How to profit from Canadian interlisted stocks

When Canadian stocks trade in the U.S. as well as in Canada, it’s usually beneficial for the company. It seldom offers much benefit, however, to Canadian individual investors.

Many Canadian stocks trade not only here but also in the U.S. Such stocks are known as ‘interlisted’ stocks. In fact, 30 of our Key stocks trade there—mainly on the New York Stock Exchange.

Most interlisted Canadian companies are large blue chip stocks. We rate all 30 of our interlisted Key stocks as either ‘Conservative’ or ‘Very Conservative’. None of our ‘Average’, ‘Higher Risk’ or ‘Speculative’ Key stocks is interlisted. While the American investment community knows many of Canada’s largest companies, smaller companies mostly ‘fly under the radar’.

Key Canadian interlisted stocks

Our 30 interlisted Canadian Key stocks are: Agrium Inc., Bank of Montreal, Bank of Nova Scotia, Barrick Gold, BCE Inc., CAE Inc., Canadian Imperial Bank of Commerce, Canadian National Railway, Canadian Pacific Railway, Cenovus Energy, CGI Group, Enbridge Inc., Encana Corp., Fortis Inc., Gildan Activewear, Imperial Oil, Magna International, Manulife Financial, Open Text Corp., Potash Corp. of Saskatchewan, Royal Bank of Canada, Shaw Communications, Stantec Inc., Sun Life Financial, Suncor Energy, Teck Resources, Telus Corp., Thomson Reuters, Toronto-Dominion Bank and TransCanada Corp.

Canadian companies can find it useful to interlist their shares—particularly if they’re growing in the U.S. These companies may issue shares to assist in paying for U.S. acquisitions. These shares are more readily accepted if they trade in the U.S. The fact is, Americans prefer Canadian interlisted stocks. When American journalists or investors seek our advice about Canadian stocks, they ask us to confine our picks to interlisted stocks.

Companies can profit from interlisting . . .

Interlisting can also increase the demand for the stock. Indeed, in a number of cases the trading volumes in the U.S. exceed the trading volumes in Canada. Also, overseas investors are more likely to buy the shares if they trade in the U.S. This is similar to investors buying the ADRs (or American Depositary Receipts) of foreign companies.

For Canadian individual investors, the interlisting of Canadian companies usually doesn’t matter. That is, you’ll have little chance to profit from fluctuations in share prices or currencies. That’s because arbitrageurs keep prices in line. They’ll buy shares in the cheaper market and immediately sell them in the costlier market. They do this until the price is the same in Canada and the U.S., adjusted for the exchange rate.

. . .  but you, not so much

There is one way that Canadian individual investors can profit from interlisted Canadian stocks. That’s when a stock trades significantly more in the U.S. than in Canada. The higher trading volume typically narrows bid-ask spreads. (This is the difference between the most a potential buyer is willing to pay and the least a potential seller is willing to accept). Narrower bid-ask spreads reduce trading costs.

Higher trading volumes also raise your chances of filling your orders at satisfactory prices. That’s thanks to more buyers and sellers. This is particularly important for market orders (where your buy or sell order is executed immediately).

More trading is best for market orders

When trading volumes are low, or stocks are thinly traded, market orders can go awry. Let’s say that a stock last traded at $30 a share. You place a market order to buy 500 shares ‘at market’. First you buy 200 shares at $31 each. Then you buy 100 shares at $32 each (the next best price). Finally, you buy the last 200 shares at $35 each. Your average price is $32.80 a share—not $30. With large trading volumes, you might have paid $30.25 for all 500 shares. This would’ve saved you $1,275.

Similarly, when trading volumes are low or stocks are thinly-traded, a market order to sell could fetch less than you expect. That’s due to potentially significant gaps between the bid prices.

Since most interlisted Canadian stocks are large, however, they usually trade actively. This means that you can probably buy and sell shares on the Canadian market at reasonable prices. In addition, you’ll side-step paying currency-conversion costs.

 

This is an edited version of an article that was originally published for subscribers in the February 3, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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