Picking Canadian stocks a year after the crash
In an up-and-down market there is still some “up” ahead, says this Canadian analyst, who has a dozen Canadians stocks to recommend.
The stock market hit bottom a year ago this week. And it rallied.
So is this crisis finally over? Is the world economy pulling out of trouble? Are we there yet?
While everyone would love an easy answer, the fact is that we just can’t be sure yet, says one seasoned Canadian analyst.
New alarms keep going off, says Mr. Carlyle Dunbar in Investor's Digest of Canada. Like the Greek debt crisis, a classic case of ignoring risk when times are good and paying the price when they go sour.
“Still, the stock market’s trend is upward,” says this analyst. It’s not going to be straight up all the way, he cautions. But it never really is.
He gives his estimate of the market’s likely progress in the months ahead and selects the most promising Canadian stocks as he does.
He concludes with six gold stocks he believes will benefit from the revival in that precious metal.
Long term is shorter
“There are opportunities for investors, but buy-and-hold is a more difficult investment strategy because ‘long term’ has become shorter,” Mr. Dunbar says.
Basically, we are faced with an up-and-down situation for years to come, in his opinion. But we’re looking at up in the months ahead.
The S&P/TSX Composite Index made “a huge move in a short time,” from 7,600 to 12,000. That made a short-term setback almost inevitable. But the rise that began a year ago still has more upside potential, he adds.
There is a vacancy, however in what Mr. Dunbar calls “market leadership.” Canada’s dominant industries — financial, energy and materials — are just keeping pace with the market.
A few smaller fry — utilities, consumer staples and some industrials — are running a little ahead of the market. But no one sector stands out.
This means you go cherry picking among individual stocks and seek out those that have been rising faster than their peers.
High growth ceiling
Mr. Dunbar turns to the big-cap TSX 60 Index to find stocks that have price momentum. He finds four.
T-shirt maker and distributor Gildan Activewear (TSX-GIL) is one. Trading today at $26.70, it has a forward price/earnings (PE) ratio of 15.3. Taking a ratio of 20 as the measure of a fully valued stock, this indicates that Gildan still has room to grow. There’s no dividend.
George Weston Limited (TSX-WN) is not low-priced at $67.54, but the grocery giant has been moving up and has a high growth ceiling with a low P/E ratio of 8.8. It also yields over 2 per cent on its dividend of $1.44.
Number two among Canadian fertilizer firms, Agrium (TSX-AGU) trades at $70.25 and has a forward P/E ratio just over 11. It yields 0.2 per cent on its dividend of $0.11.
Bombardier Inc. (TSX-BBD.B) just picked up a big jet contract and trades at a modest $5.91. Its current P/E ratio is just 11 and it yields 1.7 per cent on its restored dividend of $0.10.
Further down in size, this analyst finds two stocks with momentum. One is Exco Technologies (TSX-XTC), which works with the die-cast and auto industries. It trades at $2.55, has a forward P/E ratio of only 11.8 and yields 3.1 per cent on its dividend of $0.08.
Charter travel specialist Transat A.T. Inc. (TSX-TRZ.A) is the other. It trades at $19.52 with a forward P/E ratio of just 9.5, but no dividend.
The other place to go searching is in metals.
Double their recent prices
“Blessed with mineral riches, Canada will benefit from the gold revival,” says Mr. Dunbar. Indeed, a few months ago, he broke with his long policy of not recommending specific portfolios.
There are six mid-sized gold stocks that he likes. Once he had picked this portfolio, he sighs, the stocks promptly slid back in the slumping January market. But each has the resources to turn into a bigger producer and possibly a dividend payer, he affirms.
The stock taking the biggest hit was Kirkland Lake Gold (TSX-KGI), possibly due to the fact that it has increased its share count considerably. But it is also bringing new ore into production from new zones on the properties of four former producers. It trades at $7.67, some $0.60 above where it was when this article went to press.
The shares that held up the best were those of Rubicon Minerals (TSX-RMX) and San Gold (TSX/V-SGR). Rubicon has held steady at $4.40. San Gold, which has discovered new high-grade gold at its Manitoba property, trades at $3.25.
There are three other stocks in this gold mini-portfolio that the analyst expects to rebound from a drop in price. Lake Shore Gold (TSX-LSG) stands at $2.85. Queenston Mining (TSX-QMI) trades at $4.59. And Wesdome Gold Mines (TSX-WDO) is at $2.17.
In fact, the six stocks taken together should rebound sharply, Mr. Dunbar tells his readers in Investor's Digest of Canada.
“The capital gains potential for each of these stocks is double their recent prices. As takeover targets, they would command large premiums.”
He does add that Lake Shore and Rubicon are less likely targets than the others, due to their large controlling shareholdings.
The bottom line is that there is no bottom line for the financial crisis yet, this analyst ruefully admits. But there’s still a pretty high growth ceiling for some rising Canadian stocks.
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