Looking North for Profits
Canada offers host of investment opportunities.
Minyanville is excited to welcome Darol Ryan as our newest professor. Prior to co-founding Lightwater Partners, Darol was Executive Director at JPMorgan, where he traded equity derivatives for the firm's largest hedge fund clients in both North America and Europe. Please join us in welcoming Darol!
Just an hour from New York, you'll find one of the most exciting economies in the world: Canada.
Toronto, the financial center, is booming: It sells what the world needs, and it's managed to avoid much of the financial carnage the US has experienced. Canada has a robust and growing economy. On the resource side, Canada ranks 1st worldwide in potash, uranium and nickel reserves; in oil reserves, it comes in second.
The country prides itself on its highly productive and educated workforce. Its currency -- which once traded at a 40% discount to the dollar -- traded at par just a few weeks ago.
On the investment side, the S&P/TSX Composite (the S&P 500's Canadian equivalent) is one of the best performing indices in the world: This year, it ranks as the seventh-largest exchange, with 4,000 listed companies and a total market cap of $1.8 trillion.
It's a great story - but with any major bull market comes volatility and dislocations. It's interesting to look underneath the surface, and especially to understand what's been happening in the last few weeks.
The stock market has become increasingly more volatile over the last decade, along with the commodity run-up. Many new players have entered the market, and they've tended to focus on the small (sometimes micro-cap) energy and metals space; these can have violent swings.
Since the beginning of the third quarter alone, the S&P/TSX Composite is down 9%.
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However, there's another exchange that tracks the smaller names: The TSX Venture Composite, which is composed of over 2500 stocks. This index is characterized by emerging companies, most of whom are in the resource sector. This composite is down 26% from July 1, and a stunning 42% from its top in May 2007.
In fact, this market has been in a downtrend for over a year. Canada's Venture Exchange acted as a leading indicator, signaling a commodity correction long before the major resource stocks of the world corrected.
In the month of July alone, the average hedge fund in Canada was down over 10%; some large funds were down more than 25%. When liquidity is low, exits become small for many of those trying to play in this space.
On the other hand, there are plenty of companies with vibrant businesses in the mid- to large-cap space to invest in - over 350 companies with a market cap over $500 million on the TSX alone. In addition, 30% of the market-cap is in financials, so it's not all commodity stories.
Here's a list of the top 12 largest Canadian stocks by market cap - and there may be some surprises among these names:
Royal Bank of Canada (RY)
Research in Motion (RIMM)
Canadian Natural Resources (CNQ)
Bank of Nova Scotia (BNS)
Barrick Gold (ABX)
As we navigate through the balance of the year, it's my hope to pass along thoughts from the North - a market that's open, transparent and filled with many opportunities.
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