It has been a tough month for TSX stocks. In the past month, the TSX Index has fallen 5.44%, and year-to-date returns are down 1.4%. Interest rates are rising, putting pressure on many of Canada’s large dividend stocks. However, rising rates also pressure high-valuation growth stocks like Shopify (TSX:SHOP).
Shopify stock has fallen faster than the TSX
Shopify stock has fallen faster than the index over the past month. It is down 8.7%. Now, the stock is up 49% in the year, but there is some concern that there is more downside in the stock.
Firstly, Shopify is an extremely expensive stock. It trades for 8.7 times sales and 73 times earnings. It trades with a market cap-to-free cash flow ratio of 82 times! If you do the inverse of that ratio, it equals a 1.2% free cash flow yield. That’s not a very large, tangible return investors get on the price you pay today.
Secondly, that valuation is questionable when considering that its revenue growth is set to decline to the mid-20% range, down from +50% annual growth in the prior five years. Don’t get me wrong; that is an impressive rate, but does it justify the large multiple an investor needs to pay today?
A challenging macro environment could slow Shopify’s growth
If we are entering a challenging economic cycle, there is concern that Shopify customers could see declining growth. As a result, total volumes through its network could slow faster than many anticipate.
With interest rates higher, consumer spending could weaken, and so could small business spending/investing. That could slow Shopify’s growth trajectory. A decline in growth would likely force a re-rating in the value of the stock.
While Shopify has been a great Canadian growth darling, there are some risks. As a result, it may be best to stay on the sidelines until the valuation becomes more attractive.
Canadian Natural Resources is an alternative for tangible cash returns
If you are looking for a boring dividend stock that does pay some tangible rewards today, one may want to consider Canadian Natural Resources (TSX:CNQ).
Canadian Natural is Canada’s largest and one of its most profitable energy companies. Yet with a price-to-earnings ratio of 9.9 times and a price-to-free cash flow ratio of 9.5, it is still reasonably priced. It trades with a free cash flow yield of 10.5%. It only yields a dividend of around 4% today, which suggests there is still plenty of room for its dividend to grow.
Canadian Natural has 30 years of energy reserves that it can unlock at very little cost. Today, the market hardly factors these energy reserves into the stock’s valuation.
Canadian Natural has delivered 23 years of consecutive dividend growth of over 20%. It is an exceptional record for what is considered a cyclical energy stock.
With oil prices rebounding to the +US$80-per-barrel range, CNQ should enjoy a strong windfall of cash. It is using this cash to drastically de-lever, buy back stock, and pay ever-growing dividends and special dividends. If you don’t mind the volatility of energy stocks, this can be a good place to earn a steady income and value return.
Over the past three years, Canadian Natural has actually outperformed Shopify stock with a 358% total return versus a -49% return for Shopify. In the long term, Shopify stock has outperformed. However, one might worry if its best days are behind it.
