Go Skiing in the Market Avalanche
These Canadian stocks will help fight off the winter blues.
The financial media is equipped with an extensive vocabulary for times of market panic, and most of it is the type of cheery, feel-good rhetoric designed to hearten and uplift the average investor. Words like plunge, battering, rout, meltdown, and apocalypse are sure to bring out the sunshine on these wintry January days. Just remember, this is nothing compared with a blizzard in Winnipeg. Let's take a look at some tough Canadian stocks where you might find shelter over the long term.
Monday saw a nearly 5% drop in the S&P/TSX Composite Index, as recession fears spread from Asia to Europe to North America. Although Tuesday's emergency Fed rate cut brought some relief, we think the sell-off has created some bargains. These high-quality companies are trading at or near appropriate margins of safety to their fair values.
Biovail is a Canadian pharmaceutical that uses proprietary drug-delivery methods to design safer and more effective alternatives to off-patent drugs. Its shares languished as the firm awaits FDA approval on its depression drug BVF-033, the successor to its Wellbutrin XL, which faces generic competition in 2009. Analyst Brian Laegeler feels the company has solid opportunities in the pipeline, however, as he expects Ultram ER to pick up the slack over the next few years. Over the long term, he feels Biovail is spending enough to keep generating development opportunities, and the company should continue to benefit from the positive changes implemented by CEO Doug Squires.
Canadian Natural Resources (CNQ)
There are many names in Canadian oil and gas that we feel have been excessively punished during the market downturn, including EnCana (ECA) and Provident Energy Trust . One of our most compelling values is Canadian Natural Resources, whose stock has never fully recovered from the reduced spending it announced in the wake of the changes to the Alberta royalty framework. Although the economics of its natural-gas opportunities were negatively affected, Canadian Natural still has plenty of places to spend its capital. The company continues to march toward the start of its Horizon oil sands project, and its heavy oil opportunities aren't going anywhere. Over the long term, we think the company can eventually find places to expand its natural-gas exposure, should the returns prove attractive enough.
Enbridge is a leading Canadian pipeline and infrastructure company connecting resources to markets. The enormous growth from new frontiers such as Alberta's oil sands and the Gulf of Mexico will provide Enbridge with a host of opportunities for capital investment. In addition, the company operates the largest gas utility in Canada. Enbridge's assets are largely regulated, which can cap the upside but ensures greater predictability of cash flows. The company faces the risk that oil or natural-gas production will fail to materialize on schedule, not to mention stiff competition from the likes of Kinder Morgan , but the company should be able to leverage its existing network and established relationships to develop profitable projects for years to come.
Royal Bank of Canada (RY)
The Royal Bank of Canada's (RBC) stock price has recently jumped, but investors should keep an eye on it if it dips into 5-star territory in the future. Analyst Chris Blumas thinks Canada's largest bank is differentiated from its peers by its extensive distribution network, which allows Royal to attract clients and cross-sell complementary products. Royal's wide economic moat is supported by a benign regulatory environment that keeps foreign competitors at bay. RBC's domestic banking operation remains the bank's bread and butter, but it appears the U.S. and International segments are building scale and they're likely to generate future economic profits. Blumas feels the biggest risk facing RBC relates to its U.S. operation and the uncertainty associated with the U.S economy.
Thomson provides information, software tools, and applications to customers in a diverse set of professions around the world. The company's narrow economic moat comes largely from its Thomson Legal business, whose vast scale and scope offer valuable legal information in a useful and meaningful format. Analyst James M. Walden isn't as impressed with Thomson Financial, but thinks the pending strategic acquisition of Reuters will enable the company to better compete with market leader Bloomberg. Although Thomson is exposed to economic cycles and potentially reduced spending by its clients, Walden expects Thomson to benefit from the continued strength of its legal business, a new focus on content and applications to complement its data offering, as well as its own corporate cost-cutting initiatives.
So just remember, investors, when the market is overwhelmed with bad news, keep your cool--and your cash handy. And if you're fully invested and are terrified of the gyrations of your portfolio, take some comfort from the fact that you're not alone. Your trusty northern neighbors have your back.
Kish Patel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.