Our Neighbor to the North
Gildan Activewear
Silver Wheaton
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Four months ago, I wrote about the various physical attributes of Canada including its size, largest cities, cultural background and natural resources. I concluded the issue with two stock recommendations: Canadian Pacific Railway (CP) and Lululemon Athletica (LULU). In the four months since then, CP and LULU have advanced 13.3% and 13.0% respectively, compared to an increase of just 0.2% for the Standard & Poor’s 500 Index and a gain of 3.8% for the Toronto Stock Exchange Index.
I have recommended other Canadian stocks in my Cabot Benjamin Graham Value Letter that have also performed very well during the past year. Am I a genius who can easily pick winning stocks? No, but I think Canadian stocks provide an excellent opportunity for value investors who favor a fundamental sales, earnings and dividend approach.
“When the U.S. sneezes, Canada catches pneumonia” isn’t true. Certainly the Canadian economy follows in the footsteps of the U.S. economy, but the volatility of the economy in Canada seems considerably less than in the U.S. The financial crisis of two years ago was avoided because Canadian banks were not allowed to lower their lending standards, and they were required to retain their conservative investments.
During the latest quarter ended 6/30/10, Canada’s gross domestic product (GDP) increased 3.9% from a year ago. Unemployment stood at 8.1% (actually 7.2% when using U.S. measuring procedures). Canada’s GDP growth and unemployment levels are noticeably better than the U.S. and Europe. GDP growth in the U.S. increased 1.6% in the second quarter, and unemployment increased to 9.6% in August.
Canada has three stock exchanges: the Toronto Stock Exchange, the Canada National Stock Exchange and the TSX Venture Exchange. The Toronto Stock Exchange, or TSX, is the largest exchange, though the New York Stock Exchange is 18 times the size of the TSX in terms of dollar volume.
The Toronto Stock Exchange Index, which is somewhat overweighted in natural resource and bank stocks, outperformed the Standard & Poor’s 500 Index in 2006, 2007, 2008, 2009 and also thus far in 2010. Since the end of 2005, the TSX is up 8.2%, compared to a decline of 10.2% for the S&P 500. The current price to earnings (P/E) ratio for the TSX is close to 20, but gold and mining stocks tend to sell at high P/Es and distort the ratio.
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My two recommendations for today have several attributes in common. The companies are headquartered in Canada, but conduct their business worldwide and are traded on U.S. exchanges. The companies’ sales and earnings have grown very rapidly in the past and will very likely continue to grow at a rapid pace well into the future. And the companies have geared up by adding substantial capacity, cutting costs, and streamlining operations to become more efficient.
Gildan Activewear (GIL) manufactures basic apparel including T-shirts, sport shirts, socks and sweat clothes. The company sells plain garments, known as blanks, to screenprinters and decorators who add designs and logos. Gildan, based in Montreal, is the leading supplier of blank garments in the U.S., Canada, and Europe. The company is adding new products including men’s and boy’s underwear, and expanding geographically into Mexico and Asia. The company has steadily boosted its U.S. market share for major items to 63%, partly because of the low price of its products.
Gildan is experiencing stronger demand from wholesalers and from mass-market retailers, such as Walmart. Higher demand has enabled the company to boost prices recently to offset rising cotton costs. The company is building two new textile and sock manufacturing facilities in Honduras to meet growing demand.
Gildan is also building a modern distribution center in North Carolina and has begun using its biomass steam generation system designed to save energy in the company’s manufacturing facilities in the Dominican Republic. The enlarged capacity and increased efficiency will help boost sales by 17% and EPS by 24% during the next 12 months. The company has a strong balance sheet with minimal debt and lots of cash. Gildan pays no dividend. At 14.2 times our 12-month forward EPS estimate of 2.04, GIL shares are undervalued.
Silver Wheaton (SLW), based in Vancouver, purchases 15 million ounces of silver annually from mines in Mexico, Portugal, U.S.A., Peru, and Argentina. The company does not own or operate any silver mines, but purchases silver produced as a by-product of gold mining. SLW pays less than $4.00 per ounce of silver from gold miners such as GoldCorp.
Silver Wheaton owns purchase agreements on proved and probable silver reserves of about 275 million ounces. The company has aggressively contracted for additional silver sources recently. Silver Wheaton contracts are immensely profitable and will produce rapid revenue and earnings growth well into the future. Sales soared 132% and EPS increased 125% during the 12 months ended 6/30/10. We expect sales to increase 39% and EPS 57% to 0.85 during the next 12 months. SLW’s price to earnings ratio of 29.1 times our 12-month forward EPS is high by some standards, but more than fair considering Silver Wheaton’s prospects. The company pays no dividend.
I will continue to follow Gildan Activewear, Silver Wheaton, and other Canadian companies in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued Canadian stocks. I hope you won’t miss it!
Sincerely,
J. Royden Ward
For Cabot Wealth Advisory
Editor’s Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Get started today!
