Every now and then the Americans really come for one of our Canadian stocks. And when they do, they jack up valuations to the moon and play havoc with our indexes.
I remember when the big US momo funds fell in love with Nortel in the late 1990s. On the way up all the Canadian institutions sold their stock to the Americans in the $20s and $30s, and then watched it rocket up to $120. On the way back down the Americans sold it aggressively, and the Canadians stupidly bought it back the whole way lower – all the way to zero.
Yet for a while Nortel was the biggest stock in the country, and if you were a Canadian equity manager who didn’t own it, you severely underperformed the index. At one point, Nortel was over 40 percent of the S&P TSX 60 index! Stop and think about the zaniness of having one stock as 40% of an index. Of course the TSX index committee realized they had a real problem on their hands and came up with an alternative cap limited index, which they released to great fanfare, right at the top! That’s right, by the time they had fixed it, Nortel was headed back down.
And it’s not like Nortel is a unique situation. Due to the fact Canada’s economy is 1/10th the size of our southern neighbour, if a company is successful in the US market, too often it produces an outsized effect versus true “Canadian” companies. Like clockwork, every few years there is a stock market darling that becomes Canada’s largest company. Too often they end up being nothing more than flashes in the pan with charts that look too similar to Nortel’s.
How about the once largest Canadian company – Ecana?
Or the other true Canadian name – Blackberry – it too was Canada’s largest stock for a brief period:
For the most part, Canada’s biggest stock is some boring bank like Royal Bank. That makes sense. It’s these other brief outliers that spring up every few years that are mind boggling.
Guess what stock captured the titled of Canadian largest stock by market capitalization this summer? Yup – you guessed it, none other than the controversial Valeant Pharmaceuticals. Here is a video screenshot from a few months ago:
And here is the chart of the market capitalization of Royal Bank versus Valeant.
Now imagine you are a Canadian equity manager this summer trying to deal with the fact that this “Bill Ackman special” was Canada’s largest stock. And what do you do now with all the controversy and the crazy volatility?
I know the Americans love to call us boring Canadians, but how many times does their country’s biggest stock get cut in half in a month?
Thanks for reading,