Skip to main content
investor newsletter

Strictly valuation-conscious investors would have underperformed badly in recent years as high growth stocks with elevated price to earnings (PE) and enterprise value to earnings before interest taxation depreciation and amortization (EV to EBITDA) multiples have led the market. Morgan Stanley consultant Michael Mauboussin explains why in a new report this month.

Mr. Mauboussin’s Valuation Multiples: What They Miss, Why They Differ, and the Link to Fundamentals is typically brilliant for the adjunct finance professor at Columbia University, former head of global financial strategies at Credit Suisse, a leader at the Sante Fe Institute and the author of what I still believe, after 20 years, is the single best short paper ever written for the average investor.

The new report argues that the most common multiples used to pick stocks no longer reflect the value creating power of a company. For Mr. Mauboussin, companies become more valuable to the extent that their investments generate a return higher than the average cost of borrowing funds over the long term. (In technical terms, ROIC (return on invested capital) exceeds WACC (weighted average cost of capital).

The problem is that the nature of corporate investment has changed dramatically. In previous generations, companies invested in plant and equipment that was listed on the balance sheet and depreciated over time through the income statement. Modern companies, on the other hand, invest in intangible assets like customer acquisition and branding, and these costs are immediately and fully subtracted from earnings. The latter practice depresses earnings relative to traditional accounting.

Modern companies are much more profitable than old economy stocks - even more so than PE ratios indicate. The paper uses Microsoft’s PE ratio at the end of 2023 as an example. Once adjusting for intangible assets, Microsoft’s PE ratio drops from 34.9 to 30.5.

Widely used stock valuation ratios have always been shorthand for complete calculations of discounted future cash flows for the life of the business. Over time, the assumptions embedded in valuations have drifted further away from accuracy to the point that in many cases they are deceptive. If this is true, then it’s a small wonder why value investors have been struggling to outperform.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Boeing Co. (BA-N) The airplane maker is facing big problems that have been weighing heavily on its share price this year. But the aerospace giant has been down before, and investors who swooped in on a bargain were rewarded. David Berman says this may be another buying opportunity.

UnitedHealth Group Inc. (UNH-N) This is the world’s largest health insurance provider by revenue, and Gordon Pape calls it one of the world’s dullest and most rewarding companies. Its share price shows an average annual growth rate of 22 per cent over the past 15 years, with an attractive dividend that has increased for more than 15 consecutive years. He thinks now is an ideal time to buy the stock if you don’t already.

The Rundown

Why aren’t Canadian dividend ETFs more popular with investors?

Canadian investors love dividends. Dividend ETFs, not so much, based on asset levels. Rob Carrick has some ideas why. (And if you haven’t seen it yet, check out his new ETF Buyers Guide installment on these income-producing investments).

Investors: Don’t do something, just stand there

Tim Shufelt on how your success as an investor may hinge on whether you can keep your composure when the market has lost its.

Lofty U.S. stocks leave investors punishing earnings disappointments

Richly valued U.S. stocks are leaving investors with little tolerance for disappointment, raising the stakes ahead of a week in which two more technology and growth giants are set to report.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Couche-Tard co-founder sells $11-million worth of shares

Ask Globe Investor

Question: I have two questions concerning the tax-free savings account. First, let’s say I have contributed a total of $90,000 to my TFSA but the account has risen in value to $120,000. If I withdraw $20,000 one year, can I contribute that $20,000 back the following year? Or am I restricted to the $7,000 annual contribution limit? Second, what happens if, instead of rising to $120,000, my TFSA falls in value to, say, $60,000, before I withdraw the $20,000?

Answer: When you make a TFSA withdrawal, the amount is added to your contribution room on Jan. 1 of the following year. Your contribution room would also include the annual limit (currently $7,000) that all TFSA holders are entitled to on Jan. 1 each year, plus any unused contribution room from previous years.

Regarding your first question, assuming you were at least 18 when the TFSA was introduced in 2009, your cumulative TFSA contribution room through 2024 would total $95,000. After subtracting the $90,000 you have already contributed, you would have $5,000 of untapped contribution room to use at any time.

If you were to withdraw $20,000 this year, that amount would be added to your contribution room on Jan. 1, 2025, plus the annual limit for that year, which we will assume remains at $7,000. So that would be $27,000 of additional contribution room, on top of the $5,000 that was carried over from previous years, for total contribution room of $32,000 as of next Jan. 1.

To answer your second question, a drop in your TFSA’s value wouldn’t change the math. You would still have $5,000 of unused contribution room, plus the $20,000 withdrawal amount that would be added back to your contribution room next year, plus the $7,000 annual limit for 2025, for a total of $32,000 – the same as in your first example.

In other words, for the purposes of calculating contribution room, it doesn’t matter whether the assets inside your TFSA go up, down or sideways. What matters is how much unused contribution room you have from previous years, the value of any withdrawals that will be added back the following year and the annual contribution limit for that year.

Still confused? The Globe and Mail has an online TFSA contribution limit calculator that will help you determine your maximum contribution. (View the calculator online at It’s important to keep detailed records of all TFSA contributions and withdrawals so that you can determine your contribution room accurately and avoid the penalty tax of 1 per cent a month on excess contributions. A final word of caution: Don’t rely on the Canada Revenue Agency’s calculation of your TFSA contribution room, as its numbers may be out of date and not reflect your recent contributions.

--John Heinzl (E-mail your questions to

What’s up in the days ahead

Jennifer Dowty speaks with TD chief economist Beata Caranci for her views on the economy, interest rates, and implications for bond and stock markets.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Compiled by Globe Investor Staff

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe