There is no quick way out of our troubles, says this Canadian expert, but seven Canadian stocks hold the promise of a much brighter future.
“I wince every time I think of Peter Lynch’s putdown that if you spent five minutes with an economist you’d be wasting three.”
So speaks Dr. Michael Graham, who has put his economic skills to work as the head of his own investment counselling service.
Mr. Lynch, of course, was for many years a noted fund manager whose books on common-sense investing became best sellers.
No economist worth his salt would make any ironclad predictions for the future at this point, in Dr. Graham’s opinion. There have been signs of optimism, to be sure, he says in The MoneyLetter, but there are simply too many uncertainties to contend with.
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His own solution involves four “p”s — protection, preparation, potential recovery and participation.
Even in this “uncharted territory” there are certain distinct advantages in being able to invest in Canada today, this expert tells us.
With that in mind, he has chosen a “Group of Seven,” a collection of Canadian stocks that promise to paint a brighter picture for the future.
What’s right with Canada
There are many causes for concern in the economy. Any signs of recovery thus far have been induced by official spending rather than by organic growth. How well will the economy do without massive government stimulus?
And what can prevent inflation with all that money pumped into the system?
But the obstacles to recovery are well known. Dr. Graham would rather focus on what’s right with Canada than what’s wrong with the world.
He quotes World Bank president Robert Zoellick, who estimated that “lots of countries would like to trade places with Canada even though it did not escape the effects of the global economic downturn.”
And Goldman Sachs singled out Canada as “the first of the advanced economies to emerge from the recession.”
Economic power shifts
Mr. David Rosenberg, who has returned to Toronto after a spell on Wall Street during which he became a well-respected commentator, “sees us not having the fiscal deficit problems of the U.S. and being well positioned as the economic power shifts to Asia and China.”
But we’re not immune from the crisis. We cannot ignore the “still-serious recession” and the spectre of inflation.
One way to prepare for this is with fixed income securities. Dr. Graham likes A-rated bonds with five-year maturities and re-settable preferred shares issued mostly by the banks.
But that’s not quite enough to get ready for the future.
The Group of Seven
Dr. Graham has four good reasons for choosing his seven stocks.
“These include protection against returning inflation, the growing ascendancy of the BRIC [Brazil, Russia, India, China] countries, the resumption of a bull market in commodities as China leads the way out of global recession and the U.S. dollar continues its long-term decline, and Canada’s favourable post-recession, pre-inflation positioning.”
Remember, these are stocks for the future. They are not all doing brilliantly now, and may not do so in the weeks ahead. Be patient.
The first is not doing especially well just now. Brookfield Asset Management (TSX-BAM.A) — once known as Brascan — has lots of commercial real estate and is adding to its portfolio of hydro generation and infrastructure assets. It has ample cash reserves and “an enviable record in buying distressed properties at times like now,” says Dr. Graham. At $19.33 it is cheap, well below its 52-week high.
No company is better positioned than EnCana Corp. (TSX-ECA) from this expert’s point of view. Natural gas prices are nothing to write home about, but astute hedging has kept EnCana’s revenues up. And natural gas has a great long-term future. At around $53, the stock is undervalued.
Sherritt International Corp. (TSX-S) is a commodity producer in nickel, cobalt, oil and coal and has important properties in Cuba and Madagascar. As the U.S. inches closer to Cuba, Sherritt could benefit enormously. Its share price of $4.90 may seem sluggish, but it’s up from its spring lows.
Safest of the group
Canada’s biggest mining firm, Teck Resources Ltd. (TSX-TCK.B), has had a rocky road. Since Dr. Graham’s article appeared, Teck has wriggled out from under some of its debt by selling China Investment Corp. a 17 per cent stake in the company. As copper prices rise in the future, so will Teck, promises this author. It’s trading at around $19.
The safest of this group of stocks is undoubtedly TransCanada Corp. (TSX-TRP) with its pipeline revenues and new projects on the go. Chief among these is the Alaska natural gas pipeline in partnership with Exxon Mobil. Still, at $31, it’s undervalued.
The shares of Viterra Inc. (TSX-VT) haven’t done too badly of late, although at $9.20 they’re still down from their highs. The former Saskatchewan Wheat Pool is Canada’s biggest grain handler and agri-business and the pending acquisition of Australia’s ABB Grain will open up new Asian markets for the company.
Molybdenum was a hot metal during the commodity boom (it’s very valuable in the steel industry) and will be again, says Dr. Graham. And Roca Mines (TSX-ROK) has lots of it in its high-grade Max mine, which has cut back on production, but can ramp up when demand does. It is currently crawling along at $0.34, the cheapest buy in the Group of Seven.
It is time, Dr. Graham tells his readers in The MoneyLetter, to weight risks against potential rewards, “and to be substantially — if prudently — invested.”
In short, protection and preparation beat predictions any time.
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reviewed by Moishe Alexander, CFC canadian funding corp CEO