When I was a young boy, if I was very good, my parents would take me to spend a week in Canada over the summer. The alternative was a week in exile on my uncle’s pig farm in New Hampshire. And while I loved my uncle, I was determined to make the trip to the Great White North every year.
The most memorable moments during our rides through Quebec Province were the flocks of wild snow geese — sometimes taking off as we drove by, typically honking in uneven harmony, always filling the sky with flapping wings.
Now, as summer’s swelter starts on Wall Street and many domestic stocks continue to tank, I think U.S. investors might want to do what I did as a child — turn their sights northward.
A few words of caution:
First, beware of a wild goose chase. Avoid fly-by-night companies that are overpriced or over indebted.
Second, don’t miss the big opportunities. Because there are now a host of Canadian investments laying golden eggs.
And thanks to the recent pullback in natural resources, many of them are extreme bargains — the kind that might suddenly take off, not to be seen again for a long time.
Here are three examples to consider:
Canadian Investment #1
TransCanada (NYSE: TRP)
Ask people to name a Canadian pipeline company and they’ll likely say, “Enbridge.” But that’s because most people don’t know that TransCanada Pipelines is the biggest pipeline company in Canada.
Calgary-based TransCanada has two segments — gas transmission and power. The gas transmission business has more than 25,500 miles of pipeline to export natural gas across Canada and into the United States. Meanwhile, the company’s power plants generate 6,736 megawatts of energy.
The stock’s got a lot going for it:
• Strong fundamentals: TransCanada’s sales jumped 31.8% in the most recent quarter vs. a year earlier, while net income soared 95.5%. The company generates strong cash flows and has a gross margin of 80.9%.
• Reasonable valuations: TRP shares trade at 14.6 times trailing earnings, 18 times estimated earnings, and eight times cash flow.
• A dividend kicker: The stock yields 3.7%.
• Good technicals: As you can see from the chart, TRP has broken its downtrend with a “bang!”
As always, there’s a downside: The stock has a debt-to-equity ratio of 1.5.
But I think TransCanada is taking on debt for good reason — to build more pipelines. In fact, these new projects are what I find really interesting …
TransCanada’s proposed $2.1 billion Keystone Pipeline project will ship 435,000 barrels of oil per day from Canada’s oil sands to the Midwestern U.S. It should be finished in 2008.
Canada’s National Energy Board is now expecting oil sands production to triple to three million barrels per day over the next decade — that’s 40% higher than the last estimate. Meanwhile, other estimates put total production as high as 3.5 million barrels per day by 2015.
You know my view on Canadian oil sands: I don’t think this is the long-term solution to America’s energy woes, and it’s a shame we have to use one of our cleanest burning fuels (natural gas) to make one of our dirtiest (oil from tar sands). However, I also recognize that investors can make a lot of money in the process. And TransCanada is well positioned to do just that.
The company is also building a 100-mile natural gas pipeline in Mexico … working on building the Alaska Highway and MacKenzie pipelines … and has a proposed project to connect Alberta with the electric grid in the Northwestern U.S.
Plus, one last thing to remember: The price of natural gas is scraping bottom right now, but it could go much higher in a hurry if hurricanes rip through the Gulf of Mexico. Should that happen, gas pipeline operator’s profits will soar, too.
Canadian Investment #2
Central Fund of Canada (AMEX: CEF)
I always like to include a mutual fund for investors who aren’t ready to buy individual stocks. This one is really interesting: In a way, you could say the Central Fund of Canada was a precious metals exchange-traded fund (ETF) before there were precious metals ETFs.
How so? This closed-end fund invests in physical gold and silver bullion, with the objective of being at least 90% in bullion at all times. Recently, it held 50.3% gold and 48.3% silver, with the rest of its assets in cash.
As a closed-end fund, CEF is a bit different from the traditional open-ended mutual fund that you might be used to. Open-ended mutual funds (as well as exchange-traded funds) create or redeem shares every time an investor buys or sells the fund.
However, a closed-end fund has a set number of shares outstanding. It raises capital through an initial public offering and then invests the proceeds according to its objectives.
Because closed-end funds limit their shares, they can trade at a premium or discount to their net asset value (NAV). CEF was recently trading at a 13% premium to its NAV. This premium reflects the fact that CEF’s price is leveraged to the price of gold.
Of course, if silver outperforms gold, CEF will allow you to participate in that as well.
Plus, CEF lets you own gold and silver bullion without the headaches of contracts, storage, insurance, or assay fees. And there are no transaction fees or sales tax beyond the commission that your broker charges you.
For more information on the Central Fund of Canada, check out their website.
Canadian Investment #3
One of My Favorite Small-Cap Miners
Sorry. Can’t name this one. It wouldn’t be fair to subscribers to my Red-Hot Canadian Small-Caps service. But if I describe it to you, I think it will give you an idea of what I mean by avoiding a wild goose chase and seeking out the golden eggs. This is a company that boasts …
Strong earnings: It posted a profit of over $20 million in a recent quarter vs. a loss in the same quarter of the previous year. Revenue rose to close to the $100 million range, more than double last year’s.
Great production: It produced over 75,000 ounces of gold and over 20 million pounds of copper just in one quarter. What’s more, gold and copper recoveries were much higher because the ore veins being mined are richer.
Low costs: Net cash cost of gold production hit a record low of $27 an ounce (copper revenues are counted against costs).
Fewer hedges: When a company hedges, it sells its future gold production at a predetermined price. While this is done to lessen risk, it also weighs on potential profits if prices go higher. This company has sharply reduced its hedges, which weren’t that big to begin with.
Plus, a sweet acquisition: The company also has an offer on the table for another Canadian miner. I think the deal would be a big winner. The combined entity would produce nearly a half million ounces of gold and nearly 200 times that much in copper. Nice!
[Editor’s note: For Sean’s free report on Canadian small caps, call 800-400-6916.]
Commodities Bull Market Far from Over!
Market Corrections in Final Stages!
Gold has come down to its 50-day moving average. Since November, every time this has happened, the area has served as a base for a move higher. There’s no reason to believe this time will be any different.
I might be early, but I doubt I’m wrong. Sure, gold could possibly get slightly cheaper from here. But the fundamental forces of supply and demand are too powerful to allow for more than temporary pullbacks.
And the same goes for energy prices. Oil is now within just $4.00 of its all-time highs. I think prices will catapult much higher.
We are in one of the biggest commodity bull markets of our lifetime. Even if it were just a typical commodity bull market, it could run for another decade. And I believe the powerful forces at work — including the emerging economies of Asia — make this an extraordinary bull market. It could be one for the record books.
Good luck and good trades,
Sean
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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