The Loonie Heads Higher

By Roger Conrad • September 7, 2012 • In Brief

Editor’s Note: Last month we made several improvements to the structure of the CE issue. These changes are intended to make In Brief more concise and each article category more relevant. We welcome your feedback regarding these changes or suggestions for any further improvements you’d like to see via our Ask the Editor page. Thank you. — RSC

Since Jun. 4 the Canadian dollar has rallied from less than USD0.96 to roughly USD1.02. That may seem unremarkable, given the currency has risen from USD0.78 since March 2009.

But coming at a time of fear in the markets–and retreat in prices of many commodities–it’s a clear signal of Canada’s rising appeal as a safe haven for investors.

Since the launch of Canadian Edge in mid-2004 we’ve extolled the Northern Tiger’s virtues, which include the extremely sound banking system, stable government with miniscule deficits, low jobless rate, immense resource wealth, conservative corporate management and penchant for paying big dividends.

Those are all powerful catalysts for future Canadian dollar gains. The problem historically has been the loonie’s close psychological link to commodity prices, particularly oil. Mainly, when black gold has headed south, the currency has given ground to the US dollar and vice versa.

This latest rally in the loonie has coincided with a partial recovery in benchmark New York Mercantile Exchange oil prices, which hit a low in late June of barely USD77. And no doubt the currency’s value would be further aided by more black gold gains.

The difference is this year the Canadian dollar is up from where it began the year, while oil is lower. And its performance has been steady as well.

That’s a stark contrast with the loonie’s steep drop in the second half of 2008. And it diverges sharply from what we saw in late 201, when investors fled back to the US dollar following Standard & Poor’s downgrade of Uncle Sam’s debt.

That bodes well for the currency going forward. The Canadian dollar’s moves are only one factor affecting investor returns. In fact they don’t impact Canadian investor returns at all.

A stronger loonie, however, is a big deal for US investors, as it pushes up the value of dividends as well as stock prices. And combined with the generally solid earnings we saw in the recent quarter, it portends well for our Canadian Edge Portfolio Holdings as well as other companies rated “buy” in How They Rate.

Unfortunately, not every Portfolio recommendation currently rates a buy. The current count of Conservative Holdings trading above my buy targets is 11 of 21. This week Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) became the latest to surge above target, capping a 25 percent-plus gain since late June.

Aggressive Holdings’ exposure to the economy and commodity prices has held back their performance overall. Several stocks, however, are actually well above target. This includes Parkland Fuel Corp (TSX: PKI, OTC: PKIUF), which has blasted off to a new all-time high.

I can’t emphasize enough how important it is not to pay above my buy-under targets for these stocks. I set these by comparing quality and safety (CE Safety Ratings) to prospective returns (yield plus projected growth).

They’re not an attempt to time the short term but a method of buying value.

Judging from reader feedback, temptation to chase winners is just too strong for some. But time and again the past few years we’ve seen markets clutch up and prices of even the strongest stocks back off sharply.

High-growth energy midstream company Keyera Corp (TSX: KEY, OTC: KEYUF), for example, started the year trading nearly USD10 above my buy target of USD42. By April, however, it was actually well under USD40, providing a golden opportunity to feature the stock in May as a Best Buy, in the feature formerly known as High Yield of the Month.

The stock is currently about 10 percent above my target price. But it’s a clear example of why it pays to be patient in a market where so many are reflexively buying and selling into momentum.

On the other side of the equation are a handful of stocks that currently trade well below buy targets. Several of these also carry high yields that clearly indicate some skepticism dividends can be sustained.

I highlight my outlook for each of these stocks–as well as the rest of the Canadian Edge Portfolio–in Portfolio Update.

But as David Dittman and I pointed out in the subscriber chat this week, our primary goal is still to buy and hold strong and growing businesses–and at this point even the laggards are measuring up.

That means low prices signal value, not a warning to run for the hills

Roger Conrad
Editor, Canadian Edge

Portfolio Update

This month I’m adding a new Aggressive Holding, Best Buy Wajax Corp (TSX: WJX, OTC: WJXFF), an innovative distributor of original and replacement parts for a wide swath of industrial Canada. There are no other changes at this time.

Portfolio Update looks at the operating and stock price performance of every Conservative and Aggressive Holding for 2012 and what to expect in both areas the rest of the year.

I also highlight earnings for the handful of companies reporting profits after the August issue when to press and analyzed in the Aug. 15 Flash Alert.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF)
Northern Property REIT (TSX: NPR-U, OTC: NPRUF)
Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)
RioCan REIT (TSX: REI-U, OTC: RIOCF)

I look at EnerCare Inc’s (TSX: ECI, OTC: CSUWF) results in the Best Buys section.

Note that Student Transportation Inc (TSX: STB, NSDQ: STB) is set to report its fiscal 2012 numbers on or about Sept. 21. I’ll send out a Flash Alert shortly after they’re released.

Best Buys

Best Buys features the two best buys for September. Buying these each month is a good strategy for starting a portfolio, provided the picks meet your own risk-reward preferences. Note this section was formerly called High Yield of the Month.

This month’s choices are a current Conservative Holding, EnerCare Inc (TSX: ECI, OTC: CSUWF) and a new Aggressive Holding, Wajax Corp (TSX: WJX, OTC: WJXFF).

EnerCare continues to grow its waterheater rental and submetering businesses, even as it remains the quarry of private capital firm Octavian Capital Partners.

Wajax is a fast-growing distributor of equipment to Canadian energy, resource, construction, transportation and power companies.

Both stocks now trade below buy targets and pay monthly dividends between 7 percent and 8 percent.

In Focus

Investors’ rush to find “safe” stocks has pushed prices of many Canadian real estate investment trusts (REIT) to new highs in 2012. The gains have been at least partly backed up by robust results posted by owners of retail, residential, industrial and office properties, thanks to strengthening markets and many REITs’ aggressive acquisitions the past few years.

