by Tim Melvin | January 13, 2014 9:31 am
The markets were not as kind to our northern neighbors in 2013 as they were here at home. Canadian stocks, as measured by the benchmark S&P/TSX Composite, were up just 9.6% last year — the fourth-worst among global developed markets. The iShares MSCI Canada ETF (EWC) was up less than 3% during the past 52 weeks and has shed 1.68% so far this year.
Canadian stocks are dominated by resource producers as well as gold and silver miners, and markets have not been kind to those industries in the past few year. The S&P/TSX Raw Materials Index fell by 31% in 2013 making it difficult for the Canadian Indexes to match the performance of other global markets.
When I take the time to look at Canadian stocks through a deep-value lens, I see that there are some bargain issues worth owning in the international part of your portfolio. Most of them are resource-oriented in nature, and to my contrarian mind, that’s great news. For the rest of the world economies to continue recovering, resource usage will have to pick up, as will inflation. That is great news for oil, timber and mining companies, and potentially fantastic news for the gold and silver markets.
Penn West Petroleum (PWE) is an oil and gas company in Western Canada that has been selling noncore assets to focus on its oil- and liquids-rich properties. PWE recently completed the sale of $486 million in properties that did not fit into the company’s future plans and is using the cash to expand drilling operations and strengthen the balance sheet. A total of $1.5 billion to $2 billion of noncore asset sales is planned over the next few years.
Penn West just completed a strategic review and concluded that its long-term plan is “to deliver to shareholders compound annual growth in oil production and funds flow subsequent to a de-levering period and provide shareholders a return through a sustainable dividend.”
Management remains committed to the current dividend, and right now shares yield more than 6%. More importantly — from the perspective of a deep value investor — PWE stock trades at just 47% of its book value.
MFC Industrial (MIL) is in the commodity supply chain business. MFC sources and delivers a wide range of commodities, including metals, natural gas, wood products, coal and ore. It also provides financing and risk management services to customers. The merchant banking division makes strategic investments in commodity-related companies.
MFC is engaged in a struggle for control with investor Peter Kellogg, but I think any outcome of the matter will be good for investors. Kellogg and another member of his organization were just elected to the board, and Kellogg will be focusing on unlocking the value of the shares.
MIL stock trades at just 65% of book value and pays a dividend of 3.1% at current prices.
Canadian markets should start to feel the impact of increased resource consumption from a recovering global economy and a weak Canadian dollar that should boost exports. Canadian stocks like these two — as well as resource producers that trade below book value like Pan American Silver (PAAS) and Resolute Forest Products (RFP) — should see a sharp boost in their share price over the next few years.
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