From Sean Brodrick: Canadian stocks are cheap. But I wonder for how much longer. Let me show you what I mean in two charts.
First, here are the price-to-book ratios for three major indices.
We have America’s leading stock index, the Dow Jones Industrials.
We have the S&P 500, the index of the 500 leading stocks in the U.S.
And we have the S&P TSX Composite Index, the benchmark Canadian index.
The S&P/TSX Composite represents about 70% of the market cap of the Toronto Stock Exchange. It has about 250 of the biggest companies on the TSX.
The price-to-book value for a stock is just its share price compared to what its component parts would be worth if you sold them off today. It can be a way to see if something is undervalued. But a low P/B ratio can also show that something is fundamentally wrong.
So look at this chart and ask yourself: “Does the market believe that there is something fundamentally wrong with Canadian companies?”
Because they sure are cheaper …
According to Bloomberg, the recent P/B for the S&P TSX Composite was 1.79. Compare that to 2.79 for the S&P 500 and 3.38 for the Dow.
Now, maybe there’s more economic growth in the U.S., and those Canadians are sandbagging it, right? Nope! Canada is growing at around 2.6% to 3%, according to the Bank of Canada. The U.S. is growing at around 1.9%, after 1.6% last year. And some forecasters put U.S. growth lower.
Note: Those forecasters aren’t very popular.
Anyway, it’s not that. One thing it might be is the currency. The Canadian dollar has been in a long slide.
The Canadian dollar is also known as the “Loonie,” because its one-dollar coin features a picture of a loon.
The Loonie has slumped for years. Ever since the end of the last gold bull market. That’s not a coincidence. Mining is VERY important to the Canadian economy.
In fact, mining accounts for 19% of Canada’s total exports. Canada ranks in the top five countries in the global production of potash, uranium, nickel, cobalt, aluminum, platinum, sulphur, tungsten, diamonds, graphite, gold and more!
Have you seen what’s happening to mineral prices lately? I’m not just talking gold. Silver … nickel … zinc … cobalt!
The long bear market in many commodities is over. The new bull is polishing his horns.
And the companies that mine those commodities should see their share prices inflate right along with the price of their products.
Sure, we’ve seen many of these stocks rally. A bit. But we aren’t close to done. Heck, we aren’t at the end. We may not even be at the end of the beginning.
Get wise, and get long Canada. You’ll want to be onboard for this rally.
The iShares MSCI Canada Index ETF (NYSE:EWC) was unchanged in premarket trading Thursday. Year-to-date, EWC has gained 3.40%, versus a 5.37% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Uncommon Wisdom Daily.