Happy June, Trade Off friends.
Jon Erlichman here with another edition of Trade Secrets, our weekly newsletter for The Globe and Mail’s stock picking contest, Trade Off.
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The leaderboard
We’re into the final stretch of the competition, with just a couple of weeks of trading left!
If you’ve been riding the rally for AI’s hottest names, you’re not alone. They’ve steadily been the standouts on the leaderboard.
Stepping back for a moment, we’re now more than 3½ years into a bull market that has seen the S&P 500 double.
After a run like that, it’s worth asking how much gas is left in the tank. The bulls would tell you plenty, pointing to the AI build-out, corporate earnings holding up, and the prospect of more rate cuts. The bears would tell you valuations on some of the market’s biggest names have started looking stretched. As always, the truth is probably somewhere in between.
That broader context is worth keeping in mind as you size up your portfolio for the home stretch.
This week in markets
Many investors focus on earnings when sizing up a stock.
But earnings alone don’t tell you whether a business is actually creating value for its shareholders. Every company raises money to operate, either through debt or by issuing shares, and that money costs something. The real question is whether the business earns more than its capital costs.
The metric that captures it is Return on Invested Capital, or ROIC. Warren Buffett pays close attention to it. So does David Driscoll, president of Liberty International Investment Management, who joined me on the latest episode of Ticker Take.
Driscoll first started using ROIC back in the 1990s while working at credit rating agency DBRS. He noticed that the companies generating the highest returns on invested capital also tended to be the best long-term investments.
His logic is straightforward. A business earning 15 per cent on the money it puts to work, against a cost of capital of 8 per cent, is creating real value with every dollar. That gap funds dividends, R&D, acquisitions and lower debt. On top of ROIC, Driscoll layers in a few other filters: healthy operating margins, a debt-to-cash-flow ratio of two years or less, strong cash conversion, and a clear competitive advantage.
His 10 stocks on this measure include ASML Holding ASMLF, Microsoft MSFT-Q, Comfort Systems USA FIX-N, Lam Research LRCX-Q, Heico Corp HEI-N, Franco-Nevada FNV-T, Idexx Laboratories IDXX-Q, Chubb CB-N, CME Group CME CME-Q and Graco GGG-N.
Some are tied to the AI build-out. Others have nothing to do with it. What they share is a long track record of earning more than they spend to operate, regardless of what’s in favour at the moment.
This isn’t financial advice, but for Trade Off players, it’s a worthwhile lens. Whether you’re thinking about the final days of the contest or years beyond it, businesses that consistently create value tend to be the ones that hold up best.
Are stocks too expensive?
Speaking of those stretched valuations, the “stocks are too expensive” narrative is everywhere right now. And yes, there are some names in the S&P 500 trading at eye-popping multiples.
According to Bloomberg, more than 20 stocks in the index are currently trading at over 55 times forward earnings, with Boeing BA-N, Tesla TSLA-Q and CrowdStrike CRWD-Q among them.
But those names are the exception, not the rule.
Of the 500 stocks in the index, 285 are trading below 20 times forward earnings, and 185 are below 15 times. The averages are getting pulled higher by a handful of high-flyers, most of them tied to the AI trade. The rest of the market looks a lot more reasonable than the headlines suggest.
Trade Secret tips
A few reads from The Globe and Mail worth your time this week.
ETFs continue to be a popular way to get exposure to themes, sectors and entire markets in one shot. Get an in-depth look at 500 of the largest options for Canadian investors with The Globe’s 2026 ETF Guide. It’s a great resource whether you’re an ETF pro or just getting started.
This Number Cruncher piece lines up nicely with this week’s main theme. It highlights seven U.S. companies generating strong free cash flow with balance sheets to match. The kind of names that don’t get the loudest headlines, but tend to age well in a portfolio.
And for those of you thinking about portfolio balance more broadly, here’s a piece on fixed income. It hasn’t been the easiest stretch for bond investors, but having some exposure outside of stocks still matters, well beyond the contest.
Until next week, good luck with your picks and enjoy the warmer weather.
Jon
Jon Erlichman is the founder of Ticker Take on YouTube and a contributor to BNN Bloomberg.