A Good Time to Revisit Canada

08/18/2011 12:06 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

All the selling in the US didn’t stop at the Canadian border, but Canada’s prospects are very bright, and now is a good time to scoop up great yields at bargain prices, observes Roger Conrad of Canadian Edge.

The Canadian dollar is no longer just a petrocurrency, doomed to bust and boom along with volatile oil prices.

Rather, the loonie is increasingly being viewed globally as a safe haven, backed by one of the world’s strongest banking systems, a federal government with at least nearly balanced books, and a generally healthy economy that’s by no means overleveraged.

It’s a bit early to declare full decoupling. But, for the most part, the Canadian dollar has held its own while the world’s economic anxiety has grown, remaining comfortably above parity with the US dollar.

Meanwhile, oil prices, as measured by near-term NYMEX (New York Mercantile Exchange) Division light sweet crude contracts, have skidded all the way down into the mid-80s.

That’s not something that has happened often, if ever. And the loonie’s resilience means Canadian stocks are much more likely to avoid the kind of double-whammy they suffered during the 2008-09 crash, when US investors’ stock-market losses were magnified by currency losses.

Second, such low benchmark bond rates make a Canadian credit crunch less likely than ever. In fact, Canadian companies are likely to enjoy low borrowing costs for the rest of the year, even if the Bank of Canada does lift interest rates, as many expect.

Low interest rates have emerged as a major catalyst for Canadian companies’ growth. That’s confirmed by the robust expansion of companies reporting second-quarter results.

And several—including Student Transportation (Toronto: STB, OTC: STUXF)—have been able to use the enhanced purchasing power of the loonie as well to expand abroad, particularly in the much larger US market.

Such strategies do carry risks, not the least of which is managing further appreciation by the loonie.

The agreement that raised the federal debt limit almost certainly did head off a market panic. But the US still faces a yawning government deficit, coupled with a stubbornly high unemployment rate—and no agreement among policymakers about how to deal with either, other than relentless finger-pointing.

The more a Canadian company invests here, the more vulnerable it is to this country’s problems. On the other hand, companies like Student Transportation are also getting high-quality assets cheap.

And while die-hard pessimists and rabid financial television watchers may think otherwise, history shows the US will bounce back eventually—richly rewarding those who patiently place their bets.

Of course, at this point in time most investors are focusing on preservation rather than growth. That’s understandable with the US economy weak, the European sovereign debt crisis threatening to engulf Italy and Spain, and even emerging Asia not reporting particularly good news lately.

Moreover, when macro conditions worsen, some stocks blow up. That, unfortunately, has happened to Yellow Media Inc (Toronto: YLO, OTC: YLWPF), and there are plenty of candidates to follow it into the mire.

Each fall will cast aspersions on other companies deemed similar, igniting more selling and pushing prices lower, even for stocks of companies that are thriving as businesses.

That’s what always happens when stocks sell off, and we’re definitely in the middle of a slide, with the S&P 500 off some 170 points (12.4 percent) from the post-2008 crash high set back in May. [The S&P has fallen hard again today, driving the aggregate loss past 200 points as of late morning—Editor.]

Yellow’s collapse is a clear warning that we’re going to have to vigilant, and willing to prune stocks whose underlying businesses are weakening.

The most important lesson from the 2008 crash is this: So long as companies stay on track as businesses, they will recover from even the most severe stock-market losses, and then some. That means those who buy when others are bailing out are in effect locking in hefty capital gains as well as high income streams.

Invest carefully, but by all means do invest as bargains emerge. You may not get a better crack at many of these stocks.

So, two recommendations: I’m selling Yellow Media and replacing it with Student Transportation. And I’m also raising Colabor Group (Toronto: GCL, OTC: COLFF) from hold to buy.

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