How six Canadian stocks earned their way to the top
The market should still be positive in 2010, says a Canadian analyst, but investors should stick to stocks with proven earnings growth.
Where is the stock market going?
Your guess is as good as anyone else’s. After a long, uneven rally, there seems to be a dead heat between bullish and bearish forecasts.
That doesn’t mean there are no signposts we can rely on. In fact, there some key measurements that point the way to good Canadian stocks in this volatile environment.
Specifically, there is the all-important category of earnings growth, says Ms. Jennifer Dowty, a Bay Street VP and portfolio manager.
Writing in Investor's Digest of Canada, she submits a list of firms that have “stellar three-year, five-year and 10-year earnings growth.”
In short, she is judging stocks on how much money they actually earn year in and year out, rather than on some vague future promise.
And there is a particular reason for preferring proven performance as we look at the year ahead, she adds.
No repeat performance
From its low of 7.566 on March 9, 2009 the S&P/TSX Composite Index has forged ahead to this morning’s much loftier number of 12,044.
Much of this surge was led by small cap stocks — as is usually the case in such market rebounds.
Do not expect a repeat performance, says Ms. Dowty.
“Positive market momentum will continue in 2010,” she predicts. “However, there will likely be a rotation from small cap outperformance to mid- and large-cap outperformance at some point.”
Quality companies will regain their momentum and pull ahead of many of the speculative small caps that led the market in 2009. This analyst highlights six such companies, four stocks and two income trusts.
And because there are exceptions to every rule, one of them is a small cap that should keep on trucking.
Tech stocks merit attention
We’ve already had occasion to discuss Research in Motion (TSX-RIM) this week (see Daily Buy-Sell Adviser, March 29).
Yes, the competition is getting hotter and heavier in the smart phone business, but analysts appreciate this stock for several reasons. One is its domination of the global mobile communications market (especially the business market). Another is its balance sheet, with plenty of cash and no long-term debt. Yet another is its strong return on equity at 30 per cent.
The expectation is that investors will come to appreciate it as much as they have in the past. It trades at $75.90, $20 below its 52-week high.
There’s another Canadian tech stock that merits attention, says this analyst. Open Text (TSX-OTC) is the world’s largest independent maker of “enterprise content management software,” which in plainer English means helping companies to keep track of all their information.
After a few earnings disappointments during the slump, Open Text snapped back in February with a strong showing. It also made a new acquisition. It is also possible this firm will be taken over one day.
Open Text trades at $48.18, and like RIM it pays no dividend.
Not worry about your investment
Another stock on the list is about as close as you can get to a sure thing, says Ms. Dowty. “This is a stock that you can buy and then not worry about your investment.”
It is engineering firm SNC-Lavalin Group (TSX-SNC), which works in more than 100 countries around the globe. It continues to deliver strong earnings growth and recently raised its dividend again. The fundamentals are all solid, she comments.
SNC is trading today at $49.46 and it also yields 1.4 per cent on its dividend of $0.68.
One small cap investors should stick with, Ms. Dowty states, is “stellar stock” Churchill Corp. (TSX-CUQ). This construction company does most of its work in western Canada.
The company has over $3 a share in cash available for acquisitions “and its rising backlog suggests that the company’s growth momentum should continue,” says the analyst. Especially with higher GDP growth predicted for B.C. and Alberta in 2010 and 2011.
Churchill trades at $19.44 and has no dividend.
China again
Coal is the key for the first of the two income trusts in the group. China and India need lots of it for electricity and Westshore Terminals Income Fund (TSX-WTE.UN) has the largest coal-exporting facility on North America’s west coast at Roberts Bank, B.C.
This trust has a strong balance sheet and its quarterly distribution of $1.68 is yielding an eye-opening 10.2 per cent. The one question is the upcoming trust tax and how this trust plans to deal with it.
Still, the unit price has already climbed by double digits this year and there is room for more growth, this analyst tells her readers in Investor's Digest of Canada. In the meantime, it trades at $16.42.
Once again, it’s China that makes the difference for Labrador Iron Ore Royalty Fund (TSX-LIF.UN). As the world’s largest consumer of iron ore, China finds its own production constrained and its demand rising. So prices are going up in a tight market.
Labrador’s earnings came in as expected in March and the company announced a special distribution. There could be another one later in the year. The analyst voices no concerns over this trust’s conversion.
The trust is yielding almost 4 per cent on its regular distribution of $2.00 and is trading today at $54.38.
Wherever the market is headed, this analyst insists, the only companies that should earn your respect are the ones that have shown they can earn their keep.
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