Canadian stocks have seen heavy trading in recent sessions as many world events are shaping the future of the country. Investors should note that one of the biggest events pertaining to Canada was the passing of CETA, a new trade agreement between Canada and the European Union. The Canada-European Union Comprehensive Economic and Trade Agreement will help make Canada an even more important trade route, with strong relations between Europe and the United States.
The new deal covers virtually all sectors and eliminates tariffs on 98% of goods. The CETA deal makes Canada one of only a few countries to have guaranteed and preferential access to the European Union and United States of America, the top two world economies.
Canada gains easier access to the population of more than 500 million people in the European Union. The deal could also help boost the Canadian economy, after three straight years of growth lower than 2%.
For Europe, the deal is important as it saved more than $500 million annually in tariffs. The deal also helps Europe gain access to the United States easier and possibly more cost effectively. For Canada, the deal means more jobs and likely more economic output. Canadian stocks could see a sharp rise the next few years as the benefits of CETA are weighed out.
There are many Canadian stocks for investors to choose from. Listed below are three stocks that I believe stand to benefit greatly from the European Trade deal with Canada. The companies participate in sectors singled out as strong areas of interest from CETA.
Canadian Stocks to Buy: Canadian National Railway (CNI)
One of the companies that could benefit from demand for transporting goods from Canada to the United States and internationally is Canadian National Railway (USA) (NYSE:CNI). With an expansive ownership of railroads across Canada and great routes in the United States, CNI could be a big winner if increased demand comes from CETA.
Canadian National Railway Company has three major geographical regions (Western, Eastern, Southern) that cover all of Canada and also take railroads through the United States all the way to the important New Orleans port region. CNI’s rails have access to 75% of the United States population.
This company is more than a railroad, as it has also expanded its business to cover trucking, freight forwarding, warehousing and distribution. In fact, the company’s CNTL trucking division is one of the largest in Canada, delivering more than 1,300 loads a day.
CNI has seen a minor slowdown in shipping demand for oil and coal, as energy prices fall. Rising demand for shipping automobiles and international goods has helped offset the declines. Canadian National Railway has also seen a big boost in its productivity measurements like revenue per mile and operating margins. In the third quarter, earnings per share fell only 1%, despite a 6% decline in revenue.
If European companies try to use Canada as a way to get their products and services into the United States, CNI should benefit directly and indirectly. CNI is well diversified to weather the current oil demand problem too, with only 19% of revenue coming from oil transport.
Canadian Stocks to Buy: Magna International (MGA)
Magna International Inc. (USA) (NYSE:MGA) is a large automotive supply company headquartered in Canada. One area that has been called out specifically as a beneficiary of CETA is the automotive industry. This manufacturer of items like hinges and latches for all the major automobile manufacturers could be a good Canadian stock to add to your portfolio.
Magna International reported a record third-quarter recently. In the third quarter, MGA saw revenue grow 16% and earnings per share grow 14%. Total sales hit $8.85 billion in the quarter, bringing the nine-month total for MGA to $27.19 billion.
An acquisition in September of European company BOCO Group could mean the opportunity for tariff-free trading between Europe and Canada makes Magna International a big winner.
Europe is becoming a big part of the growth story at Magna. In the third quarter, European external production sales grew 29% to $2.18 billion. More units are made in the European market, but the division trails North America in terms of overall revenue. MGA also has 159 facilities in Europe, compared to the 155 in North America.
Shares of Magna International sit in the middle of their 52-week range. MGA has a market capitalization of $16 billion and has a huge opportunity here as demand for automobiles grows in Canada as the country will now be a gateway to the United States from Europe.
Canadian Stocks to Buy: Agrium (AGU)
Another key sector that is seen as a beneficiary of the CETA deal is agriculture. One of the largest agriculture companies in the world is headquartered in Canada and could be a big winner from the new trade deal between Europe and Canada.
Agrium has more than 1,500 facilities in seven countries. North America accounts for 90% of the company’s EBITDA. Strong diversification across different crops is a key reason why AGU continues to be a good investment option.
Agrium helps produce over 50 different crops. The most important ones for Agrium are corn (23% of revenue), wheat (18%) and soybean (16%). Agrium is also well diversified in terms of revenue sources. Crop protection accounts for 39% of revenue and crop nutrients accounts for 31%.
Agrium is also in the process of merging with Potash Corporation of Saskatchewan (USA) (NYSE:POT), a leading potash producer also based in Canada. If this deal goes through as planned, Agrium will be an even bigger winner from the likely increase in agricultural products demand in Canada.
The combination of the two Canadian companies will create the largest crop nutrient company in the world and make the newly combined company the third-largest natural resource company in Canada.
While investors wait to see what the big benefits of CETA are for Agrium, they are being rewarded with dividends and share buybacks. Agrium has a dividend yield of 3.5% and continues to raise its payout. The company has seen its dividend increase by an average of 18% the last three years. In 2015, Agrium paid out $1 billion to shareholders in dividends and buybacks.
Agriculture is an area that could see strong demand with the new trade deal between Canada and Europe. Agrium is also capitalizing on the continuing growing world population that needs more food. Agrium is benefiting as a producer of three large crop nutrients that have forecasted world growth of 2% or more.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.