TSX long-term value investor ideas for 2016

For the long-term value investor, here are some compelling stories to think about in 2016. Metro Inc.

Canada’s third-largest grocery retailer is also its most profitable. The Montreal-based Metro operates in Quebec and Ontario, gaining clout in the latter with its 2005 purchase of the Dominion and A&P banners (since rebranded Metro). With cost efficiencies and a comparatively lean workforce, Metro boasts a net profit margin of 4.3 per cent, while that of rivals Loblaw Cos. Ltd. and Sobey’s owner Empire Co. Ltd. are each less than 2 per cent. Even long-term, it’s difficult to identify significant risk potential at Metro given the recession-resistant character of grocery and drug retailing, and the sheer heft of Metro’s market coverage with its 800 or so supermarkets, drugstores and specialty food chains. The latter include corner store operator Marché Richelieu and Marché Adonis, a top Quebec ethnic food purveyor. What makes the value investor’s eyes pop is the Metro’s low stock-market valuation relative to its competitors. Metro stock trades at a price-earnings multiple of just 15.4 times its estimated 2016 profit per share, far below the industry average p/e of 27.2. Linamar Corp. Few companies in today’s market offer Linamar’s growth potential, with a stock affordably priced at less than 10 times’ forecast 2015 earnings. The Guelph-based auto-parts maker has the markings of a longterm outperformer, having emerged unscathed from the Great Recession’s collapse in vehicle sales, and posting a near quadrupling in profits since 2011. Linamar has mastered geographic expansion (48 plants on four continents), new product development (more than 150 product launches in 2014 alone), and fiscal discipline (revenues were up 45 per cent between 2011 and 2014, while costs increased just 35 per cent). Skilled balance-sheet management enables Linamar to finance continued expansion, including its recent $1.2-billion friendly bid for France’s Montupet S.A., a specialist in aluminum castings that will reinforce Linamar’s own prowess in aluminum components and further expand its global reach. Much larger peer Magna International Inc. is more diversified in products and capabilities, but the yawning revenue gap between the two firms (Linamar’s $4.2 billion to Magna’s $48.9 billion) suggests a great deal of room for Guelph-based growth. That goes for Linamar’s dividend yield, as well, which is currently just 0.59 per cent. Procter & Gamble Co.

P&G is in one of its periodic swoons, its stock having slipped by 26 per cent from its all-time peak just 12 months ago. P&G has been here before. Its stock plummeted 48 per cent in the late 1990s, and fell 38 per cent in the late 2000s, only to recover each time to set new all-time highs. Now as then, there are panicky calls on the Street to break up the company. Fair enough: P&G is a $102 billion (in sales) behemoth whose products are used about 4.6 billion times a day worldwide. But P&G is already shedding two-thirds of its brands. In the past year, oncecherished P&G brands like Cover Girl, Max Factor, Wella and Duracell have been shed at handsome prices in P&G’s largely completed campaign to downsize a product portfolio that had become bloated. That still leaves P&G with market-leading brands collectively worth about $120 a share in earnings power. And that’s before a leaner P&G boosts profits now that it’s able to focus on its highest-margin products, including Tide, Gillette, Olay, Pantene and Pampers. The stock also boasts an industry-leading dividend yield of close to 4 per cent. Honeywell International Inc.

Honeywell is not a contrarian play, its stock having outperformed the S&P 500 by a factor of three in the past decade. The company is best known for its thermostats and other control systems, though its monitoring systems actually control everything from household furnaces to liquefied natural gas (LNG) plants.

The New Jersey firm’s mastery of controls gives Honeywell a head start in its bid to become a dominant player in the emerging “Internet of Things” market. Honeywell is hedging its bets by establishing itself in dozens of IOT sectors, many still nascent. The $54 billion (2014 sales) Honeywell has the R&D heft to devise machine-tomachine IOT systems for building contractors, commercial property managers, factory and mining operators, and municipal supervisors aiming to create “smart” cities. Growth in IOT revenues will be measured in the tens of billions of dollars per decade, giving Honeywell stock unusually big upside potential for such a large and stable company.

The stock also yields a generous 2 per cent yield, above average for this sector.

Oil - Canada- TSX And 2016 Predictions

That’s the truth at the heart of the collapse in oil prices in 2015, a force that will shape our personal finances in the coming year. In the GTA, it’s good news. The commute is cheaper and so is the cost of heating our homes. It adds up to a tax cut as good as the one the Liberals are giving us.

In the west, where 40,000 industry-related jobs have disappeared, more pain is on the way because the energy rout may only be midstream. Even if it isn’t, more jobs will likely go. Until the price of oil stabilizes, the only thing companies can do is guess and keep cutting to ensure their costs remain below their falling revenues.

It’s hard to recall that 18 months ago, oil was at $110 (U.S.) a barrel. It traded Monday at a little under $37, two-thirds lower. The current price per barrel is enough to buy 24 bottles of Sleeman’s Original Draft at the Beer Store — but not the cans, which cost a few dollars more. If you think about that in terms of your household, how would you fare if your family income was cut by 67 per cent?

This is all about a fight for control of the world’s oil market, dominated by the Organization for Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the lead. As China’s insatiable demand for energy drove up prices, a search for cheaper supplies made sense. New technologies made it easy to drill into shale formations and fracture the rock to release oil, creating a plentiful supply of energy in North America.

A sign of the times is that this month the U.S. lifted a 40-year ban on the export of domestically produced oil.

That is because fracking is making the U.S. virtually energy self-sufficient, just as China’s economy is slowing — and so is its need for oil. In the meantime, Iran is adding two million barrels to world markets as part of its nuclear deal.

The Saudis, seeing a long-term threat to their oil power, have ensured that OPEC continues to produce at the same pace to maintain market share. The Saudi goal is to drive the higher-cost fracking industry under. Our even more expensive oilsands are caught in the crossfire.

OPEC shows no signs of standing down. It reaffirmed its strategy at a December meeting, and last week its World Oil Outlook forecast that a barrel of oil would only cost (in real terms) around $70 by 2020.

So here’s what it means for us: The dollar

In June 2014, with $110 oil, the loonie sat at 92 cents (U.S.). It cost us $1.09 for an American dollar. On Monday, it was at 72 cents, a drop of 22 per cent. It was $1.40 to $1 at the consumer level.

If oil rebounds, so will the dollar; if not, it may fall further which is something readers care a lot about. How to get a better U. S. exchange rate deal was the most popular column of the year. Canadian stocks

Toronto share prices are down 9.8 per cent year to date. Energy stocks make up about 10 per cent of the TSX and have fared much worse. The TSX Energy Index is down 26 per cent.

If oil prices improve, these shares will too. Ditto for our banks, which are big lenders to the oilpatch and are another big part of the main TSX composite index. They’ve had a lousy year too, down 5 per cent. Inflation

We climbed out of our 61-centdollar hole in 2000, gradually getting to par in 2009 without much inflation. Our exports to the U.S. were cheaper and so more attractive, creating profits and jobs. By substituting Mexican avocados for California ones, we energized our economy without higher prices. Cross your fingers we can do that again. Interest rates

If we can’t and inflation starts picking up, rates may rise even though the Bank of Canada doesn’t want them to. If so, housing will cool, consumer spending will fall and we’ll all have a harder time.

There are a lot of ifs, ands and maybes here and, as always, beware of forecasts. In June, when I wrote about the dollar, the consensus was that it would be between 77 and 80 cents now. Between now and this time next year, anything can happen. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays.