Monday, July 20, 2009

Phoenix for Canadians

Further to my recent post on Phoenix stocks, I was asked by my Canadian friends for a Phoenix list for Canadian stocks (as I am living in Canada).

The problem is that the Canadian stock market is full of low-priced stocks, a key criteria of the Phoenix screen. Consider the members of S&P/TSX Composite Index, 29.8% of its members are priced below $10 a share, compared to 10.6% for the S&P 500. Even if we lowered the cutoff to $5, 8.7% of the S&P/TSX Composite trade below $5, compared to 3.2% for the S&P 500.

Moreover, the Canadian market is full of low-price mining stocks that you could take a punt with, here is an example (which is not a suggestion to buy or sell the stock).

A macro call on commodities and recovery
The essence of the Phoenix strategy is the combination of a macro call for a recovery by buying highly levered “fallen angel” stocks. To capitalize on that theme of a recovery, secular commodity bull (my theme) and fallen angels, I offer the following.

The chart below shows the relative returns of the Energy Select Sector SPDR (XLE) compared to the S&P 500. The XLE remains in a secular relative uptrend, indicating that it remains in a secular bull phase.

Oil prices, having retreated from a high of $147, are now trading at about $64 and showing some signs of stabilization. One way of playing the recovery in energy prices is through property developers focused on Alberta, such as Genesis Land Development (GDC.TO)

…and Melcor Development (MRD.TO)

These certainly qualify as fallen angels, as their stock prices were clobbered in the Crash (down 90% peak-to-trough for GDC and 80% for MRD).

In addition to the recovery in oil prices…

…recent statistics for the Calgary residential property market, as an indicator for Alberta overall, shows signs of a mild recovery. Not only have prices begun a modest upturn, but market internals such as inventory and the sales-to-list ratio have improved.

Needless to say, these stocks have moved off their bottoms and remain highly speculative. They represent high risk/high reward calls on oil prices and the economic recovery.

Buy them at your own peril.

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