Stock pickers at Bank of Montreal are betting improving growth in the U.S. and a dropping loonie is the perfect recipe for further gains as Canadian equities rally to all-time highs this year.
Canadian stocks from auto-parts maker Magna International Inc. (MGA:US) to real-estate company Tricon Capital Group Inc. and technology services provider CGI Group Inc. that do much of their business beyond the nation’s borders are attractive buys amid modest domestic growth, Jeffrey Bradacs, a fund manager at BMO Global Asset Management, said in an interview in the Toronto Bloomberg office yesterday.
“The key driver of the last bull cycle was China, but this cycle is led by the U.S. economy,” said Bradacs, 33, who runs the C$2.1 billion ($1.9 billion) BMO Canadian Equity Fund. “We’re seeing companies in Canada are really benefiting from this.”
Companies reliant on the U.S. stand to gain as the world’s largest economy is forecast to grow 3 percent in 2015, which would mark the strongest expansion since 2005. Canada’s economy is forecast to advance 2.5 percent next year, according to estimates compiled by Bloomberg, less than projections for 3.1 percent global growth.
Along with Magna, CGI and Tricon, Bradacs’s fund also owns pharmacy technology business Catamaran Corp. (CCT) and clothing maker Gildan Activewear Inc., the Canadian companies with the highest and third-highest percentage of revenues from the U.S. in 2013, according to data compiled by Bloomberg. Catamaran gets all its revenue from the U.S., while Gildan books about 90 percent.
Other Canadian companies with at least 65 percent of revenues from the U.S. include Algonquin Power & Utilities Corp., Cameco Corp. and Agrium Inc., data compiled by Bloomberg show.
Canadian equities, especially exporters, have rallied to all-time highs this year amid a weaker Canadian dollar, leading to the highest quarterly profits in three years. The benchmark Standard & Poor’s/TSX Composite Index has surged 14 percent for the second-best performance among developed markets behind Denmark.
“We continue to be optimistic earnings growth we’ve seen in the second quarter will be sustained going forward and that will drive the market higher throughout the rest of the year,” said Lesley Marks, chief investment officer of fundamental Canadian equities at BMO Global Asset Management, which oversees about C$300 billion in assets globally.
The Bank of Canada will favor a weaker Canadian dollar to keep exporters competitive, with BMO expecting a further drop in the loonie to 88 U.S. cents over the next year, Marks, 44, said. The loonie, named for the iconic Canadian waterfowl, was up 0.3 percent at 91.40 cents yesterday. It’s down almost 3 percent this year.
In the oil patch, there are opportunities among Canadian natural gas producers as a cold summer has created some slack in prices, Marks said.
Bradacs and Tyler Hewlett, who runs the BMO Canadian Small Cap Equity Fund with C$493.4 million in assets, favor positions in natural gas producers Tourmaline Oil Corp. and Storm Resources Ltd.
“We saw some seasonal weakness this summer so we added some names,” Hewlett, 36, said. “Storm is our favorite in natural gas. They’re conservative in how they use their balance sheet for growth.”
Bradacs’s Canadian Equity Fund has returned about 13 percent this year, behind the S&P/TSX and ranking in the bottom half of similar funds, according to data compiled by Bloomberg. He avoided gold stocks, which have jumped 24 percent this year as the price of the metal rebounded, on concerns about cash flow, production and profit.
Hewlett’s small-cap fund has posted a 20 percent return this year, beating 85 percent of similar funds. The fund got a boost from a 276 percent jump this year in core holding Amaya Gaming Group Inc. (AYA), which bought online gambling company PokerStars in June.
“It’s one of the most successful names we’ve ever owned,” Hewlett said. “It was a boom-or-bust company where we saw the upside was higher than we thought. Last spring we started adding significantly and it paid off.”
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