Two Canadian stocks that are worth waiting for
Looking closely at the laggards in its Growth Portfolio, this U.S. advisory still sees lots of hope for two Canadians stocks and two from the U.S.
“I can’t bear to look.”
At the height of the market crisis of 2008, many people wouldn’t even open their financial statements.
But that can happen with stocks even in good times. The winners get a big smile, while the losers barely get a glance. Maybe they’ll just go away.
But it’s far more useful to examine those laggards, says Mr. Elliott H. Gue, the editor of Personal Finance. He turns to the advisory’s Growth Portfolio to do just that.
Two of the low-flying stocks he’s critiquing happen to be Canadian. Two U.S. firms also get the once-over.
But of course we’ll start with the two Canadian resource stocks Mr. Gue is considering. They have not been sent packing.
One big mistake
The editor begins by reminding his readers that this advisory is an investment newsletter, not a trading service. “Our goal is to offer superior returns on a 12-month basis.”
The Growth Portfolio outpaced the broader averages last year, he says, and he expects the same in 2010. So this is just the time to sit down and look at the stocks that fell off the pace. And be realistic, he insists.
“One of the biggest mistakes investors make is holding stocks that aren’t working, in the misguided notion they might turn for the better, while selling winners for fear of giving back profits.”
Hold your course as long as you see the prospect of real progress ahead. But weed the laggards out ruthlessly if they don’t measure up.
A flat spot market
The two Canadian stragglers are big companies. Cameco Corp. (TSX-CCO; NYSE-CCJ) is the world’s largest uranium miner. Goldcorp (TSX-G; NYSE-GG) is one of the largest gold miners in the world.
The Cameco story begins with one important fact. The uranium spot price market is among “the least liquid in the world,” explains Mr. Gue.
More than 80 per cent of uranium used in nuclear plants is sold on long-term contracts, so the spot market only works as a signal of near-term supply and demand.
Today, the price is $41.75 a pound, well behind its 2006 highs, but “10 times the depressed prices that prevailed in the late 1990s.” Basically, it’s flat, even though other commodities have risen in the past 12 months.
This doesn’t help Cameco’s share price. Nor is the immediate outlook brilliant. Major utilities around the world have contracted most of their supplies for the next year or so, so they won’t be buying at spot prices.
At the same time, the U.S. Department of Energy is selling uranium stockpiles, which has pushed prices down even further.
Right now you might be thinking, so what’s the attraction? Isn’t it time to nuke this stock?
No, says Mr. Gue. The Department of Energy won’t be selling uranium after 2010. It doesn’t want to destabilize prices. What’s more, there are more than 50 new nuclear reactors being constructed around the world.
Plus long-term supply deals for a number of existing reactors are winding down. In fact, Cameco is signing long-term deals for $65 to $75 a pound, “a sign that the market expects a tighter supply.”
Even at current prices, Cameco is a low-cost producer that can sell uranium profitably, says the editor. Things should get better in the second half of the year. Buy under $35, he says. Cameco trades at $24.79 and yields 1.1 per cent on its dividend of $0.28.
Gold is money
Goldcorp is our “favorite gold miner,” says this editor. It pulled back slightly in the first quarter, essentially following the price of gold.
“But gold and shares of gold-mining firms should remain core holdings for all investors. Gold is a hedge against inflation, deflation, financial instability, credit instability, and a weak U.S. dollar,” says Mr. Gue. “In short, gold is money.”
And there are plenty of things that could send gold higher, he adds, such as a decision by China to diversify its reserve holdings away from the U.S. dollar and into gold. It has only 1.5 per cent in gold right now.
Don’t give up the glitter, says the editor. Buy Goldcorp under $45. It is trading at $43.47 and yields 0.4 per cent on its 18-cent dividend.
Outstanding results
The two U.S. laggards are also in the resource line of work. EOG Resources (NYSE-EOG) is an oil and gas producer. Its biggest drawback is that it has taken a fall after a big run-up.
EOG topped the S&P 500 by 10 per cent in the final months of 2009. Then it slipped by 4.3 per cent in the first quarter.
But it’s been roaring back up again, as management discusses some new oilfields — but guardedly, since it is afraid of driving up the price of leasing land. Meanwhile, it has confirmed “outstanding results” from other fields like the Niobrara oil project in Wyoming and Colorado.
Buy this stock up to $115, says the editor. It has tumbled to $108.19 today and yields 0.5 per cent on its $0.62 dividend.
Peabody Energy (NYSE-BTU) is the biggest private sector coal producer in the world. It is also the only U.S. miner with a major presence in coal-rich Australia.
Peabody’s mines in the western U.S. also lend themselves to safer and easier production than many mines in the east, which makes them an even more attractive source after the recent tragedy in West Virginia.
Peabody was a “real standout” for the Growth Portfolio in 2009, says Mr. Gue, rallying 100 per cent. It has since suffered from profit taking, as high-rising stocks will, but that’s no reason to dump it. Buy up to $53.
The stock is at $43.64 and yields 0.6 per cent on the 28-cent dividend.
Portfolio improvement starts at the bottom, in this editor’s opinion. Don’t get carried away about what’s happened in a few weeks or months.
If your losers are really winners with a brighter future, don’t throw them out. If that means U.S. investors should keep hanging on to Canadian stocks, so much the better.
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