Time for Canadian investors to get back on defense
Slow growth in the U.S. should make Canadian investors think defense, says this analyst who recommends two stocks in telecommunications.
It rarely fails. Bad American news trumps good Canadian news.
Word that Canada’s economy is growing much faster than expected should have had champagne corks popping around the TSX yesterday.
No chance. A disappointing jobs report from the U.S. overwhelmed the happy story from Canada and the market fell.
It seems the only thing we can count on these days is inconsistency.
If you think defense is the best offense under these circumstances, one prominent Canadian analyst and author agrees with you.
Mr. John Stephenson was skeptical of employment figures in the U.S. even before this week’s disappointing jobs report came out.
Writing in The MoneyLetter, he foresees slow economic growth in the U.S., which is bound to serve as a drag on Canada’s improving situation.
This analyst offers his prescription for defensive investing and several good reasons for following his advice.
Historically high yields
Canadian investors should “consider shifting some of their assets from riskier securities like commodity producers to slower-growing but more defensive securities,” says Mr. Stephenson.
One group that fits this latter category very well, he says, is Canada’s cable and telecommunications industry.
“Currently, this group trades at historically high yields with the distinct possibility of stronger growth in the near term,” he adds.
The yields pushed higher as investors tried out new entrants in the wireless field and the shares of the more established firms languished. But the pendulum is swinging back.
“Cable and telco companies have been buying back their shares and acquiring companies — sure signs of their confidence in the sector,” states the analyst. He recommends two.
Looking up
Telus Corp. (TSX-T) is Canada’s second largest telecommunications firm with over 6 million wireless subscribers and 4 million wireline subscribers mostly in B.C., Alberta and eastern Quebec.
It had a disappointing year in 2009 as it spent heavily to extend its network. But things are looking up in 2010. The financial pain is in the past and the stock trades at a discount to its peers, this analyst tells us.
But the stock is moving up. Mr. Stephenson has a 12-month target of $44 and the shares trade today at $38.32, an increase of almost $3 in the short time since this article went to press. They still yield a juicy 5 per cent on the dividend of $1.90.
This analyst also likes the future of Cogeco Cable (TSX-CCA). It is the fourth largest cable company in the country, with 70 per cent of its 850,000 subscribers in Ontario and the rest in Quebec.
30 per cent of Cogeco is owned by Rogers Communications, which is “in the process of a creeping takeover of the company.”
If Rogers were to step in and acquire the remaining shares at a typical valuation for a takeover, says the analyst, the price would shoot up from its current valuation near $40 to more than $70 a share.
Cogeco trades at $41.74 today and yields 1.4 per cent on its dividend of $0.56.
Not leading a rebound
South of the border, the “official” unemployment rate may be 10 per cent, but the real rate is likely closer to 20 per cent, says Mr. Stephenson.
And there is another problem with America’s economic recovery, he adds. After a recession, three industries normally lead the way back to better times — housing, autos and banking.
These days, it would be hard to find three industries in the U.S. less capable of leading a rebound.
Worse, financial stocks now constitute 40 per cent of the S&P 500 Index, sharply up from their historical 15 per cent contribution.
The likelihood of them living up to their weight on the index is not great, says the analyst, “particularly in light of the dubious manner in which many of their products were rated and marketed.”
“America has many strengths,” he concedes, “and it will need them all now.” Increasingly, he adds, the best opportunities after the collapse are right here in Canada.
But play defensively, Mr. Stephenson repeats. After a solid upswing in the S&P/TSX, he tells his readers in The MoneyLetter “it makes sense to shift part of your investment portfolio toward high quality dividend paying stocks that have lagged the market rebound.”
Easter is upon us and in these parts it feels like summer. Have a wonderful weekend. We’re back on Monday.
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