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A heads-up on U.S. stocks for Canadian investors

These may be dark days in America’s markets, but they’re still a must for Canadian investors, says this advisory, which has some fresh buys.

You might think this is a good time to avoid U.S. stocks. But bruised and battered though it is, Wall Street remains the world’s richest market.

So own American stocks, but proceed with caution.

That is the advice we get from one of this country’s longest-serving investment advisories, The Investment Reporter. No self-respecting Canadian portfolio should ever be without U.S. stocks.

But while the rules of engagement remain the same, their interpretation has changed a bit (sort of like fighting in hockey these days).

For one thing, the rise of the American dollar makes shopping for U.S. stocks a little less attractive than it was when the loonie was flying level with the greenback.

But if U.S. stocks are a more cautious buy, they are still a buy.

So while the advisory discusses some pitfalls that have opened up during the current crisis, it also reminds its readers why it is worthwhile to keep one corner of your portfolio lined with American equities.

It also highlights six stocks it has recently added to its list of U.S. “All-Star” stocks.

One quarter of your holdings

This advisory remains firm on the home-and-away balance you should have in your stock portfolio. At least one quarter of your holdings should be in U.S. or other foreign equities.

“One advantage of buying foreign stocks,” it adds, “is that they diversify your currency exposure.” You may earn Canadian dollars and have your house, cottage and pension paid in loonies. But you spend American dollars every time you cross the border.

And as long as the greenback remains strong — against all odds, many would say — it certainly doesn’t detract from the value of your portfolio.

Next to the imbalance in the two currencies, the greatest problem facing investors is simply the devastation that has been wrought in U.S. stock markets.

Many long-time bellwethers of the American market have been hit hard. This advisory was compelled to put General Electric (NYSE-GE) on hold after the company’s now-you-see-it-now-you-don’t act during which it said it wouldn’t cut its dividend — and then cut it.

The global recession adds another degree of difficulty, since so many American multinationals draw revenues from around the world.

But even with these problems, The Investment Reporter believes, with Mr. Warren Buffet that “it’s a mistake to bet against the U.S. market.”

The dollar goes further

According to the numbers, U.S. stocks do better than Canadian stocks over time. In the 65 years from 1939 to 2004, Canadian stocks did well, with average yearly compound returns of 10.3 per cent.

Using that average as a base, a dollar invested in Canadian stocks in 1939 would have given you $580 by 2004 — if you re-invested your dividends. Over the same period, U.S. stocks returned 11.8 per cent. In this case, the same dollar goes much further. You get $1,369.

Small stocks in the U.S. did even better. They returned an average 15.9 per cent. Now your dollar mushrooms to $14,756.

U.S. stocks also bring in money from sources that are hard to find in Canada. For instance, Carnival Corp. (NYSE-CCL) has a worldwide fleet of cruise ships. There is simply no Canadian equivalent. Nor can we rival America’s large roster of big drug companies and health care firms.

And who in the world can match the pricing power of giants like Coca-Cola (NYSE-KOK) and McDonald’s Corp. (NYSE-MCD)?

There’s also an advantage to be gained by lining your RRSP with U.S. stocks, the advisory reminds its readers. You can sidestep the 15 per cent withholding tax on U.S. dividends. And of course with the foreign content limit gone, you can load up on American stocks to your heart’s content.

It only remains to see which six U.S. companies this advisory thinks are worth adding to its list of American buys in this zany market.

Online selling and continuing education

Four of these six stocks pay dividends, which this advisory considers a crucial lifeline for investors in good markets and bad.

One non-dividend payer is that well-known online buying and selling market EBay Inc. (NASDQ-EBAY). It’s good for gains if you don’t need income, says the advisory.

The other is in the veterinary business. Idexx Laboratories (NASDQ-IDXX) makes detection and diagnostic products that identify contaminants in meat, plants, soil and water.

Briggs & Stratton (NYSE-BBG) is America’s largest maker of the small air-cooled gasoline engines that power lawn mowers, tractors, generators, compressors, pumps and the like.

Daktronics Inc. (NASDQ-DAKT) is the world’s largest supplier of the electronic scoreboards and message boards that appear in sports arenas, transportation and communications.

You may recognize DeVry Inc. (NYSE-DV) from its commercials for career-enhancing post-secondary education. There’s a lot of that going around in this recession.

Finally we have one of those traditional recession-proof stocks, Dominion Resources (NYSE-D), which supplies electricity in Virginia, West Virginia, North Carolina, Ohio and Pennsylvania. Demand is growing in this large market.

With the Canadian dollar down, you might wish to buy American stocks at a “leisurely pace,” says The Investment Reporter. But do not turn away from the rich market down south. That would be both unneighbourly and unwise.