Why Invest in Canadian Stocks

Oh Canada!

Why Invest in Canadian Stocks

Two Undervalued Canadian Stocks

Canada is a great country. Yet Canada gets very little press here in the U.S. We hear about the economic slowdown in China; the recession in Europe; the Italian election; the slow economic recovery and sequestration in the U.S.; and the never-ending struggles in the Middle East and Africa. But aren’t there at least some Canadian companies that provide steady growth in the steady political and economic environment in Canada?

When I was a young boy of 14, my Mom and Dad took my three sisters and me on the vacation of a lifetime. From New England, we swung through 21 states and five Canadian provinces. We traveled by car, train, bus and ferry. Most of the trip was by train, which was great fun. The wonders that we saw were fabulous, especially riding in an open-air railcar through the Canadian Rockies.

Later in life, I was able to travel to Nova Scotia, Prince Edward Island, Montreal and Quebec City. Five years ago, I accompanied my youngest son to Vancouver, British Columbia, where he began his first year at UBC. He knew he chose the right college, when, from his third-floor dorm-room, he looked out over the Strait of Georgia to the City of Vancouver and the rugged mountains in the background.

Stephen HarperCanada is the world’s second largest country by total area. Russia is first. China and the United States are slightly smaller. Canada’s common border with the U.S. is the longest in the world. Canada’s population of 33.5 million is spread out over 10 provinces plus three territories. The capitol of Canada is Ottawa and the three largest cities are Toronto, Montreal and Vancouver. Stephen Harper (right) has been the Prime Minister since 2006.

Canada has one of the world’s highest immigration rates, with more than half the total coming from Asia, Currently, 28% of Canadians derive their heritage from Great Britain, 23% from France, and 15% from other European countries. English is the primary language spoken in 59% of
Canadian households, while French is spoken in 23%. Immigration has continued to contribute significantly to the nation’s population growth.

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 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.

Canadian map

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 wheat, which is grown 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. Canada enjoys a large surplus in its trade with the U.S.

Many interesting corporations are located in Canada. Most major Canadian corporations are located in large cities within a short distance of the border with the U.S. The fastest growing Canadian companies with 10-year revenue and earnings growth of 12% or higher are:

Gildan Activewear
Open Text
Silver Wheaton
Suncor Energy
Valeant Pharmaceutical International

There are a lot more companies worth noting: companies with slower, but dependable growth such as Canadian National Railway; as well as newer companies with exciting growth prospects such as Lululemon Athletica. In addition, Canadian companies seem to pay higher dividends, including TransAlta (7.6%), Bank of Montreal (4.6%) and Shaw Communications (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 Toronto Stock Exchange (TSX) is the major stock exchange in Canada; the New York Stock Exchange is 18 times the size of TSX in terms of dollar volume.

The Toronto Stock Exchange (TSX) Index, which is somewhat over-weighted in natural resource and bank stocks, outperformed the Standard & Poor’s 500 (S&P 500) Index from 2006 through 2010 but then faltered in 2011 and 2012. Indeed, the Toronto Stock Exchange Index 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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In my opinion, many exceptional buying opportunities now exist and investors should buy undervalued Canadian stocks. I screened my Benjamin Graham Database to find Canadian companies with rapidly growing earnings and strong balance sheets.

In my opinion, these two companies offer outstanding appreciation potential during the next one to two years.

Gildan Activewear (GIL: 36.33) 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 underwear for men and boys, and expanding geographically into Mexico and Asia. The company has steadily boosted its U.S. market share for major items, partly because of the low price of its products. In addition, Gildan is enlarging existing facilities and constructing new plants in Honduras and Asia to increase manufacturing efficiency and boost production capabilities.

Gildan, which depends on cotton to make its garments, suffered through a year of very high cotton prices, which caused expenses to soar and profits to drop. Cotton prices have retreated to previous levels during the past six months.

In May 2012, GIL acquired Anvil Holdings, a maker of high-quality T-shirts and sport shirts. The purchase is already adding to profits. In addition, Hanesbrands, a Gildan competitor, announced it will no longer sell apparel to wholesale screen-printers. Gildan already commands 65% of the market and is well-positioned to grab Hanesbrands’ share.

Sales soared 39% during the quarter ended 12/31/12, easily beating my estimate. EPS advanced from a deficit of 0.38 a year ago to a profit of 0.32. The quarterly dividend was recently increased by 20% and now provides a yield of 1.0%. GIL shares remain undervalued at 12.8 times my 12-month forward EPS estimate of 2.77 despite the probable surge in sales and earnings during the next several quarters.

Royal Bank of Canada (RY: 62.04), founded in 1864 in Toronto and also know as RBC, is the fifth largest financial institution in North America and the largest bank in Canada. RBC offers all types of banking and investment services to individuals and businesses through its 1,700 branch offices in Canada and 400 branches in 30 foreign countries.

RBC recently sold its 420 U.S. branches and its U.S. banking network to PNC for $3.5 billion. The sale will enable RBC to expand its Canadian operations and to make strategic acquisitions at home and abroad. Indeed, RBC purchased the remaining 50% ownership in RBC Dexia Investor Services for $1 billion. Royal Bank also bought part of the wealth management division of Royal Bank of Scotland. Finally, RBC will acquire the Canadian auto finance and deposit business of Ally Financial for about $3.5 billion.

Revenues increased 12% and EPS advanced 15%, beating my forecast for the quarter ended 10/31/12. Royal Bank produced solid growth across all of its Canadian banking businesses. The company will report its next quarterly results today. If you would like my summary of the new results, just reply to this email and I will send the results to you.

The healthy Canadian economy will help Royal Bank to register an EPS increase of 6% during the 12 months ending 10/31/13. At 11.8 times my EPS forecast of 5.27, RY shares are undervalued. The recently increased dividend now provides shareholders with a generous yield of 4.0%. The high yield and strong balance sheet will limit stock price erosion.

I will continue to follow Gildan Activewear, Royal Bank of Canada and other Canadian companies in my Cabot Benjamin Graham Value Letter. My April issue will focus on six new undervalued Canadian stocks. Click here to not miss my issue of the six new undervalued Canadian Stocks!


J.Royden Ward
Editor of Cabot Benjamin Graham Value Letter

P.S. 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. Find more about undervalued stocks here.

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