Canadian Commodity Stocks: 4 To Buy, 1 To Hold

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Includes: ABX, GLD, KGC, NTR, SU, TLM
by: Efsinvestment

Canada has vast amounts of natural resources, which are yet to be explored. The country is rich in oil and natural gas reserves, as well as precious and essential commodities. According to the country's official statistics, revenues from natural resources constitute more than 11% of Canada's GDP. Companies in this sector generated revenue of $133 billion in 2009 alone. A significant portion of the productivity in the natural resource field is exported to the U.S. and other trading partners. In 2009, the natural resource sector contributed almost $70 billion to Canada's trade balance.

There are more than 100 Canadian natural resource stocks that trade within the U.S. markets. These stocks offer the U.S. investors an opportunity to profit from Canada's vast amount of natural resources. However, some of these stocks are priced with hefty premiums, whereas others are trading at a discount. Over the next few articles, I am planning to examine these stocks from a fundamental perspective, adding my O-Metrix grading system (Out of 10) and FED+ Valuations where possible. This is the first article on this series. Here is a list of 5 Canadian basic material companies. Based on my analysis, I rate 4 of them as buy, and 1 of them as hold:

Stock Name

Yield

EPS Growth Estimate

O-Metrix Score

FED+ Valuation

YTD Return

My Take

Kinross Gold (NYSE:KGC)

1.1%

4.7%

2.42

$11 - $24

-5.44%

Buy

Barrick Gold Corporation (NYSE:ABX)

1.1%

8.7%

4.95

$68 - $91

6.41%

Buy

Suncor Energy (NYSE:SU)

1.3%

15.10%

7.81

$58 - $82

17.24%

Buy

Potash Corp. (POT)

0.6%

9.6%

4.21

$53 - $62

8.44%

Buy

Talisman Energy (NYSE:TLM)

2.2%

17.5%

0.9

$9.5 - $19.5

-3.45%

Hold

Data from Finviz/Morningstar, and is current as of February 13. You can download O-Metrix calculator, here.

Kinross Gold

While gold (NYSEARCA:GLD) holders enjoyed one of their golden years in 2011, Kinross disappointed its shareholders with a return of -35%. Kinross is one of the largest gold miners around the world. It is headquartered in Toronto, Canada, but Kinross' production and exploration activities are spread across Americas, Africa, as well as, the Russian Federation.


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Although the company's paltry bi-annual dividend of 6 cents does offer much income, the dividends have been increasing since 2008. It offers a yield of 1.1% supported by a payout ratio of 14%. The stock returned -5.45% since January. Based on an EPS growth estimate of 4.7%, it has an O-Metrix score of 2.42. FED+ Fair Value range is $11 - $24. I am not a big fan of gold miners, and I think the precious commodity prices are highly inflated. However, Kinross has gone through a series of acquisitions, and the company has a good moat in the business. It is also trading at relatively low forward P/E of 10.27. Therefore, I rate it as a buy.

Barrick Gold

Barrick Gold is another gold miner that underperformed the market in the last year. This year has been a better one so far. It returned 6.41% since January. Barrick was a relatively expensive company a year ago. However, after boosting its earnings by 165% in 2011, it looks like a good deal now. The forward P/E ratio of 8.74 falls into single digit valuation levels.


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Although Barrick is a pretty volatile stock, it can be a good diversifier with a low beta of 0.43. It offers a yield of 1.25% supported by a payout ratio of 10.95. Based on an EPS growth estimate of 8.7%, it has an O-Metrix score of 4.95. FED+ Fair value range is $68 - $91. At a price of $48, Barrick is trading well below my FED+ Fair value estimate. Analysts mean target price of $65 also imply at about 35% upside potential. Therefore, I rate it as a buy.

Suncor

Suncor is one of my favorite energy companies in North America. Formerly known as the Suncor Incorporation, this Canadian energy giant was founded in 1953. Suncor's primary oil fields are concentrated in the Canadian oil sands. The company also operates four refineries in the U.S. and Canada. Ironically, the profits increased by 200% over the last year, but the stock did not perform well, loosing near 30% in 2011.


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Suncor offers a yield of 1.3% supported by a payout ratio of 15%. It returned almost 17% since January and I expect the stock to test its 52-week highs this year. It is priced at a single-digit forward P/E ratio. Based on an EPS growth estimate of 15.1%, it has an O-Metrix score of 7.81. FED+ Fair Value range is $58 - $82. The company is expanding into other energy related businesses, and the existing oil sands are expected to continue being profit catalysts. Therefore, I rate it as a buy.

Potash

Potash is one of the best stocks to play on global population growth. As the world population grows to reach to almost $10 billion in 2050, the demand for agricultural fertilizers will keep growing. As a prominent player in this field, the Saskatoon-based Potash Corporation of Saskatchewan was able to boost its earnings at an annual rate of 40% in the last 5 years. However, the stock's return fell way below the earnings growth. Potash was able to increase its EPS by 80% in the last year, but the stock lost 27%.


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I think Potash has found itself a strong support around $40-$41. It offers a yield of 1.25% supported by a payout ratio of 8%. It returned 8.44% since January. Based on a conservative EPS growth estimate of 9.6%, it has an O-Metrix score of 4.21. FED+ Fair Value range is $53 - $62. Analysts mean target price of $46 fits almost perfectly within my estimates. As the stock has significant upside potential, I rate it as a buy.

Talisman Energy

Talisman was among the worst performers of the last year. Its market cap was slashed by 50% in 2011. Talisman is trading at 205 times its earnings. While I try to avoid recommending stocks with high P/E ratios, Talisman offers a forward P/E ratio of 13.10. At a P/B ratio of 1.2, it is a relatively cheaper stock compared to others in the business.


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Talisman offers a yield of 2.2%. Its dividends are kind of unpredictable, but the trend in dividend payments is upward. Based on an EPS growth estimate of 17.5%, it has an O-Metrix score of 0.9. FED+ Fair Value range is $9.5 - $19.5. After losing half of its market valuation, it is too late to sell, but one needs to look for signs of recovery in the stock. Therefore, I rate it as a hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.