We’re even seeing a revival of long-stalled distribution growth at many individual REITs, with more to come the rest of 2012 and into 2013. And REITs have used extremely low capital costs to strengthen balance sheets, leaving little direct exposure to an unexpected tightening of credit conditions.

Balanced against that are lofty sector valuations, which have made bargains few and far between.

I highlight these risks and the sector’s best opportunities for value and growth.

Dividend Watch List

New Flyer Industries Inc (TSX: NFI, OTC: NFYEF) was the only company in the Canadian Edge coverage universe to cut its dividend last month. The new monthly rate of CAD0.4875 per share is actually better than expected, representing only a 32 percent reduction from the bus manufacturer’s prior level.

The underlying business, however, is still facing considerable hurdles, as the company’s primary customers–mainly state and local government entities–remain cash-strapped.

The stock is flat since the cut was announced and is up from its early July lows. But my advice is still to steer clear, at least until there are clear signs of business recovery.

See Dividend Watch List for more endangered payouts.

Canadian Currents

Virginia Shaw owns a 60 percent voting interest in specialty pipeline services company ShawCor Ltd (TSX: SCL/A, OTC: SAWLF), a recent addition to How They Rate coverage. This week the company announced that Ms. Shaw, who also chairs the board, may be willing to sell her shares as part of a larger deal for the entire company.

ShawCor, which recently reported solid second-quarter results along with a company-record backlog, has surged on the Toronto Stock Exchange.

Another Upside Surprise Up North–Statistics Canada reported that gross domestic product (GDP) expanded faster than expected in the second quarter. It was a modest beat, but the Great White North still boasts the best growth among Group of Seven countries.

Bay Street Beat–The numbers are in for all but one CE Portfolio Holding. Here’s the latest from Bay Street.

How They Rate Update

Coverage Changes

There are no coverage changes in How They Rate this month.

Advice Changes

Aston Hill VIP Income Fund (TSX: VIP-U, OTC: BVPIF)–To Hold from SELL. The closed-end fund has raised investment income to match its payout, no mean feat in a tough environment.

AvenEx Energy Corp (TSX; AVF, OTC: AVNDF)–To SELL from Hold. Second-quarter drops in production and profits raise risks of another dividend cut.

Bellatrix Exploration Ltd (TSX: BXE, OTC: BLLXF)–To Buy @ 4 from Hold. The oil and gas producer plans to list on the New York Stock Exchange (NYSE) on the heels of strong second-quarter output gains and steady profits.

Bonterra Energy Corp (TSX: BNE, OTC: BNEFF)–To Hold from Buy @ 55. Management is maintaining full-year production guidance despite a second-quarter shortfall. But a little caution is called for until we see third-quarter results in early November.

Canadian Natural Resources Ltd (TSX: CNQ, NYSE: CNG)–To Buy @ 30 from Hold. The company’s ability to raise production 22 percent while cutting capital spending was unexpected and a good sign for the rest of the year.

Liquor Stores NA Ltd (TSX: LIQ, OTC: LQSIF)–To Hold from Buy @ 18. A court ruling in Kentucky could undermine the company’s franchise in the state, even as the company’s CEO since 2009 has suddenly resigned.

Nexen Inc (TSX: NXY, NYSE: NXY)–To SELL from Hold. The stock trades nearly 10 percent below CNOOC’s offer of CAD27.50 per share. But it would likely plunge to its pre-deal range in the mid-teens if what seems to be a growing list of opponents to the merger convince regulators to block it.

Pengrowth Energy Corp (TSX: PGF, NYSE: PGH)–To Buy @ 7 from Hold. The company faces skepticism after cutting its dividend following the takeover of the former NAL Energy Corp. But second-quarter results were steady, and the stock trades at a discount to asset value.

Ratings Changes

AvenEx Energy Corp (TSX; AVF, OTC: AVNDF)–To 1 from 2. Poor second-quarter results lead to spike in the payout ratio.

Bonterra Energy Corp (TSX: BNE, OTC: BNEFF)–To 2 from 3. The second-quarter payout ratio spiked to 93 percent.

Safety Ratings

The core of my selection process is the six-point CE Safety Rating System, which awards one point for each of the following. A rating of “6” is the safest:

Payout Ratio–A ratio below our proprietary industry baseline.
Earnings Visibility–Earnings are predictable enough to forecast a payout ratio below our proprietary industry baseline.
Debt-to-Assets Ratio–A ratio below our proprietary industry baseline.
Short-Term Debt Ratio–Debt due in next two years is less than 10 percent of market capitalization.
Business Stability–Companies that can sustain revenues during recessions are favored over more cyclical ones.
Dividend History–No dividend cuts over the preceding five years.

Here’s an in-depth explanation of the proprietary CE Safety Ratings System.

Resources

The following Resources may be found in the top navigation menu at www.CanadianEdge.com:

Ask the Editor–We will reply to your queries via email or in an upcoming article.
Broker Guide–Comparison of brokers for purchasing Canadian investments.
Getting Started–Tour of the Canadian Edge website and service.
How to Build a Portfolio–Guidance on how best to structure your holdings.
Cross-Border Tax Guide–What you need to know about taxes and Canadian investments.
Other Websites–Links to other websites to help you get the most out of your Canadian stocks.
Promo Stocks–Guide to the mystery stocks we tease in our promotional messages.
CE Safety Rating System–In-depth explanation of the proprietary ratings system and how to use it effectively.
Special Reports–The most recent reports for new subscribers. The most current advice is always in your regular issue.
Tips on DRIPs–Details for any dividend reinvestment plan offered by Canadian Edge Portfolio Holdings.