Good Time to Buy U.S. Stocks | The Prairie Trader Eyes Allied Apricot |
Dollar parity a story of bargains and good market returns
by Fabrice Taylor
The rising Canuck buck might be a problem for Canadian industries but it’s a true boon for investors. Say what you want about the U.S. economy, it’s still home to some of the greatest, most enduring and profitable companies in the world.
Think about Apple, Google, Johnson & Johnson, Goldman Sachs, Kraft Foods, Coca Cola. The list goes on, but the point is that our friends to the south have an amazing ability to create dominant companies every few years, companies that thrive and last for a century or more.
According to Interbrand, 60% of the world’s top 100 brands are American. Almost 70% of the top 25 brands are U.S. You just can’t top the place for commerce.
And now is your chance to own a little piece of that big and lucrative pie. With the dollar at par, U.S. shares are as affordable as they’ve been for a long time. For a long time, until recently, buying a share of Coca Cola was prohibitive. The stock is quoted at US$53 as I write this. When the dollar was at 63 cents, its all-time low, a decade ago, a share would have cost you C$84. And while it’s true that the dividends you’d receive every year – US$1.76 a year per share – would be worth more in Canadian dollars – C$2.80 – the real problem is that your investment would be vulnerable to upward movements in the currency.
Coke stock has done well over the decades, returning about 10% a year over a long period of time.
But imagine if you’d bought it today for C$84 and the stock rose 10% a year while the Canadian dollar went from 63 cents to par over the next decade. Your investment capital would have only appreciated by 5% a year – half the stock’s gain (I’m excluding dividends in both cases. Factoring them in would improve both numbers but again, the rising currency would mean that the dividends, once converted to Canadian dollars, was worth progressively less.)
With the dollar at par, the situation for Canadians who have long coveted U.S. stocks is much better. Yes, the dollar can go higher. But it can also do nothing or go lower. In either case, it’s a benefit to Canadians.
Let’s consider an example. When the dollar rose to roughly par a couple of years ago, (higher than par briefly for that matter) you could have bought, say, blue chip Allied Apricot for, say, $100 in either U.S. or Canadian dollars.
We all know what happened to the stock market and the world economy shortly thereafter don’t we?
They all nosedived. Stock markets tanked, commodity prices tanked and Allied Apricot tanked. But you might have been OK. Allied is a blue chip so while it fell a lot, it didn’t do as poorly as, say, Canadian stocks, which are much more sensitive to the economy owing to our preponderance of resource businesses.
Let’s say Allied fell 30%. Are you down? No. Because the dollar also fell about 30%. So while your stock, which you paid US$100 for, was now worth US$70, your investment in Canadian dollars was worth $100. You were even on the trade. And because Allied is a blue chip, it pays a dividend. Let’s say 3%. So you earned a $3 dividend and, if the timing was right, it ended up being worth about $4.30 in Canuck bucks. You actually made money during the worst and most drastic economic crisis of all time!
Of course few people did, because few people would have put all their money into dividend-paying U.S. blue chips at precisely the right time. But the point is made: buying U.S. shares when the dollar is strong can help.
Again, though, the dollar can go up, which turns this investment thesis on its head. Things get worse. But from par, the dollar can’t go up as much as it could from, say, 70 or 80 cents.
And there’s another compelling reason to take this idea into consideration. If you live in Alberta, you are inevitably vulnerable to oil-price fluctuations.
When oil is strong, the dollar tends to be strong also. When oil is weak, the dollar tends to be weak.
So buying quality U.S. shares with a powerful loonie during good times can cushion you from the bad times because as oil falls, your income (or job security) falls, the dollar falls, but your investments hold up because they’re denominated in U.S. dollars. Your dividends, and what you can buy with them, go up in value.
One final word about this strategy: although U.S. stocks, especially the best ones, have done very well over the past year, they are still reasonably priced. Johnson & Johnson, for example, is quoted at 12 times earnings, which is very reasonable for a company of that quality.
Coke, at 14 times, isn’t particularly pricey either, especially given the gradually improving economy.
Sure, a rising currency can hurt us as exporters. But there’s a silver lining to the cloud and investors should take advantage of it.
Fabrice Taylor is the Prairie Trader. He is an award-winning journalist and equity analyst.
Prairie Trader is an independent overview and assessment of investments available to Albertans. Alberta Venture assumes no responsibility for the accuracy of any stock recommendations. You can send letters about this column to feedback.
