My Canadian Investing Ideas for the year – 2016!

My Canadian Investing Ideas for the year – 2016!

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One of my goals for this year is to make $50k in addition to my income. Having a goal is nice, but like most people if you don’t have a plan you are not going to get there.

There is only two ways I believe that I can get there. Starting a company or investing. I believe I don’t have enough passion to start a company. After spending some time understanding entrepreneurs and what drives them to start companies I don’t have what it takes. I don’t want to solve anyone’s problem, there isn’t an idea I passionately believe in. I simply want to make money and prove to myself that I can. That is probably my passion.

Keeping that in mind and keeping in mind that already a month has passed in the current year , I decided to get started on my investing goals.

I am lucky enough to have access to research material on stocks, macro-economic trends, investing ideas etc. One such document had a list of 30 stocks that it highlighted as good ideas for the year. I read through the document and picked stocks that I believe will do well for the year given my understanding of the world economy and the Canadian economy.

A large percentage of my investing capital is currently in Canadian Currency. As such I don’t want to pick a stock that only trades on the US exchange. I simply don’t want to convert my CAD to $ at the current exchange rate.As such my picks are stocks that trades on a CAD exchange.

There are 6 Canadian companies recommended in the report I read.

 Alimentation Couche – Tard Inc (TSX:ALD.B) 

Alimentation Couche-Tard Inc. operates convenience stores. The Company is engaged in the sale of goods for immediate consumption, road transportation fuel and other products through corporate stores and franchise operations. “

The analyst has a price target of 69$ . Current price is $60.98 . That is a gain of 13% if it is able to reach that price.

Personally, I am not interested in the convenience store market. So this stock is a no for me. Also I am not too sure if this sector will fair will if our economy struggles.

For this stock I placed an order for $5000 at market price in my TMX simulator so I can keep an eye on this stock. Based on how this stock does this year, I would know how valuable this analyst’s recommendations are.

Canadian National Railway Company (TSX:CNR) 

“Canadian National Railway Company is engaged in the rail and related transportation business. It transports goods for business sectors, ranging from resource products to manufactured products to consumer goods. “

I have a soft place in my heart for CN. Our final year MBA project was on CN. This is an 8 month project that looks at the industry the company operates in, the suppliers, customers, the upcoming trends that will impact the company, the competition, and the internal financials and culture of the company. All this analyses is to help determine the future strategy for the company. Our group did a presentation to the senior management team of CN, including the CEO. 

Based on the current price of CN stock and the target price of the analyst of $82 the return on this investment would be around 7%. 

One of the things that is always highlighted about CN is its efficiency ratio. It has the best efficiency ratio in North America. This is an important ratio for railroads. It helps track how much a rail road is utilizing its assets. The better this ratio is the lower the cost of operating for a rail road. This will be helpful in tough economic times when it is a struggle to increase top line growth.

CN’s revenue is dependent on the money it makes transporting various goods such as oil, commodities, automobiles, lumber etc. When different industries are struggling such as oil there will be a reduction in CN’s business. Based on review of last year’s financial numbers CN was able to do well regardless of the struggles from Oil because it had an increase in business from other sectors such as automobiles. 

For this year I believe there will be challenges because of dropping oil prices, decrease in demand for commodities from emerging markets , but I also believe it may be able to offset the drops from increase in demand for automobiles ( US Economy is expected to do well) , and increase in lumber from the housing industry in the US. 

I also believe CN is a good stock to hold for long term, and is a stable stock. Its return is about 7%, good to hold in a portfolio if you have other more volatile stocks.  

I am going to buy some for my RRSP and leave it in for now. 

Enbridge Inc. (TSX:ENB) 

“Enbridge is an energy transportation and distribution company. Enbridge conducts its business through five business segments: Liquids Pipelines; Gas Distribution; Gas Pipelines, Processing and Energy Services; Sponsored Investments and Corporate.”

From the research list Enbridge has the highest forecasted increase in the Canadian company categories. It is expected to increase 30% within the next year. 

I am not familiar with the energy sector. I found the projected return profitable, so I did some research. 

