Canaacord Adams Weighs In on Gold, Banks and Insurers

Despite the recent correction in gold prices, including an 8.4% drop in the past two weeks alone, gold stocks should remain one of the best-performing groups in Canada this year, says Canaccord Adams portfolio strategist Nick Majendie.

Following a cross country visit to 30 Canadian companies including four of the country's gold miners, Mr. Majendie told clients in a note that, while gold production costs will probably rise when Q1 results are published, investment demand for gold will remain strong if the financial turmoil continues until year end as forecasted by the banks he visited.

He wrote:

Gold stocks always do well in such times. For example, the S&P 500 was down about 50% in 1973-1974 and 2000-2002 and both times, gold stocks gained more than 50%.

Thus, despite the possibility of a continuing correction/consolidation in gold stocks in the short term, we believe the sector will be one of the strongest, if not the best performing group for the full year.

The analyst remains confident that the TSX will climb at a double-digit pace to 15,000 next year, largely on the back of continued commodities strength. In addition to his prognosis on gold, Mr. Majendie also weighed in on the banks, expecting them to lower estimates after Q2 results.

He said:

While six months ago, the universal response was that it would likely be over by the spring of 2008, now the feeling is it will [...] last until at least the end of the calendar year.

With that in mind, Mr Majendie said he was more impressed by Manulife Financial Corp. (MFC) and Brookfield Asset Management (BAM) in terms of risk/reward, than by any conventional banks.

Regarding Manulife, he said the insurer's medium-term earnings per share growth target of 15% per year is likely achievable.

It is double the likely growth rate of the Canadian banks in that time frame and yet it sells at a premium of only a point or two above most Canadian banks. Thus, it represents much better value, in our opinion.