Many Americans view Canada as though it was the 51st state. Of course, Canadians do not appreciate a patronizing attitude such as this, and with good reason. Canada and the U.S. are not only independent of each other, but significantly different, which can be seen in how the countries' healthcare systems operate and their distinct economies.
American investors who view Canada as not much different than the U.S. do themselves a disservice because they miss opportunities provided by our northern neighbor. The economies of the two countries are intertwined and interdependent, as evidenced by being each other's largest trading partner. But that does not mean the two economies work in lockstep.
The first quarter of this year produced a nearly 4% growth rate in Canada, about double the U.S. growth rate. Some observers are worried, though, that the feeble U.S. economy will hamstring Canada's economy and that growth there will come to an end or even shrink.
Toronto's newspaper, The Globe and Mail, offers a positive note about Canada's economy going forward: Canada's banks have minimal exposure to European debt. So, the uncertainty surrounding the debt issues of Greece, Portugal, Italy and Spain will have a limited effect on Canada's banking system.
Also, I have followed a changing portfolio of Canadian stocks since 2007 on my website, Validea.com, and it has performed well. Since its inception, the portfolio is up 40.4% vs. a decline of 20.8% for the benchmark index, MSCI EAFE (Morgan Stanley Capital International Europe, Australasia and Far East), during the same time period.
One stock currently in this portfolio is Agrium (AGU). Though Canadian-based, Agrium is the largest agricultural retailer in the U.S., so it provides investors with a nice U.S./Canada mix. The company sells fertilizers, chemicals and seeds to farmers, and it has retail operations in both North America and South America. In addition, it has a wholesale business involving such crop nutrients as nitrogen, phosphate, and potash, which it mines and manufactures.
I use computerized strategies based on the writings of well-known Wall Street investors to choose stocks, and one of these strategies, which is structured on the work of Peter Lynch, gives Agrium very high marks. This strategy looks at the P/E/G ratio, which is a measure of how much the investor is paying for growth. It relates the widely used price-to-earnings ratio in conjunction with a company's growth rate; the desired result should be 1.0 or less.
A P/E/G of 1.0 means the investor is paying $1 for every 1% increase in growth. A P/E/G of 0.5 or less is considered especially strong. Agrium's P/E/G is a highly favorable 0.26, based on its P/E of 10.81 and growth rate of 41.82%, which is calculated using the average of the three-, four- and five-year, historical EPS growth rates. In addition, the company is managing its inventory well, and its debt is moderate (about one-half of equity). Agrium is a solid company.
Another stock in Validea's Canadian portfolio is Tim Hortons (THI). Anyone who has driven around Canada is likely familiar with this company. It is the largest, quick-service restaurant chain in Canada, with more than 3,100 locations, almost all of which are franchised. It operates over 600 locations in the U.S., as well, and calls itself the fourth-largest, publicly traded, quick-service restaurant chain in North America, based on market capitalization, and the largest in Canada.
Like Agrium, the Peter Lynch strategy favors Tim Hortons. It's P/E/G is also in the most-desired territory at 0.42, based on a P/E of 12.02 and a relative growth rate of 28.74%, which is calculated using the average of the company's three-, four- and five-year, historical EPS growth rates. In addition, the company's debt is moderate.
Investing in Agrium and Tim Hortons is not making a bet that is entirely Canadian-based, but these names provide a good mix of exposure to both Canada and the U.S. In addition, the companies are well run with strong market positions and proven track records. If you haven't considered Canada for investments, you might want to, and these two companies are good candidates for virtually any portfolio.