at long-term share performance, track record of profitability and industry dynamics.

Twenty stood out as “quality” worthy of Munger’s approval.

In the consumer and communications sectors they are Alimentation Couche-Tard Inc., North West Company Inc., Metro Inc., Dollarama Inc., Sleep Country Canada Holdings Inc, and Telus Corp.

From the financials sector are Intact Financial Corporation, Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada and Great-West Lifeco Inc.

In the industrial sector are Canada’s two railways, Canadian National Railway Co and Canadian Pacific Kansas City Ltd, Toromont Industries Ltd. and Waste Connections, Inc.

Constellation Software Inc., Enghouse Systems Limited, CGI Inc. (Class A), Stella-Jones Inc. and CCL Industries Inc. (Class B) complete the list.

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Quality, however, is not enough. Munger also needed stocks to be reasonably priced. To evaluate this the team used forward P/E relative to growth rate and dividend yield.

“When all is said and done, we believe that five Canadian stocks would have caught Munger’s eye, once the “at a reasonable price” tag was added into the equation. They are Sleep Country, Intact, Toromont, Constellation, and Stella Jones,” said the team.

All of these companies have the “protective moats” Munger valued to support their performance. Intact has scale in its favour and Toromont, one of the world’s largest Caterpillar Inc dealers, exclusively handles Cat products across Canada, said the analysts.

North America’s leading producer of pressure-treated wood, Stella Jones has a large market share in railway ties and telephone poles. Sleep Country is Canada’s leading sleep retailer whose success in developing alternative selling channels has allowed it compete against big box stores, they said.

Constellation’s edge is its reputation for buying profitable software companies with good margins and growth rates but not taking over daily operations, said the analysts.

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But the CIBC team had one more question to answer: “Would any of these companies have held a candle to Munger’s favourite stock, Costco?”

To find out they compared long-term price and return on equity (ROE) performance over 15 and 20 years for Costco and their top 20.  Several of the Canadian names, including Alimentation Couche-Tard and Constellation Software, topped the American retailer’s long-term ROE and price performance. The only drawback for some of them, CIBC said, is their smaller market cap.

“Maybe Munger would have owned some of these companies if he had been born in Orillia, Ontario rather than Omaha, Nebraska,” said the team.

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Eye-popping data this week revealed that Canada’s population grew at the fastest pace since the 1950s, gaining 1.25 million new residents so far this year.

Canada was already leading the G7 in population growth before the pandemic, but the 3.2 per cent increase is more than double the rate back then, said National Bank economist Matthieu Arseneau who brings us today’s chart.

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Population numbers help economists put other economic readings in perspective.

Though inflation has eased overall this year, shelter costs continue to rise at a pace of 5.9 per cent year over year, he said. If this component was removed, inflation would already be back at the Bank of Canada‘s two per cent target.

The central bank pushed up mortgage costs by raising interest rates, but it’s the population boom that is driving the biggest surge in rental prices in over a generation, Arseneau said.

• Today’s Data: Canadian retail sales and survey of employment, payrolls and hours for October, U.S. Real GDP, Philadelphia Fed Index, U.S. Leading Indicators for November

Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

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If you are planning to add your personal finances to your list of New Year’s resolutions read this column. Sandra Fry has some suggestions for making different choices about money in 2024 while still being a little naughty. Find out more

Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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