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
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.
Canada is the world's second largest country by total
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 has been the Prime Minister since
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
, 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
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
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:
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
The Toronto Stock Exchange (
) is the major stock exchange in Canada; the New York Stock
Exchange is 18 times the size of TSX in terms of dollar
The Toronto Stock Exchange (
) 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.
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
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
Cabot Benjamin Graham Value Letter