7 top Canadian stocks that have a secret weapon in the commodities rout

7 top Canadian stocks that have a secret weapon in the commodities rout

The best-performing Canadian stocks amid the commodities rout have one thing in common: the mighty U.S. dollar. Earnings estimates compiled by Bloomberg suggest their run will continue.

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Seven of the top 10 best-performing stocks in the Standard & Poor’s/TSX Composite Index this year report their businesses in U.S. dollars and generate a significant amount of their sales there. This includes the top five-ranked equities: drugmakers Concordia Healthcare Corp. and Valeant Pharmaceuticals International Inc., beverage purveyor Cott Corp., holding company Constellation Software Inc. and real-estate services provider Colliers International Group Inc.

The U.S.-focused firms are exploiting the rebound in the world’s biggest economy and its currency as a commodities rout and worries about a housing bubble batter material and financial stocks.

“The change in the currency is monumental and will have a very big influence on the economy and on companies as we move ahead,” said Douglas Porter, chief economist at Bank of Montreal in Toronto. “The winners will be those companies that have most of their costs in Canadian dollars and their revenue in U.S. dollars.”

The Canadian dollar’s slump to a 10-year low amid a global plunge in commodities comes as the Federal Reserve prepares to raise interest rates before the end of the year, exacerbating an already widening gap between the two currencies.

Decade Low

The loonie plunged to a low of C$1.3103 against the U.S. dollar on July 24, the lowest intraday level since September 2004. The currency has dropped 11 per cent this year as oil, the country’s biggest export, plunged and the Bank of Canada cut interest rates twice to fight the spreading economic malaise. The currency was trading at C$1.2932 per U.S. dollar at 4:20 p.m. in Toronto on Tuesday.

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The loonie’s decline is forecast to help lift average adjusted earnings among the Top 10 S&P/TSX companies by 30 per cent to C$1.40 a share in the next quarter, according to analysts’ estimates collected by Bloomberg. That compares with an 11 per cent advance for the broader index.

Apparel retailer Gildan Activewear Inc., the top stock in the S&P/TSX Consumer Discretionary Index this year with a 35 per cent gain, earned $2.09 billion in revenue from the U.S. in 2014, 89 per cent of the total, according to data compiled by Bloomberg.

Constellation Software has surged 68 per cent for the best performance among technology stocks this year. It earned 52 per cent of revenue from the U.S. in 2014.

Riding Coattails

Valeant has doubled its stock this year, overtaking Royal Bank of Canada as the largest company in Canada by market value. The drugmaker has acquired a series of international businesses, including Rochester, New York, contact lens maker Bausch & Lomb Inc. and most recently Egypt’s Amoun Pharmaceutical Co., and gets 54 per cent of its sales from the U.S.

“If there’s a theme in Canada, it’s riding the coattails of a competitive currency that’s getting more competitive with each passing day,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto. “It’s absolutely a theme that has not been played out.”

Rosenberg’s firm manages about $8.6 billion, and has been shifting into assets over the past 12 to 18 months leveraged to take advantage of the U.S. consumer.

“Our portfolio’s been positioned all year long to take advantage of the only source of reliable growth globally, which is this $15-trillion animal otherwise known as U.S. domestic demand,” Rosenberg said. In Canada, this includes companies such as Tricon Capital Group Inc., FirstService Corp. and CCL Industries Inc.

Martin Pelletier, a portfolio manager at TriVest Wealth Counsel Ltd. in Calgary, said positioning for the weak loonie is “yesterday’s trade” because he doesn’t believe there will be another rate cut and the currency is near a bottom.

He’s looking for opportunities to buy in the recent sell- off, including some energy stocks, real estate investment trusts and banks.
Bloomberg.com

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7 top Canadian stocks that have a secret weapon in the commodities rout

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