Should You Buy DOCKS? The FAANG Stocks of the TSX

In a recent Globe & Mail article on July 26 2018 Ryan Modesto of 5i Research introduced us his Canadian version of the American FAANG stocks. He coined the stock picks with the name 'DOCKS'. 

Meet the DOCKS

Descartes Systems (DSG)

Open Text (OTEX)

Constellation Software (CSU)

Kinaxis (KXS)

Shopify (SHOP)

This is a pretty tech heavy list of Canadian only stocks except for Shopify which is an online e-commerce platform targeted at entrepreneurs. They are also classed as growth stocks and come with high expectations and a high p/e ratio.

As Ryan states in his article they have returned 290% in the last 3 years if you would have purchased an equal weight basket of all stocks.

I don't own any of the stocks as of this writing but I may add some in the not too distant future. The question is are they a good investment for you and fit into whatever investment strategy you use.

I am a dividend growth investor so these particular companies are just not a good fit for me. They pay small to NO dividends at all. Having said that you can't argue with the past returns they have generated. I also believe once you decide on your own strategy you should stick with it.These stocks would only be bought by me for my gambling portfolio if at all.

I have only been tracking the recommendations since this article was published here;

https://www.theglobeandmail.com/investing/investment-ideas/article-meet-the-docks-the-faangs-of-the-tsx/

Results So Far

I'm tracking an equal money amount invested on 26 July when this article was written for Globe subscribers. Here are the percentage gains/losses;

DSG 4%
OTEX 1.7%
CSU 11.2%
KXS 2.5%
SHOP 17.3%

This represents a collective loss of 33.3% since publication. It really matters when you buy. Never ever buy everything all at once. Demonstrate some patience and cost average in if you really must have these stocks. The other piece of advice I would have would be wait for earnings to be announced and wait for the stock to stop falling.

If I wanted to start building a DOCKS portfolio, I would buy CSU and SHOP right now. They have come off the most. CSU really disappointed by missing earnings expectation and the market punished them. Good buying opportunity in my opinion. Same with SHOP.

Like all growth stocks these 5 should come roaring back during the last quarter of 2018. I know nothing and you should know that, I'm just saying these stocks all have the potential to grow further like Facebook, Apple, Amazon, Netflix and Google.

Other Great Canadian Companies Worth A Look

Dollarama (DOL) ROIC - 39.2%

Tucows (TC) ROIC - 22.2%

Spin Master (TOY) ROIC -39.4%

Alimentation Couche-Tard (ATD.B) ROIC - 14.5%

MTY Food Group (MTY) ROIC - 12.2%

If I had the money and wanted to start a 100% Canadian Bacon Growth Portfolio, I would start with the 8 stocks I mentioned with a green ROIC.

They all have a great return on invested capital and continue to make money for investors. This is the basic metric that Warren Buffet uses to analyze stocks and a question he urges all investors to ask themselves before choosing to buy an investment. 

"Keep it simple, simply choose the company that after you invest will return the most money back to you. Does the business make money and does it return most of it back to shareholders?"

You invest to make money so choose the best companies you understand and will do that.

I am not a big tech investor type of guy so a lot of these companies I don't understand.

Return on Invested Capital (ROIC)

Descartes Systems 6.4% as of April 2018

Open Text 5.7%

Constellation Software 64.2%

Kinaxis 68%

Shopify 139%

You can see how the metrics change when using some different screens. Why buy a company that destroys shareholder value and also doesn't pay a dividend. Maybe one day Shopify will be the next Amazon I don't know. Right now based on most numbers it is a poor investment.

All of the FAANG stocks have double digit positive ROIC metrics. They are all a better buy than any of the DOCKS stocks.

According to GuruFocus Kinaxis and Shopify both earn returns that do not match up to its cost of capital. They will destroy value as they grow.

Let's take a look at BRK.B which is Warren Buffett's investment company for average investors. His ROIC is 16.7% and ROE is 12.4%. Berkshire just announced earnings today and the stock is up over $7 and 3.5%. It is now trading at just over $207 US.

"Berkshire Hathaway Inc generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases." - GuruFocus

I own none of the stocks mentioned in this post. I will be buying some as better opportunities present themselves. I will let you know when I decide to take the plunge. Damn CSU is looking good though.

In Sum

I have no idea why Ryan Modesto chose 4 techs and an online e-commerce store that is not making money. Speculation? Oh ya for sure. I don't understand how any of them work so more study is required on my part. Cute acronym so maybe that was the goal, I don't know.

I highly doubt that the DOCKS will match the returns of the FAANG stocks going forward. However, you can't argue with their past results and collective return of 290%. You would do well to sprinkle some of these great Canadian companies throughout your portfolio to help juice returns.

If you are looking at ways to save money this new book The Cashflow Cookbook can help you find some savings to then use to invest.

If you are having trouble getting your financial house in order and organized then you need to read Worry Free Money. Both of these books written for Canadians by Canadians.

What do you think about investing in DOCKS instead of FAANG? Are you a buyer or a looker?