Our investment in e.l.f. Beauty (ELF) has been disappointing; but we've been getting a wave of good ...
A Canadian View
09/16/2005 12:00 am EST
"Our heartfelt sympathies go out to the people of the Gulf Coast," says Gordon Pape. Here, the Canadian stock expert looks at the long-term impact that Katrina will have on a variety of natural resource sectors, such as energy, pipelines, coals, and forestry.
"The devastation wrought by Hurricane Katrina is terrible enough but the real horror is the aftermath. One terrible storm has suddenly revealed how vulnerable we all are. That a nation as rich and powerful as the United States seems paralyzed and helpless in the face of this escalating disaster makes the situation even more disturbing and disheartening.
"The markets reacted rather strangely as the full extent of the Katrina disaster became clear. If the New York results are a bit puzzling, the strong performance of our own S&P Toronto Stock Exchange Composite was no surprise. The Index has been strong thanks in large part to the surge in energy-related stocks and gold. The full extent of the economic impact of Katrina won’t be clear for some time.
"It’s not just the tremendous cost of rebuilding the shattered region that’s the problem. The latest spike in already-high oil prices will inevitably have strong ripple effects throughout the North American economy, the most immediate of which will likely be to put a damper on other consumer spending. When you pay $80 to fill your gas tank, the money has to come from somewhere. So the family doesn’t go to McDonald’s, or the new TV set is postponed, or you buy sausage instead of steak. Something’s got to give and my sense is that we’re heading for an economic slowdown that may be more severe than most people realize.
"Some early warning indicators out of the US suggest that an easing in the pace of economic growth was already in the works before Katrina. On the whole, I believe Canada will fare better than many other countries if there is a slowdown, in part because of growing US interest in our energy reserves. But I think we need to be cautious going forward and structure investment portfolios with care. The sectors I would focus on at this time are the following:
"Oil and gas producers: The high price of fuels has not only been a profit bonanza for the sector but has made new investments in the Alberta oil sands, tight oil extraction, and exploration more attractive. Even if the price pulls back by US$20 a barrel, which would not be impossible during an economic slowdown, the profit margins would continue to be favorable. Oil company prices are very high right now because of the Katrina factor. Canadian Oil Sands Trust (CA:COS.UN Toronto) has been very strong and I suggest watching for a temporary weakness in the sector and adding to positions at that time.
"Energy supply companies: Shares of companies that supply goods and services to the oil and gas sector should continue to do well for some time to come. Oil prices will likely retreat after crippled US production and refining capacity gets back on stream but they will remain high until at least next year. An example is Keyera Facilities Income Fund (CA:KEY.UN Toronto), which remains a buy.
"Pipelines: As the US rethinks its supply routes, the focus in Washington will increasingly be on Canada. That should mean existing pipelines will operate at or near capacity and more will be built as oil sands construction continues to ramp up. Kinder Morgan (KMI NYSE) should do well in that environment.
"Coal: We’re going to have to choose between lower energy bills and the environment. In at least some cases, lower energy costs will win out, and Kyoto be damned. If more factories are forced to close down because of high oil, natural gas, and electricity prices, industry and governments are going to look at alternatives. Coal is still a pollutant but modern technology can greatly diminish the negative effect. Fording Canadian Coal Trust (CA:FDG.UN Toronto) has had a terrific run but there’s more profit potential there.
"Uranium: The nuclear option has to be looked at again, despite the many problems associated with it and the strong anti-nuclear lobby. Cameco (CCJ NYSE) is the world’s largest uranium producer. It’s trading near its 52-week high but here again there’s a lot more potential.
"Forestry: If the demand for building materials that will result from Katrina doesn’t persuade the US to abandon the softwood lumber tariff, I don’t know what will. All it does is drive the price of reconstruction even higher. But even if the Bush administration stands firm, our forestry companies will probably be able to ship everything they can produce to the US South. Within this sector, we particularly like the outlook for Canfor (CA:CFP Toronto).
"Meanwhile, there are several sectors I would avoid, such as airlines, hotels, and US automakers. Also, be wary of the big property and casualty insurers for the time being. No one knows how great their exposure will be in the wake of Katrina, beyond saying that it will be massive. In short, there are still opportunities out there. But, as always, you need to be selective."
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