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Canadian Stocks, A Good Currency Hedge For US Investors?

I'm a Canadian, and while I consider myself very patriotic I try to divide my investments pretty evenly between Canadian and U.S. listed stocks. Its not a hard and fast rule by any stretch, if I really like a company and its only listed in the U.S. I won't hesitate based on having a fixed % of US stocks inside my portfolio.

If a company however is listed in both the US and Canada I will always buy the Canadian version, such as PWT.TO which trades on the NYSE under the symbol PWE.

Actually almost every Canadian stock I've ever looked at has had at least a US OTCBB (foreign) listing in the states. The lone exception would be KWA, a retirement home company that just popped after disposing of their sole remaining asset. It went from just 1 cent a year ago to around 6 cents....their PR announcing the sale said they'd have about $1.6 million left over after settling the transaction and that a dividend was one option being considered for the cash. I didn't bother waiting to find out, selling my holdings between 5 and 6 cents.

But I'm bragging now.

The nice thing about having US investments for a Canadian over the past year is the added gains that have come from the falling Canadian dollar. I mentioned HMPR in a blog post on May 19 when it was trading in and around $1.80 to $1.90....I've held HMPR for almost 2 years now, having bought in around the $1.65 area and so on top of the appreciation in the share price I've also profited (on paper) from the increased value of the U.S. greenback against Canada's loonie.

HMPR has been a great investment for a Canadian, its risen in value two ways....firstly from appreciation in the PPS as its climbed from the $1.60 to its current level of $2.10 to $2.20....and secondly from Canada's currency going from .90 cents versus the US dollar down to its current price around .78 cents.

But I'm bragging again.

Why has Canada's "loonie" (the Canadian dollar is only minted as a coin and has a loon on it) fallen so far. While differing opinions surly exist, most would agree the biggest reason is oil. The Canadian dollar has become something of a petro dollar, and when oil prices are high, our dollar wasn't that long ago when the Canadian dollar was worth more than a US dollar, when oil was trading well over $100 per barrel.

But what of Americans looking to buy Canadian stocks? If yanks (and southerners too) buy Canadian listed stocks and the Canadian dollar climbs, they'll make money on the currency as well as the stock, provided the stock climbs.

Here's an example. An American has $50,000 USD to invest and decides to put $10,000 into Canadian listed stocks. Because of the strength of the US dollar he actually has about $12,000 in Canadian dollars.

To keep the math simple we'll say he buys 1 Canadian stock trading for $12...1,000 shares in other words. Then oil prices start recovering and we'll say the "loonie" jumps from its current value of under .80 cents to close to 90 cents....we'll call it a 10% jump to keep the math simple again.

We'll also assume the shares are static, still worth the $12 they cost when purchased. Our currency conscious investor then sells his 1,000 shares and gets back $12,000 Canadian. But....whereas that $12,000 Canadian cost $10,000 US before at 80 cents Canadian, now its worth about $13,200 in US dollars because of the increase in the Canadian $$$. And if our American friend picked a stock that went up, he's making money two ways, both in stock appreciation and through currency hedging, as happened with me and HMPR.

Of course there are many factors to be considered. Hedging strategies have their own inherent risks. The Canadian dollar could fall further, I myself remember the days when our loonie was worth somewhere around 60-65 cents US, back when our economy was less dependent on world oil prices.

Oil in my opinion should be a big influencer in terms of deciding whether or not to employ this strategy. If you think world oil prices are going to climb in the coming months and years, then that bodes very well for the value of Canada's dollar. But if you think oil prices are going to stay where they are, or go even lower....then imo its likely wiser to leave your $$$ invested in the U.S of A.

Or, like me, you can mix it up a bit and put just a portion north of the 49th parallel and benefit is the loonie climbs, but not get hurt too bad if it falls.

I'd love to see some comments if I have any readers left after putting up my "cheeky" bike riding picture.


This is strictly an opinion piece, and my opinion(s) could very well turn out to be wrong. This instablog post is intended strictly for informational and entertainment purposes and should not be used as a basis for any investment decisions. Verify all information presented, while I have endeavored to ensure accuracy I do not warrant that any or all information presented is without error.

Investing in stocks or options involves significant risks. For investment advice you should seek the input of a professional.

Disclosure: I am/we are long HMPR.

Additional disclosure: You can find me in numerous forums where I use the names krill66 (yahoo) growacet (stocktwits) and ledrog (stockhouse).