Falling Canadian Dollar Boosts Appeal of Canadian Stocks

NEW YORK (TheStreet) -- Recent reports show the American economy recovering, but Canada is not doing as well. Because Canada's economy is dependent on natural resources, it has suffered as prices of many commodities have failed to recover from the Great Recession.

That said, for investors with a long-term outlook, there are compelling reasons to consider Canadian stocks .

The most important is that there are a number of excellent publicly traded companies in Canada.

Prem Watsa, who is known as "The Warren Buffett of Canada," has many of these companies in the portfolio of Fairfax Financial Holdings (FFH:Toronto) (FRFHF:Pink Sheets), the investment firm he heads. Like Buffett, he is a value investor who takes long-term positions. So devoted is Watsa to this investment style that he named his son after Ben Graham, the intellectual force behind value investing.

To the delight of the shareholders, Fairfax Financial is up more than 30% for the first three quarters of 2013, according to a Bloomberg report published by Ottawa Citizen. Over the past 20 years it has posted Buffett-type returns with an average rate of 13%, the report said. At present, Fairfax Financial has positions in Canadian firms such as Resolute Forest Products (RFP), BCE (BCE) and BlackBerry (BBRY).

Many Canadian stocks are also solid enough to pay above-average dividends.

The average dividend for a member of the S&P 500 is around 1.9%. BCE, a telecommunications firm, has a dividend of more than 5%. The Bank of Montreal (BMO) has a dividend yield of 4.4%, while Brookfield Office Properties Canada (BOXC), a real estate investment trust headquartered in Toronto, has a yield of 4.5%.

The next factor that should lead investors "north of the border" is that the "loonie," or Canadian dollar, is at a three-year low. A Goldman Sachs (GS) report predicts that it will fall even more in 2014, according to CBC News. That makes every asset priced in Canadian dollars that much cheaper to foreign investors. As Canada is very hospitable to buyers from abroad, assets should rise in value over the long term to outsiders taking advantage of the discount.

That is especially true for natural resources, particularly oil and gas assets.

There are many oil and natural gas firms operating in Canada that are attractive for long-term investors. These range from prominent blue-chips such as Suncor Energy (SU) and Canadian Natural Resources Limited (CNQ) to promising small-caps such as Octagon 88 (OCTX:OTC) and Americas Petrogas (APEOF:OTC). Warren Buffett is a major shareholder in Suncor Energy.

As I wrote in a previous article on TheStreet, the small-caps have tremendous potential. Speaking at the "Invest for Kids" conference in late October, Mark Lasry, co-founder of the Fifth Avenue Capital hedge fund, recommended Connacher Oil (CLL:Toronto), a Canadian small-cap oil and gas entity to the crowd.

For gold investors, Canada is at the forefront, too. Goldcorp (GG) and Barrick Gold (ABX) are the two biggest mining names in the world, by market capitalization. There are also many promising small-caps in the precious metals group. Nevsun Resources Limited (NSU), with a market capitalization of about $610 million, has a profit margin of more than 20%, a dividend of around 4.5% and no debt.

Legendary investor Jim Rogers is known for remarking that a weak currency is the sign of a weak economy, which is the sign of a weak government. That is clearly not the case with Canada. Due to declines in demand for many commodities, the Canadian dollar is down. But the loonie will rise again, as will the share prices of many of companies operating in Canada.

At the time of publication, Jonathan Yates had no positions in any of the stocks mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

 

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate, on both committee and personal staff.  He was also General Counsel for a publicly traded corporation.  He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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