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Don't Count Canada Out
03/19/2013 7:00 am EST
Falling metals prices have recently pressured returns from Canadian companies, leaving many stocks undervalued, writes J. Royden Ward from Cabot Wealth Advisory.
Canada is the world's second largest country by total area, after Russia. Since World War II, the development of Canada's manufacturing, mining, and service sectors has led to strong GDP growth, with services accounting for nearly 70% of GDP.
Tourism and financial services represent Canada's most important industries within the service sector. Manufacturing is led by transportation equipment, chemicals, minerals, processed foods, wood and paper products, fish, petroleum, and natural gas.
Many of Canada's industries depend on the country's rich energy resources, which include hydroelectric power, petroleum (including extensive oil sands), natural gas, coal, and uranium.
Canada is also the world's largest source of many minerals, including nickel, zinc, and uranium. Major mineral areas include Sudbury, Ontario (copper and nickel); Timmins, Ontario (lead, zinc, and silver); and Kimberley, British Columbia (lead, zinc, and silver). Petroleum and natural gas are found in Alberta and Saskatchewan.
We often think of Canada as being too cold for farming, but agriculture employs about 2% of the population, and provides much of the country’s agricultural needs. In addition, Canada is one of the world's leading agricultural exporters, especially in wheat, which grows in Manitoba, Saskatchewan, and Alberta. Apples and peaches are grown in abundance in Canada. More than half of the total land area is forest, and Canadian timber production ranks among the highest in the world.
Fishing is an important economic activity in Canada, too. Lobster from the Atlantic and salmon from the Pacific are the principal catches, of which 75% is exported. The once-flourishing fur industry is centered in Quebec and Ontario.
The United States is by far Canada's leading trade partner, followed by China and Mexico. Most major Canadian corporations are located in large cities within a short distance of the border with the US.
The fastest growing Canadian companies with ten-year revenue and earnings growth of 12% or higher are:
- Agrium (AGU)
- Catamaran (CTRX)
- Gildan Activewear (GIL)
- Goldcorp (GG)
- OpenText (OTC.TO)
- Silver Wheaton (SLW)
- Suncor Energy (SU)
- Valeant Pharmaceutical International (VRX)
There are a lot more companies worth noting—companies with slower, but dependable growth, such as Canadian National Railway (CNI), as well as newer companies with exciting growth prospects such as Lululemon Athletica (LULU).
In addition, many Canadian companies pay high dividends, including TransAlta (TAC) at 7.6%, Bank of Montreal (BMO) at 4.6%, and Shaw Communications (SJR) at 4.3%.
I am a value investor. I follow the teachings of Benjamin Graham, which are now utilized by many of the leading investors of today, including Warren Buffett. I look for quality companies at bargain prices. It doesn’t matter in what industry the company operates and where the company is headquartered.
Lately, Canadian companies appear clearly undervalued and offer excellent appreciation potential during the next one to three years. Companies in other countries seem less attractive at this point in time.
The TSX Index, which is somewhat overweighted in natural resource and bank stocks, outperformed the S&P 500 from 2006 through 2010, but then faltered in 2011 and 2012. Indeed, the TSX has under-performed the S&P 500 by 25% from the end of 2010 to today, because of falling metals prices.
I predict the pendulum will swing in favor of the TSX soon. Now is an excellent time to buy undervalued Canadian stocks.
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