Focus on consumer stocks and manufacturing stocks

Monty Python’s “Always Look on the Bright Side of Life” is the ultimate parody of syrupy songs meant to cheer someone up. “Some things in life are bad, They can really make you mad, Other things just make you swear and curse. When you’re chewing life’s gristle, Don’t grumble, Give a whistle and  . . . Always look on the bright side of life.” So whistle along while we take a look for some Canadian stocks that just may cheer up your crucified portfolio’s life.

Most commodity producers are doing poorly and dominate the headlines and investors’ attention. But many stocks in the other economic sectors are doing well–particularly companies that generate most of their earnings elsewhere, such as in the growing U.S.

Canadian stocks trade on the Toronto Stock Exchange. But it’s almost as if two stock markets exist. One consists of producers of commodities. The other is of stocks that have little to do with commodities.

Producers of commodities continue to suffer. That’s because commodity prices have fallen, of course. This is true of oil and gas, base metals such as copper, precious metals such as gold, among many others. The trouble with commodity prices is that they’re unpredictable. When oil traded at over US$100 a barrel, who knew it would fall under $30 a barrel so quickly? Given the unpredictability of commodity prices, we’re unsure of just when they—and the shares of commodity producers—will recover.

These commodity producers account for a large part of the Canadian stock market. As a result, the drop in natural resource stocks has pulled down the market as a whole. This has grabbed the headlines and the attention of investors. There are legitimate worries that an economic slowdown in China will continue to hold down commodity prices, at least in 2016.

Many non-resource stocks are attractive

Many non-resource stocks, on the other hand, remain attractive. Consider, for example, manufacturing stock Magna International (TSX─MG). It makes auto parts worldwide. Low interest rates make car purchases more affordable these days. And lower gasoline price make cars cheaper to operate. As a result, we think the drop in Magna’s price makes the shares well priced. It remains a buy for long-term share price gains as well as decent and rising dividends.

The economy of the United States remains much larger than China’s. Given our long shared border, Canada’s economic health depends far more on the U.S. economy. Even better, the U.S. economy is thought to have grown by 2.5 per cent in 2015. That’s the best of the G7 (the Group of Seven industrial countries). Only Britain comes close, after having grown by 2.4 per cent last year. This is positive for many non-resource Canadian stocks.

Magna, for instance, earns more of its profits in the U.S. and Europe than it does in Asia. Similarly, consumer goods stock Saputo Inc. (TSX─SAP) earns most of its money in the U.S.

So do other consumer goods stocks such as Alimentation Couche-Tard (TSX─ATD.B), Hardwoods Distribution (TSX─HWD), High Liner Foods (TSX─HLF), Thomson Reuters (TSX─TRI) and manufacturing stocks such as CCL Industries (TSX─CCL.B), Dorel Industries (TSX─DII.B), Gildan Activewear (TSX─GIL) and Stella-Jones Inc. (TSX─SJ).

Financial stock Toronto-Dominion Bank (TSX─TD) has more than half of its branches south of the border and Canadian railway stocks CN (TSX─CNR) and CP (TSX─CP) do a lot business in the U.S.

Two reasons to cheer up and whistle

Some Canadian investors seem too fretful about the stock market. This could lead to missed opportunities. A market setback is a terrible thing to waste.

Stock markets fell in January, of course. Many fear that this means that the global economy is headed for a recession in 2016. Just remember that falling stock prices are unreliable predictors of recessions. In October, 1987, for instance, the U.S. stock market plunged by over a fifth in one day. Yet the economy kept growing. Only stock market upswings are reliable predictors of better economic times ahead. In March, 2009, the stock market began to recover. Later on, so did the economy.

There’s also fear about China’s slower economic growth. Indeed, it’s thought to have grown by ‘only’ 6.9 per cent in 2015. That’s well below its double-digit growth rates in recent decades. Just keep in mind that China is now the world’s second-largest economy. Growth of seven per cent or so adds more to the global economy than higher growth rates when its economy was much smaller.

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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