Blog: The Curse of the TSX
By Jeff Pollock
The Royal Bank of Canada, or RBC, is often considered the natural leader on the S&P/TSX Composite Index (“TSX”). Incorporated in 1869 just two years after Confederation, RBC has frequently commanded the top spot as the most valuable company on the TSX (this is also referred to as the largest market capitalization, which is calculated by multiplying the company’s number of shares outstanding by the stock price).
RBC currently boasts the largest market capitalization on the TSX, worth more than $200 billion.
Over the last two decades, several companies have briefly overtaken RBC to command this top position. However, each time it happens, the new leader frequently falls on hard times thereafter and sees its stock price plunge.
At its height, Nortel Networks represented 36% of the entire TSX with a market capitalization worth almost $400 billion in September 2000. Following a series of accounting scandals that misrepresented the true health of the company, it took less than two years for the stock’s value to erode down to less than $5 billion by August 2002. Over the next decade, the company declared bankruptcy and liquidated its assets. In 2009, Nortel’s stock was delisted from the TSX, costing investors many billions of dollars.
Seven years after Nortel’s fortunes peaked, Research in Motion’s market capitalization hit $67 billion and overtook RBC on October 24, 2007. The smartphone manufacturer’s stock price had surged +150% thus far in 2007 as businesspeople increasingly became attached to their new device. However, the market imploded in September 2008 with the collapse of Lehman Brothers and the stock price plunged by over 50%, which to this day has never recovered. After Apple began targeting business consumers soon after, Research in Motion became yesterday’s obsolete technology. Today, after renaming itself Blackberry, the market capitalization is under $6 billion, down over 90% from its 2007 levels.
On July 24, 2015, Valeant Pharmaceuticals surpassed RBC when its market capitalization touched $116 billion following an aggressive acquisition spree that aimed to take control of its health care rivals. Soon after, controversies that surrounding price hikes, business practices, and accounting policies led to a US Securities and Exchange Commission investigation. The stock price consequently retreated by trading south. Today, after renaming itself Bausch Health Companies, the company’s market capitalization is $12 billion, down almost 90% from its July 2015 value.
The most recent example of a company to surpass RBC was Shopify, which achieved a $121 billion market capitalization during May 2020. The COVID-19 global pandemic created a slew of new entrepreneurs. Shopify gained investor interest because of the online platform it offers to new entrepreneurs aiming to launch an online business. The stock price grew to $2,228.73 per share as of November 19, 2021. Since then, the stock has contracted exactly 50% to today’s closing price of $1,113.98. The market capitalization is currently almost $140 billion, still above its May 2020 level, but less than half its valuation just two months ago.
The commonality between these examples suggests that companies which lack a long-term strategy or attempt to mislead the public are destined to fail. The destiny of Shopify’s valuation remains under observation (we don’t own shares for clients, which trade at 100x earnings compared to RBC's 12x). We analyze high growth companies through a critical lens and pay close attention to historical performance, particularly during times of economic contraction, to provide us with guidance going forward. Our clients will remain shareholders of RBC.
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