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Diversify with Canadian Stocks

Canadian stocks are a good way to diversify your portfolio without taking on too much risk. And here’s one Canadian stock that appears quite undervalued.

Today, I want to talk about Canadian stocks. To introduce the idea, let me bring you back to a column I wrote roughly two and a half years ago supporting the idea that the U.S. should merge with Canada.

Diane Francis, an American-Canadian journalist and author, had written a book trumpeting the idea, titled Merger of the Century.

I read it, and was convinced by her argument that such a merger would:

A. Create a continent-wide superpower to counter the growing economic and military threats of China and Russia.

B. Provide a new growth path for U.S. money, workers and technology.

C. Enable more efficient utilization of Canada’s vast natural resources.

There’s a lot more to the book than that, of course. Francis is a thorough researcher and a good writer, with numerous books to her credit, and if you take the time to read it, I promise you’ll learn something.

But my readers weren’t impressed by the idea.

While U.S. readers’ reactions to the column were mixed, the reactions of Canadians were decidedly negative, particularly those identifying as French-Canadian from Quebec.

They don’t want to have their identity overshadowed by loud aggressive Americans. They’re proud of their heritage and they want to keep it!

In short, culture trumps economics for many people.

And so, for the foreseeable future, Canada, for U.S. citizens, will remain a nice place to visit—and a nice place to get some investment diversification.

Why Own Canadian Stocks?

Economic stability. Canada’s banking system is a model of stability. Low risk is still the ruling principle, unlike in the U.S. Low debt is normal in the country. As a result, Canada came through the 2008-2009 recession with less pain than most countries, and didn’t need to struggle as hard to get back to normal—not that we’re back to normal in the U.S.

Trusted banks. Moody’s Investors Services ranks Canada’s banking system No. 1 in the world for financial strength and safety, and the World Economic Forum has dubbed Canada’s banking system the best in the world for seven years running.

Low volatility. Canadian stocks are less volatile, in part because they’re often thinly traded and thus not liquid enough to interest major players.

Cheap currency. The Canadian dollar is historically cheaper than the U.S. dollar, thus inflating the value of Canadian exports by making them more affordable to U.S.—and other—customers.

Low tax rate. With a low tax rate on new business investment of just 17% and corporate tax rates of 26% to 27%, Canada is attractive to outside companies hoping to cut costs by relocating their operations. In fact, that’s why Burger King bought Tim Hortons!

I’ve got a Canadian stock for you to buy too, but first, a little detour to review my recent Canadian vacation.

It started with a lovely wedding (the son of friends) at Sunday River Ski Resort in Maine and after that we just kept going north, with a couple of other friends, to explore Quebec City.

The drive north took us on sparsely traveled back roads through the Maine forest, with one highlight being this view of Lake Mooselookmeguntic.

Quebec City was beautiful, and prices quite reasonable from our point of view. The food was delicious, and I got to practice my French. The only downside, perhaps, was the presence of lots of other tourists, many courtesy of the cruise ships that dock at the waterfront.

Here’s my wife and me with friends, setting out for a tour powered by a horse named Bob.

Then it was off to Montreal, where cultural highlights were the Musee des Beaux-Arts, the Notre-Dame Basilique (see below) and the hordes of Montreal Canadiens hockey fans we saw walking toward a sold-out pre-season game as we enjoyed an outdoor dinner.

Last but not least was a walk out the Quai de l’Horloge to see—and climb—this clock-tower whose works are similar to those of London’s Big Ben. Entry was free, it was 192 steps to the top, and I enjoyed every one.

One Undervalued Canadian Stock

The Canadian stock I’m talking about today is not a household word in the U.S.; it may not be in Canada, either, but it was recommended by Cabot’s ace value analyst Roy Ward, and that means it’s worth a look.

Here’s why.

Back in September 2015, Roy recommended shares in A.O. Smith (AOS), the venerable water heater company. Roy’s analysis said the stock was substantially undervalued, and he concluded his recommendation with this: “The company’s 17.3% return on equity makes the stock attractive to investors like Warren Buffett. AOS will likely rise 33% within one year.

Well, just two weeks ago on October 6, Roy recommended selling A.O. Smith, sending this message to his readers:

Sell Alert October 6, 2016

A.O. Smith (AOS 51.25) reached its Minimum Sell Price of 51.36 today, October 6. The company reported slow sales growth in the first two quarters, but earnings increased more than 20% in the last two quarters. Profits were aided by lower raw material costs and higher prices for the firm’s water heaters. AOS shares have surged to a new all-time high and are now over-valued at 28.2 times current earnings per share. The dividend yield is small at 0.9%.

A.O. Smith was first recommended in September 2015 at 34.48. The company was featured in the Cabot Enterprising Model using the Graham-Buffett analysis. AOS has advanced 49.0% in the past 12 months compared to a gain of 10.1% for the Standard & Poor’s 500 Index during the same time period.”

I think that’s pretty impressive.

So, here’s what Roy had to say about his Canadian stock recommendation (which I’ll call Stock X):

“Stock X is a leading designer, manufacturer and marketer of network-connected video surveillance systems, surveillance cameras and video analytics (software that scrutinizes video input). Customers include police departments, schools, hospitals, prisons, airports and public transportation systems. Stock X provides the security video systems for San Diego’s public transit system, Toronto’s Rogers Centre stadium, the entire University of Tennessee campus and many other venues. The company is headquartered in Vancouver, British Columbia.

“Stock X’s research goal is to upgrade surveillance cameras to high-definition quality, enabling customers such as retailers and governments to protect against theft or terrorism by providing detailed images usable in court or usable by facial recognition software. The company’s cameras can identify faces and license plates from 46 meters (150 feet) away.

“Stock X generated $400 million in sales during the 12 months ended June 30, 2016 and will likely generate $1 billion in sales in 2020. The company boasts a strong balance sheet with modest debt and ample cash.

“The stock’s current 15.7 P/E is easily justified by the company’s growth prospects. Earnings per share will likely grow at a 16.0% pace during the next five years. The resulting PEG ratio of 0.98 is attractive. I expect the stock to perform quite well in the months ahead as sales and earnings begin to accelerate.

“For longer-term investors, the current low price offers an excellent entry point to buy an exciting company in the rapidly growing surveillance sector. I expect the stock to double and reach my Minimum Sell Price within two years.”

To get the name of this Canadian stock in the security industry, along with Roy’s latest update on it, click here.

Remember, when you hook up with Roy and build a diversified portfolio of low-risk undervalued stocks, you can expect long-term returns like this!

Since inception on 12/31/95, the Cabot Value Model has provided an impressive return of 1,172.1% compared to a return of 573.6% for Warren Buffett’s Berkshire Hathaway. During the same 20-year period, the Dow has gained just 257.8%.

Timothy Lutts is Chairman Emeritus of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.