Canadian values: 4 Ben Graham buys

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

We screened our Benjamin Graham database to find Canadian companies with rapidly growing earnings and strong balance sheets.

We believe many outstanding buying opportunities exist among undervalued Canadian stocks. We believe the following four offer excellent appreciation potential during the next six to 12 month.

Canada is an excellent place to invest right now because the economy is growing, banks are solid and the national debt is under control.

Canadian banks were not allowed to sell risky loans or buy unsafe investments. The housing market in Canada remains solid, economic growth continues to climb, and the nation’s debt remains low.

Canadian National Railway (CNI) operates Canada’s largest railroad system covering Canada from east to west and the central U.S. south to the Gulf of Mexico.

Canadian National is the most efficient rail operator in North America with high profits and low costs.

The company hauls a wide variety of goods including forest products, intermodal shipping containers, farm products, petroleum and chemicals.

It’s $1.7 billion capital improvement program to expand port facilities, add track, and purchase freight cars and fuel-efficient locomotives will help EPS to roll along at a good clip.

CNI currently trades at just 12.1 times forward 12-month earnings per share, with a dividend yield of 2.0%. CNI is a solid long term investment.

Lululemon Athletica (LULU), founded in 1998 in Vancouver, British Columbia, makes long-lasting athletic clothing for running, dancing, practicing yoga and other active endeavors.

The company sells women’s pants, shorts, tops and jackets in 138 company-owned and four franchised stores in Canada, the U.S., Australia and Hong Kong.

The company will likely increase sales and earnings by 19% during the next 12 months. The stock, as measured by P/E, is expensive at 38.6 times our forward EPS estimate of 1.26, but far less than its 50.0 times EPS of a few months ago.

Potash Corp. of Saskatchewan (POT) is a leading producer of potash, nitrogen and phosphate fertilizers.

Critical demand for food in places like China and Africa will require more and more fertilizer to maximize crop production.

The company is spending $7.5 billion to enlarge its facilities, which will increase its fertilizer production more than 50% by 2015.

Larger global grain crops are boosting fertilizer demand, evidenced by Potash’s sales rise of 54% and EPS jump of 85% during the past 12-month period.

We expect strong sales and EPS growth in 2011 and 2012 as well. POT shares sell at a reasonable 11.3 times forward 12-month EPS.

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

The company does not own or operate any silver mines, but purchases 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. Its contracts are immensely profitable and will produce rapid revenue and earnings growth well into the future.

The price of silver has dropped significantly during the past several weeks, but we expect higher prices in 2012. The recent decline in the stock price offers an excellent buying opportunity.  

Learn more about this financial newsletter at Cabot Benjamin Graham Value Letter.