Sep 21, 2009

The Market That Will Surprise In The Coming Decade

Though I will likely be ridiculed on the following prediction, It is hard to make a substantive argument to the contrary. But there are too many gems, overlooked stocks and strong fundamentals to dismiss this country in the least. Given my many articles about the inflation tsunami about to hit the western countries (with a few caveats of course), Canada or more specifically the Toronto Stock Exchange and The Venture Exchange could potentially perform in-line or outperform many BRIC countries.

So what is the logic? I believe we are gearing up for the second leg of the commodity bull market, which will make the last ten years look like child's play. This has to do with the massive oil reserves that even many oil experts or ignorant of (more on that later) , the vast array of agricultural products that will be in demand by all the emerging and industrialized economies throughout the world. Finally, another industry I continuously promote is the mining industry. It is not that Canada is one of the top one or two mining countries but rather the fact that the majority of the big and small players alike or incorporated here.

Oil - There is extreme value abound in the Canadian Oil Trusts (mainly because of the overreaction of the loss of the current tax-exempt status starting in 2011). Many of these companies have actual growth which will help or fully negate the impact of reduction to the groups bottom line. Some of which come to mind are PennGrowth (
PGH) , Enerplus (ERP) and Canadian Oil Sands Unit Trusts. The first two have cut their dividends to a measly 11%+. Should these prices remain for the next 5 years, I could see them yielding 20,30,40% (I obviously don't expect that ). Canadian Oil Sands Unit Trust( has a substantial hand in the Synacrude project, which will pay off for years to come as the reserve base is quite large in addition to the current tapering off of Cap-ex required. This leads me into my favorite aspect of Canada's oil the complex, the much hated oil sands (but that's just another reason to love it). Yes i know the arguments against the sands i.e high cost of goods sold/manufactured, but that is hogwash. Many of them have extraction costs of $40-$45 dollars per barrel, while the less efficient producers still remain below $60. Even on a conservative estimate with oil averaging $120 per barrel over the next decade, how can you argue a 50% operating margin is anything but great! Oil companies aren't stupid and understand the nuts and bolts of the industry, i.e Suncor (SU) buying Petro-Canada (PCZ) ( One main reason was to dramatically increase exposure to the oil sands). Not to dwell on oil but I wrote a previous article with worldwide oil reserves, so that may be worth taking a gander at before the criticisms begin.

Agriculture... Wow is this a misunderstood industry or what? Many important crops have seen very low single digit growth over the last decade while the population grows and emerging countries demand for these products skyrockets as their standard of living has gone up. I could drag on for quite a while so I will first mention Potash (which i have previously written about as well), whose mines of significant importance are found in Canada and Russia (though there are numerous mines around the world but no single country hold the quality and quantity that the aforementioned do. One very telling sign of the increasing importance of this crop is BHP billitons recent entry into the market..And of course they chose Canada. Potash is an amazing fertilizer of which many extracts can be used for a multitude of purposes. Broadly speaking potash provides environmental protection, extremely high yields just to name a few. To avoid all the other bi-products (see "what you should know about potash), I will add one more use that is widely used in the Asian countries and that is tobacco. Potash (
POT), should be a core long term holding in every type of investors portfolio. As I believe Wheat, Corn, Cotton and many others will see sharp price appreciation, the former has an amazing supply-demand disconnect and will be in high demand for the foreseeable future. This is because Australia experiences droughts like clockwork, making this market volatile, Canada also has the same problems ( in terms of weather) - while Europe has to grow enough for themselves and China's demand will go nowhere but up. This being said wheat futures will likely be extremely lucrative (assuming you know the risks) and well as wheat-pooling companies such as Viterra( , who has recently purchases Australia's ABB Grain (the market share leader), thus negating the seasonality impact. Corn and Cotton may be turned to as oil should oil goes back the stratosphere.

Again, I go back to the miners.Though i will attempt from rambling. Assuming a long term price of $1200 for Gold (which is a lowball figure in my opinion) and $25/oz price of silver - the margins that will had by this industry will be a desired asset to have in many portfolios. Many miners have cash costs of $400/oz but assuming (for simplicity sake), the average cost is $600/oz..Like oil a 50% operating margin will be easily achievable. The largest silver companies have cash costs now about $6-$7/oz but assume this number jumps to $10/oz. This will equate to a 60% operating margin, again not to shabby. Let's take the case of my favorite Silver company, Silver Wheaton (
SLW)- They have contractual agreements averaging 21 years with a 1% cap rate on cost increases to their average purchase price of $4/oz. Assuming this moves to $5, they will boast an 80% operating margin and about a 75% net margin (as they don't pay income tax) and have only a handful of employees.

All in all, i think the TSX is place to have a portion or significant exposure to going forward, especially if you invest via index funds.

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