Four cheers for Canada — and the loonie
Forget the ‘Halloween tax’ say these U.S. experts on the Canadian market — Canada is still a great place to invest. They have five buys.
The famous Halloween tax of 2006 didn’t just scare Canadians. It had a ghoulish effect on many Americans as well.
American investors had taken a shine to Canada’s income trusts, so when Finance Minister Jim Flaherty stood up in Parliament and lowered the tax boom on trusts, he caused an international incident of sorts.
Get over it, says one of America’s foremost experts on Canadian investments. Canada is still a very hospitable place for investors.
Mr. Roger S. Conrad still believes the so-called Tax Fairness Plan was a policy mistake. But it shouldn’t keep U.S. investors from sending their investment dollars north for some profitable opportunities.
As we never tire of saying, the more U.S. money flows into Canadian investments, the better for Canadian shareholders (and there is still lots of money looking for investments in the good old U.S. of A).
Mr. Conrad tells his story to the readers of Personal Finance. He and Mr. David Dittman (his associate editor on a separate advisory called Canadian Edge) assess the virtues of the Canadian market.
Then they name four buys — two income trusts and two big Canadian stocks — and add one more recommendation, the loonie itself.
Don’t blame us
Mr. Conrad and Mr. Dittman entitle their article “Don’t Blame Canada.” What Canada should not be blamed for, they specify, is the kind of financial indiscipline that has run riot around the world.
There was a great deal of initial fear that the 2006 trust tax investments would sideline some very desirable investments, they say. But “a little cold-eyed scrutiny” tells us otherwise.
“As the passage of two and a half years has shown, the Halloween Massacre was no ‘death knell’ for trusts, nor was it sufficient grounds to abandon Canada.” And Canada is in pretty good financial shape, they add.
“The credit crisis and resulting recession have revealed the Canadian government’s fiscal discipline and the country’s conservative banking system to be a solid foundation for high-dividend paying companies and growth companies as well.”
Now let’s get down to what’s specifically good about Canada.
Cash flow cow
Two income trusts lead the way. Atlantic Power (TSX-ATP.UN; OTC-ATPWF) is this advisory’s favourite. It’s a veritable cash flow cow.
A Canadian firm with most of its assets in U.S. markets, Atlantic secures its revenue with long-term contracts. Debt is amortized over the life of existing contracts. “And management hedges out commodity price and currency risk,” add the authors.
Its power plants run on natural gas, except the Chambers plant in New Jersey, which runs on coal due to the state’s cap on carbon dioxide costs. Last month, Atlantic invested $3 million in a biomass developer that opens up a future of renewable growth.
Atlantic shares, the authors explain, are income participating securities, combining equity with debt interest. The monthly distribution is paid in Canadian dollars, and the 60 per cent debt interest portion is not covered by the Canadian withholding tax, a boon to U.S. investors. Buy under US$8, they say. Atlantic trades at $7.42 in New York, $8.69 Canadian on the TSX. The annual distribution adds up to $1.09.
Every farm needs them
AgGrowth Income Fund (TSX-AFN.UN; OTC-AGGRF) will convert back to corporate status in June. But it will continue to pay its monthly distribution of $0.17 a share just as it did as a trust.
Ag Growth is a solid defensive investment, these authors contend. It makes grain handling, conditioning and storage equipment — augers, belt conveyers, drying and aeration equipment, storage bins and so on.
Every farm needs them, “and their low prices relative to other capital equipment such as tractors and combines mean AgGrowth’s revenue stream is safe.”
The company’s commitment to its annual dividend of $2.04 shows faith in the strength of agriculture and in AgGrowth’s own future, say the authors. Buy up to US$25. It trades at US$24.01, and $27.91 on the TSX.
They need no introduction
The following two stocks need no introduction for Canucks. The first is Potash Corp of Saskatchewan (TSX/NYSE-POT). This stock’s fall back to earth in the past year gives growth investors a chance to buy in at a third of its peak 2008 price.
Ignore the last quarter’s lower profits, say the authors. The supply and demand dynamic for global grain stocks is in Potash’s favour. Buy it under US$100, they advise. In fact, it has climbed back above that level, at $104 — $121 on the TSX.
The other big name is BlackBerry maker Research in Motion (TSX-RIM; NASDQ-RIMM), which is “Canada’s closest thing to a technology industry national champion.” Don’t worry about the iPhone, these two analysts say, the BlackBerry still dominates the business space.
The company’s latest results easily beat analysts’ expectations, and its guidance calls for more of the same. A stock that traded for US$150 is now available for less than half that price. Get on board before it gets back up to US$80, say the authors. It is $70 in New York, $82 in Toronto.
Long on the loonie
If you’re investing in Canadian equities, you are necessarily long on the Canadian dollar, state these experts. But why not go further?
The Canadian government’s ability to avoid deficits for a decade and the Bank of Canada’s ability to avoid “quantitative easing measures” thus far in the crisis are signs of strength, the authors assert.
“Once the global economy returns to normal growth, demand for Canada’s essential resources — energy commodities as well as potash — will rise. And that will support the loonie.”
They recommend CurrencyShares Canadian Dollar Trust (NYSE-FXC) “well off its lows, but still offering significant upside.”
Sir Wilfred Laurier once said that the 20th century would be Canada’s. Apparently he meant the 21st century as well.
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