This isn't the first time that I've written about Canada, a well-run country that has avoided many of the mistakes made by the United States. Its budget deficit is moderate, its balance-of-payments deficit is also small, its banking system is in pretty good shape and it faces very little inflation risk, since the country has maintained a reasonable monetary policy.
At this point, you might well be asking: Well, if you've said this all before, why does it bear repeating now?
The answer is simple: As I've hunted for attractive investments recently, I have noticed that a very high percentage of those companies are domiciled north of the border.
In short, it's time to invest in Canada.
Our Healthy Neighbor to the North
When I analyze Canada's current investment allure, I realize that it's partly because of the investments I find attractive these days.
If I found the conventional tech sector exciting, I would expect to find a lot of potential investments in California and Taiwan. If I liked biotech, my investment targets would be clustered in California and around Boston, with a smattering in Switzerland.
If – for some reason – I were looking for investments related to the automobile industry, I would look not at Detroit but at China and India, where the carmaking sector is showing remarkable growth as increasing consumer wealth enables them to take to the roads. And if I were looking for nuclear-power-equipment companies, my first ports of call would be France and Japan.
You get the idea.
In years past, Canada had always seemed a rather boring country to invest in. The big industrials never showed all that much growth, while the tech sector was represented by Nortel Networks Corp. (OTC: NRTLQ), which went bust, and JDS Uniphase (NASDAQ: JDSU), truly one of the great growth investments of all time – in fact, a true 100-bagger (too bad we can't figure out how to make time run backward, investing now and selling back in 2000!).
In the current economy, however, where excessive money creation and too-low interest rates have made natural resources the place to be, Canada has come into its own.
A Market Whose Time Has Arrived
As a banker back in the early 1980s, I personally knew the entrepreneurial oil companies in Calgary, and found the place great fun, rather more like the TV series "Dallas" than was the real Dallas itself. Since then, the Athabasca tar sands – which contain as much oil as the entire Middle East – have become viable. So the Calgary oil sector, after a difficult couple of decades, has revived in full swing.
For Americans, it is becoming increasingly clear that Athabasca represents our chief hope of not being held up at gunpoint by oil-controlling dictators, so the oil sector in Calgary is both economically interesting and strategically important. Given the size of the deposits, and Canada's political stability, Calgary is now a more important oil-investment nexus than either Houston or Abu Dhabi.
As I've researched gold-and-silver-mining companies over the past year, it has become increasingly clear to me that Canada is also the center for this sector, too. As Calgary is to oil, Vancouver is to gold-and-silver mining.
As is the case with oil, there is little point in investing in gold and silver mines in unstable countries; if the metals become scarce or if the price increases, you will only get expropriated. Thus, I am not a great fan of Coeur d'Alene Mines Corp. (NYSE: CDE), because its largest silver mine is in Bolivia, a country where Western property rights are very poorly respected.
However, the Vancouver-based mining companies – whether we're talking about gold or other minerals – control a vast range of deposits throughout the Americas and represent a very interesting investment field, indeed.
In the old days, Vancouver was reputed to be full of crooks; the huge 1990s mining scandal of Bre-X got started when a tiny Calgary mining concern appeared to have made a major gold strike in Indonesia. The gold samples turned out to be fraudulent, a revelation that led to the company's collapse.
There's probably still some of that going on among the smallest players, but the better-established companies with decent reputations have a track record of successful mine development, and are well worth considering as investments.
Uncovering Investment Gems
When looking at a resources company, I first check its cash flow and balance sheet – I want to make sure the firm can easily pay for its exploration and won't be forced into a weak position if there's a hiccup in its output market. After completing those tasks, I turn my attention to the company's "resource base," determine whether not its major operations are in reasonable countries, and calculate whether the firm's exploration efforts are replacing its output.
With the "Seven Sisters" oil majors, that is very often not the case: They operate in horrid environments like Venezuela, Angola and Nigeria, depend primarily on traditional sources of oil, and are often losing out in new exploration to local companies.
With Calgary and Vancouver companies, you often find successful operations, as well as resource-base growth through successful exploration. Those are the companies to go for: Your company is becoming more valuable – not less – each and every year.
For such dependable growth, it's even worth paying a modest premium. I also look at the balance sheet and cash flow, to make sure the company can maintain itself in a price hiccup. Theoretically, quarterly earnings and the Price/Earnings (P/E) ratio are less important. But it's important to point out that if a resource company can't make profits at the prevailing prices of the 2009 fourth quarter, there's probably something wrong with it!
One final point: If you see or uncover derivatives losses, avoid the company – management should have better things to do with its shareholders' money than play speculative games with Wall Street!
[Editor's Note: Martin Hutchinson has terrific foresight. He warned investors about the dangers of credit-default swaps – half a year before those deadly derivatives ignited the worldwide financial firestorm. Hutchinson even predicted where and when the U.S. stock market would bottom (a feat that won him substantial public recognition).
During the stock-market rebound that started in the middle portion of March 2009, Hutchinson's calls on gold, commodities and high-yielding dividend stocks made winners of investors who took his advice.
Experts are taking notice. And so should you.
Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and specially designated "Alpha-Bulldog" stocks into winning portfolios.
News and Related Story Links:
- Money Morning Special Investment Research Report:
It's the Best Investment in North America – and It Isn't the United States.
- Money Morning News Archive:
News Stories About Canada.
- Money Morning News Archive:
News Stories by Martin Hutchinson.
- Money Morning Buy, Sell or Hold Feature:
Buy, Sell or Hold: JDS Uniphase Corp. (Nasdaq: JDSU) Is Yet Another Rising Star in the Broadband Revolution.
The Official Web Site for the Hit Warner Bros. TV Show – Dallas.
Athabasca Tar Sands.
Abu Dhabi Economy.
- City of Houston:
Official Web Site.
- The Canadian Broadcasting Corp. (CBC) News Archive:
Stranger Than Fiction: The Bre-X Gold Scandal.
The Bre-X Scandal.
Reading the Balance Sheet.
Seven Sisters Oil Companies.
- Money Morning Investment Research:
The Index That Thrashed the S&P 500.