The best-performing Canadian stocks amid the commodities rout have one thing in common: the mighty U.S. dollar. Earnings estimates published by Bloomberg suggest their run will continue.
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Seven of the top ten best-performing stocks in the Standard & Poor\’s/TSX Composite Index this season report their businesses in U.S. dollars and produce a significant amount of their sales there. Including 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 within the world\’s biggest economy and its currency like 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 as well as on companies once we move ahead,\” said Douglas Porter, chief economist at Bank of Montreal in Toronto. \”The winners is going to 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 some 10-year low amid a global plunge in commodities may come as the Federal Reserve prepares to raise interest rates prior to the end of the year, exacerbating an already widening gap between the two currencies.
The loonie plunged to some low of C$1.3103 against the U.S. dollar on July 24, the cheapest 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 assist lift average adjusted earnings among the Top 10 S&P/TSX companies by 30 percent to C$1.40 a share in the next quarter, according to analysts\’ estimates collected by Bloomberg. That compares by having an 11 percent advance for that broader index.
Apparel retailer Gildan Activewear Inc., the very best stock in the S&P/TSX Consumer Discretionary Index this season with a 35 percent gain, earned $2.09 billion in revenue in the U.S. in 2014, 89 per cent of the total, based on data published by Bloomberg.
Constellation Software has surged 68 per cent for the best performance among technology stocks this year. It earned 52 percent of revenue in the U.S. in 2014.
Valeant has doubled its stock this season, overtaking Royal Bank of Canada as the largest company in Canada by market price. The drugmaker has acquired a series of international businesses, including Rochester, Ny, contact lens maker Bausch & Lomb Inc. and most recently Egypt\’s Amoun Pharmaceutical Co., and gets 54 per cent of its sales in 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 style 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 consider advantage of the U.S. consumer.
\”Our portfolio\’s been positioned throughout the year to take benefit of the only source of reliable growth globally, that is this $15-trillion animal also known as U.S. domestic demand,\” Rosenberg said. In Canada, including companies for example 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 also 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.