A six-pack of Canadian value stocks

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

We believe many outstanding buying opportunities exist among Canadian stocks. As such, we screened our Benjamin Graham database to find Canadian companies with rapidly growing earnings and strong balance sheets.

We believe the six companies recommended below offer excellent appreciation potential during the next six to 12 months.

Goldcorp (GG), based in Vancouver, British Columbia, is one of the largest gold producers in North and South America with mines in Canada, the U.S., Mexico, Guatemala and Argentina.

Goldcorp does not hedge future production; earnings tend to rise and fall in step with the rise and fall of gold and silver prices. We believe gold and silver prices will rise in 2012.

Output in 2012 will get a boost from a new mine in Guatemala, again in 2013 from a large mine in the Dominican Republic, and then in 2014 from three more mines in Central America. Future prospects are far better than for Goldcorp’s competitors.

Revenues increased 40% and EPS soared 61% in 2011. Our forecast for 2012 includes sales and earnings growth of 19% and 25% respectively. In addition, we see EPS increasing at an impressive annual rate of 26% during the next five years.

At 16.4 times our 2012 EPS estimate, GG is selling at a big discount to its 10-year average P/E of 23.1 times. The dividend, paid monthly, provides a yield of 1.2%.

We recommend buying GG now. Our maximum buy price is 50.76; our minimum selling price is 76.23

Open Text (OTEX) is headquartered in Waterloo, Ontario. The company has become a leader of Internet-based technologies. Its software solutions allow individuals, corporations and global trading communities to collaborate on projects, share ideas and accelerate innovation.

The rapid development of mobile and social networking ventures will provide many new software opportunities for Open Text.

Sales increased 15% and EPS rose 12% during the past 12 months. Sales will likely increase 10%, and EPS should rise 16% during the next 12-month period.

Additional acquisitions and further expansion into Asia and Latin America could drive stronger than expected growth in 2012. OTEX shares sell at 17.9 times our forward EPS estimate of 2.77.

Sales and earnings are slightly erratic, so we advise buying OTEX when the stock price declines to our maximum buying price of 46.10. Our minimum selling price is 65.53.

Royal Bank of Canada (RY), founded in 1864 in Toronto, Ontario and also know as RBC, is the fifth largest financial institution in North America and the largest bank in Canada.

Royal Bank offers all types of banking and investment services to individuals and businesses through its 1,700 branch offi ces in Canada and 400 branches in 30 foreign countries.

Royal Bank will sell its 420 U.S. branches and its U.S. banking network to PNC Financial Services for $3.5 billion. The transaction, part PNC stock and part cash, is scheduled to close in March 2012.

The sale will enable Royal Bank to expand its Canadian operations and to make strategic acquisitions at home and abroad.

Royal Bank’s earnings per share increased 16% in 2011 and will likely increase another 11% in 2012. The healthy Canadian economy will help Royal Bank to register an EPS increase of 11% in 2012.

At 10.8 times our forward EPS forecast of 4.87, RY shares are undervalued. The current dividend yield of 4.1% will limit stock price erosion. Buy RY at 53.21 or below for a minimum target of 77.78.

Silver Wheaton (SLW), based in Vancouver, British Columbia, purchases silver from mines in Greece, Mexico, Peru and Sweden.

The company does not own or operate any silver mines, but functions by purchasing silver produced as a by-product of gold mining companies.

Silver Wheaton pays less than $4.00 per ounce of silver from gold miners such as Barrick Gold and Goldcorp.

The price of silver has dropped significantly during the past few months, but we expect higher prices in 2012.

The recent decline in SLW’s stock price offers an excellent buying opportunity. Sales and earnings will likely increase 21% in 2012 and in future years.

The company recently raised its quarterly dividend which yields 1.2% and will boost its dividend significantly again in 2012. Buy SLW at 30.13 or below for a minimm selling target of 49.36.

Suncor Energy (SU), based in Calgary, Alberta, is an integrated oil and gas producer and one of the largest energy companies in Canada.

The new Suncor is focused heavily on Alberta’s vast Athabasca oil sands, but its diversification includes drilling operations in the North Sea, Libya and Syria; refi neries in Canada and the U.S.

Revenues increased 17% and EPS soared 57% in 2011 as a result of high oil prices, elevated production and a boost from the purchase of Petro-Canada. Our 2012 forecast includes sales expansion of 4% and EPS growth of 19%.

At 10.2 times our forward EPS estimate, SU shares are clearly undervalued. The current dividend yield of 1.3% is respectable. Buy SU now with a minimum target of 63.82.

Tim Hortons (THI) is headquartered in Oakville, near Toronto. From the first coffee and donut shop opened in 1964 by Canadian hockey star Tim Horton, the company has grown into Canada’s largest fast food restaurant chain.

Tim Hortons has 3,300 franchised shops in Canada; half in Ontario. The company opened 180 new restaurants in 2011 and another 180 are scheduled to open in 2012, mostly outside Ontario. The company will expand its 600 U.S. locations, which are performing well despite stiff competition.

Sales will rise 13% and EPS will probably increase 14% in 2012. The dividend yields 1.4%.

At 17.3 times our 2012 EPS estimate, THI shares are somewhat high, but low risk and less volatile than most stocks. We recommend buying at the current price with a minimum selling target of 54.10

Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.