You’re likely familiar with many of Canada’s top stocks. With multi-billion-dollar valuations, you’ve likely had personal experiences with many of these companies.
Due to their popularity, well-known stocks are often assigned a “popularity premium.” Essentially, you’re paying more for the stock simply because the story is more widely appreciated.
Sometimes this popularity premium can rise to dangerous levels, as is the case with one stock on this list. In other cases, the premium has propped up the valuation of stocks facing severe risks over the next decade. That’s the case with the other two stocks on this list.
If you own the following companies, rethink your investment immediately.
Even if you don’t own these stocks, it can pay off to understand the associated risks and how they may ultimately impact your portfolio.
Sell the optimism
Investors have been betting on Canadian banks for decades with great results. Most domestic bank stocks have beaten the market for 10 or 20 years straight, all while delivering big dividends and less volatility.
With its 5.8% dividend, Laurentian Bank (TSX:LB) has become a recent favourite, but one famous investor believes the good times are coming to an end.
Steve Eisman knows when financial stocks are about to plummet. In 2007, he made massive bets that the U.S. financial sector was about to collapse. Investors that followed his advice made billions of dollars in a matter of months.
This time, he’s coming for Canadian banks.
“Canada has not had a credit cycle in a few decades,” Eisman told Bloomberg. “I don’t think there’s a Canadian bank CEO that knows what a credit cycle really looks like.”
He specifically shorted Laurentian Bank, saying that there’s “20% plus” downside.
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This is getting crazy
Over the past 12 months, shares have doubled. Since 2015, they’ve tripled.
There’s no doubt that this company is a winner, but sometimes share prices accelerate faster than the underlying business.
Nearly every year since going public, Shopify has increased revenues by more than 50%. It’s become the dominant force in its industry. Unfortunately, this success has attracted some heavyweight competitors.
In March, $30 billion tech giant Square entered the market directly. Then $1 trillion behemoth Microsoft jumped into the ring. Shortly after, $500 billion Facebook dramatically increased its presence.
Shopify will continue growing, but its nose-bleed premium of 22 times forward sales no longer seems justified.
Fear this competitor
Supermarket stocks like Metro (TSX:MU) are in trouble.
“Amazon is rapidly improving its ability to unilaterally deliver packages and groceries without the help of an intermediary like United Parcel Service, Inc. or FedEx Corporation,” I wrote.
Amazon has been covertly scaling third-party, hyper-local delivery businesses across the U.S. and Canada.
Before you know it, Amazon will have its own same-day delivery network to every major metropolitan area on the continent. That combined with its Whole Foods locations will make it a dominant force in the $1 trillion North American grocery industry.
The time of the legacy grocer is coming to a close.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of Amazon, Facebook, Microsoft, Shopify, Shopify, and Square. Fool contributor Ryan Vanzo has no position in any stocks mentioned. Shopify is a recommendation of Stock Advisor Canada.