Here are my findings:

The Good

  • Enbridge owns the pipelines which Oil flow through. It has set contracts with Oil companies, regardless of Oil Volume. As long as a specific company has some traffic it will get paid. However, if Oil prices are depressed for a long time, new contracts will be at risk.
  • Enbridge does a good job acquiring other companies to expand its growth. Recent acquisition of Tupper Main and Tupper West gas plants is one such example.
  • My personal believe is that Oil will move backup near the $50 per barrel toward the end of the year. Enbridge will benefit from rising oil price. Will be sharing my analysis on Oil prices in a future post.
  • Enbridge has a history of paying dividends and Canadians looking for income producing stock typically purchases Enbridge. A good portion of its return will be from dividends.

The Risks

  • One of the complaints about Enbridge is that it raises dividends while going out to the equity market for more funding for growth. Companies normally have three sources to invest, either use the income they have earned, go to the debt or equity markets. Using the income they have earned is the cheapest source of investing. It can also be argued that paying out dividends forces a company to return cash that it does not have a good use for. As a result when it finds a good opportunity it may not have enough cash on hand, and may need to go to the capital markets. 

Based on my findings I purchased 103 shares at the start of February 2016 at a price of $46.54 per share. My goal is to keep this till end of 2016 and reassess at that point. I may re-evaluate my stock holdings if any major events occur.

The Toronto-Dominion Bank (TSX:TD) 

“The Toronto-Dominion Bank and its subsidiaries provide Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking, Wealth Management, Insurance and Wholesale Banking. “

TD has been recommended by the analyst among the big Banks in Canada for the following reasons:

  • Less exposure to Oil in comparison to its peers
  • Less exposure to Western Canada
  • 25% of its earnings coming from the US retail business, which will benefit from US rising interest rate.

Risks:

  • Td has a law suit pending from the Stanford Ponzi Scheme
  • Mortgage loan risks in Canada, which will affect every bank in Canada
  • Overall economy deterioration, which will affect most stocks

The expected return from TD is approximately 14%. For now, I am not going to invest in TD or any of the big banks. I may reconsider, but at the moment it is a no. I worry that if the Canadian Economy struggles due to weak Oil Prices and falling currency the effects may be seen by the bank stocks.

I have placed an order for $5000 worth of TD stocks in my TMX Simulation program to monitor the stock.

Intact Financial Corporation (TSX:IFC) 

Intact Financial Corporation is the largest provider of property and casualty insurance in Canada. Intact offers home, auto and business insurance through Intact Insurance, belairdirect, Grey Power, BrokerLink and Jevco. “

I will purchase some IFC shares as a defensive measure against upcoming challenging macro-economic climate. General theory of portfolio management dictates that you hold a balanced portfolio to minimize risks. It is considered a defensive buy because insurance industry premium growth is not related to economic growth, this stock will not suffer from a bad economy like a bank or other financial stocks, and it has a long track record of growth and profitability. 

The stock has an average volume of about 200k which is smaller than the trade volume of companies I normally trade on. I am not too worried, since this company is Canada’s largest property and casualty insurer. 

Based on the analyst estimate of a price possibility of $104, if I set a market order to buy shares tomorrow morning (Feb 2nd, 2016) at a price of around $83.43, I stand to gain around 17% to 19% if the price target is met.

I have also added this stock to my TMX simulator  to monitor its performance.

Cenovus Energy Inc. (TSX:CVE) 

Cenovus Energy Inc. and its subsidiaries, are in the business of the development, production and marketing of crude oil, natural gas liquids (“NGLs”) and natural gas in Canada with refining operations in the United States. “

The last company on the top pick list is an oil company with a very strong balance sheet. This company has a price target of $23 with its current price it will yield over 27% in return if it is able to reach its price target. I believe Oil prices will be getting better toward the end of this year, however it may drop more before it gets there. As such I will monitor this stock by buying it in my TMX simulator.

Based on the 6 recommendations, I have invested in two of the companies, and is targeting to invest in CN Rail in the near future. I will post updates as I readjust my portfolio and move some other cash holdings into securities. Good luck with your investing.

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