Friday, November 9, 2007

x border shopping

The Canadian dollar recently appreciated up to above $1.10 vs. the greenback, and then quickly moved back down to around $1.06 U.S.. Most analysts within Canada and the U.S. are predicting that the loonie will cool off to average levels anywhere in between $0.95 and $1.07 over the next year. I don't pretend to be an economist or a currency guru, however I am of the same mind as most of these analysts. I'm not sure where the loonie will land over the next year or two, but I am fairly certain that it can not maintain levels above $1.05 U.S. for very long.

Factors that are pushing the Canadian dollar higher include: very high oil prices of above $90/barrel, high commodity prices because of strong global growth, a solid Canadian economy, a weaker U.S. economy, a U.S. credit crises, recent U.S. interest rate cuts, and good Canadian employment growth. I count 7 key factors here that are keeping the loonie buoyant against the greenback. It is my belief that these 7 factors will not all stay in place for the duration over the next few months, and years. This is why I believe the loonie will eventually cool off to levels well below $1.00 US as we move into 2008 and 2009.

So where does that leave investors who share my thoughts and would like to put these inferences to action? Well, if you are a stock investor and are looking for places to stash your currently strong Canadian dollars that might earn you some dividends and buy you some time while you wait for the loonie to weaken, here are a few options:

The key things you want to look for in a U.S. denominated stock to hold for this purpose are these:
  • large stable companies in stable industries, that have histories of dividend growth
  • modest earnings growth expectations, and fairly valued stocks (you don't want a company to miss high earnings expectations and suffer a major share price hit).
  • a decent sized dividend to pay you quarterly while you hold
  • go after some exposure that you might not be able to get in Canada
  • even if you are wrong about the currency, you're still holding quality blue-chip U.S. stocks

Recommendations:

  • Johnson & Johnson (JNJ) - Health care & Consumer Products, consistency, safety, global, low debt, dividend growth, low earnings expectations, 2.5% yield.
  • UPS (UPS) - Transportation of goods and supply chain mgmt., consistency, global, low debt, barriers to entry, dividend growth, low earnings expectations, 2.3% yield.
  • Altria (MO) - Tobacco products, consistency, not economically sensitive, global, low debt, dividend growth, low earnings growth expectations, 4.1% yield

Of course any one of these three companies could suffer share price depreciation due to some unforeseen event or economic turmoil, however I believe these three are as good a place as any to hide while the U.S. dollar strengthens over time against the loonie. Obviously I would recommend holding these investments for at least a few years.

Alternatively you could look into several other investment vehicles in the U.S. which are not limited to bonds, exchange traded funds (ETFs), money market funds, and simple U.S. cash.


4 comments:

Anonymous said...

I'm seeing JNJ closer to 2.5% yield. I think you double typed the MO yield in there.

MG said...

..thanks.

Anonymous said...

Should I buy JNJ or MO for my RRSP or non-RRSP for 15 years (long term) ?
Thanks

MG said...

anon,

I'm not sure what you are asking. I would make sure that you do your due diligence before buying JNJ or MO for either account.