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Canadian Stocks Are Up Big, And No One Cares

Right now, no one is talking about Canada as an investment destination. And that’s the way we like it.

Why? Well, that gives our Canadian Edge subscribers more opportunities to establish and build positions in our favorite high-yielding stocks while they remain at bargain prices—and, even better, while the Canadian dollar is still dirt cheap.

If you have a medium- to long-term investment horizon, then you know your success as an investor is all about picking the right time to buy.

Though the Canadian stock market may have already seen its ultimate low for this cycle back in January, it still trades about 9% below its five-year high. Meanwhile, the Canadian dollar, just below US$0.79, still trades nearly 26% below its cycle high.

The exchange rate, in particular, is a huge opportunity for U.S. investors because it will provide a major tailwind as the currency continues to recover, especially once the next global commodities super cycle gets underway. Indeed, the Canadian market’s performance so far this year shows exactly how a rising loonie can enhance returns.

Since its low in late January, the benchmark S&P/TSX Composite Index has gained nearly 22% on a total-return basis in Canadian dollar terms. That’s pretty good! In fact, that’s one of the best stock-market performances in the developed world, whose bourses have struggled to eke out any gains at all.

But here’s where our preternaturally nice neighbors to the north grab the ball and spike it right in our faces: On a U.S. dollar basis, the Canadian market has returned nearly 40% since the year’s low (39.4%, to be precise).

Over that same period, the Canadian dollar rose about 15%. So you can see how the compounding effect of a rising exchange rate can further enhance gains when dividends are reinvested.

Even when you give the S&P 500 its best possible foot forward, which is measuring its gain since its low in mid-February, the U.S. benchmark didn’t perform half as well as the Canadian one. The S&P is only up 16.6%, including the reinvestment of dividends, since its low on Feb. 11.

Of course, it should be noted that on a price-to-earnings basis, the Canadian market as a whole is hardly cheap right now. But it’s not alone in that respect. Despite investor anxiety over the state of the global economy, both the U.S. and Canadian markets trade at premium valuations.

However, some sectors offer more bargains than others. Beyond that, Canadian Edge takes a value-oriented approach to stock selection, by estimating fair values for each of our Dividend Champions in both U.S. dollars and Canadian dollars, thus ensuring that you’ll never overpay for a security.

Clearly, some savvy investors have been backing up the truck and buying Canadian stocks. But it’s probably not the average U.S. investor, who tends to only pile into an investment after it’s already hot (and, therefore, about to suffer a correction).

Fortunately, you do have some time to get in on the action—possibly at an even better price than today. As we wrote a couple weeks ago, the loonie could suffer another short-term decline this month as tens of billions of dollars of Canadian dollar-denominated bonds come due.

Thus far, the loonie has enjoyed a nice jump in June, thanks in part to last week’s disappointing U.S. employment report.

Among the factors contributing to the Canadian dollar’s performance is the divergence between the Bank of Canada and the U.S. Federal Reserve. While the Bank of Canada is likely to maintain the status quo on interest rates, the Fed is nominally in rate-hiking mode, which has strengthened the U.S. dollar, while undermining the loonie.

But a weak jobs number means the Fed might be stuck maintaining the status quo too, at least for a while longer than the market had previously expected.

As such, it remains to be seen whether the rebalancing effect from C$45 billion in Canadian debt maturities will offset a temporarily more dovish Fed. But if it does and the Canadian dollar drops accordingly, then that will be an attractive buying opportunity.

Another buying opportunity could come courtesy of volatile commodities prices. In recent months, the performances of both the Canadian dollar and the country’s stock market have been highly correlated to oil prices. Consequently, a short-term dip in energy prices could push both lower.

So set a few stingy buy limits on some of our favorite Canadian dividend payers, and you may very well see your orders filled soon at dream prices.


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