Keith Richards, a regular market strategy columnist for The MoneyLetter, picks two U.S. technology stocks and a USD-dependant Canadian oil and gas stock for Canadians to profit from a further USD rally.
Is there an opportunity in owning the U.S. dollar and related securities for Canadians? The USD looks like it’s going to be stuck in the trading range that I predicted in this publication and on my blog several years ago. In the near term, there is a decent chance it could move to the top of its trading zone vs. a basket of world currencies somewhere near 100-102. That’s about 5-6 per cent upside from current levels.
A rally by the USD against world currencies will put downward pressure on our loonie, potentially amplifying the upside of holding some U.S. denominated securities.
The loonie also appears to be stuck in a bit of a range, having attempted to form a head and shoulders bottom over the past year or so. The recent falling peaks and flat trough suggest consolidation (descending triangle) within the attempted head and shoulders bottom formation. Its chart looks fairly neutral at this time. There is no clear direction as to what the loonie will do. However, I suspect that if the current levels of around $0.75 to 0.76 USD do not stick, we may see a rapid deterioration in our currency.
Factors affecting the strength of the USD will be the Fed’s tightening language and actions, and international tightening/loosening policies. Economic factors will also play into USD strength.
USD and oil will boost your portfolio’s performance
Factors affecting the loonie will be the strength of the USD, and of course, good old oil prices. Generally, I am bullish on oil, with hiccups along the way. It is tough to call as to when the Fed will pull the trigger on rates. But it’s my guess that if it’s not this month, then perhaps it will happen prior to year end. That being the case, the loonie will need to find strength from energy pricing to fight the strength of the USD.
For now I like the USD and remain exposed to it. Some of our current US positions offer both potential upside in share price and upside in the USD/Loonie exchange rate.
Our current allocation in the portfolio is representative of our positive view of technology, energy, and financials.
At this time our technology stocks exposure is gained through investment in two individual stocks—Google (NASDAQ—GOOG (non-voting) and NASDAQ—GOOGL (one vote per share)) and Microsoft (NASDAQ—MSFT). Vermillion Energy (TSX—VET) is our top oil and gas stock at this time. Remember, oil is traded in USD. As such, Canadian companies in that sector can have upside from a rising USD if they have not hedged out that play. Thus, we view Canadian energy stocks as an indirect exposure to the USD.
Here are our current views on these three stocks:
■ Google. We have been invested in this giant information technology stock since October 2015 and remain committed. The company continues to be relevant in today’s increasingly mobility-dominated market place. Some of the important factors that made our initial investment desirable remain in place. The company has a footprint across consumer software, hardware, enterprise software and the cloud. We feel this footprint will allow them to continue monetizing the ongoing shift to mobile. They are also realizing a larger contribution from non-search businesses, namely YouTube and Google Play.
■ Microsoft. The company made a fairly significant acquisition at the beginning of the summer when they purchased LinkedIn. It is expected that Microsoft will be able to integrate LinkedIn’s social learning and recruitment capabilities more deeply into Office 365. By realizing and capitalizing on new opportunities in the technology sector, the company has become hugely relevant again. There has been a successful turnaround at this company largely based on the growth of the cloud, orchestrated by the CEO Satya Nadella. The repositioning has occurred while continuing to produce huge amounts of free cash flow, further strengthening an excellent balance sheet. We believe this same leadership will soon prove that paying 10 times sales for LinkedIn was the right thing to do.
■ Vermillion. We feel there is an opportunity in the energy sector. Vermillion is an oil and gas stock that offers both geographical and product diversification in this sector. They have producing assets in North America as well as Europe and Australia. In an environment of significantly lower commodity prices, Vermillion remained focused on protecting the balance sheet, defending the dividend and continuing to invest in long-term growth. They have shown extraordinary insight and skill managing through a very turbulent commodity cycle. We believe that one way to capitalize on opportunities in the energy sector is finding very efficient managers whose stocks are mispriced.
Keith Richards, Portfolio Manager, can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. Worldsource Securities Inc., sponsoring investment dealer of Keith Richards and member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only and not necessarily those of Worldsource Securities Inc. It may also contain projections or other “forward-looking statements.” There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
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