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Consider Canada, for value stock opportunities

The broad U.S. equity market rally since the Nov. 8 election, widely being called the “Trump Trade,” is prompting some savvy investors to seek better value opportunities from stocks in Canada listed on the Toronto Stock Exchange.

“With major U.S. stock indexes all in record territory following the presidential election, it’s more difficult to identify buying opportunities, so starting to look to other markets at this stage makes eminent sense,” said John Maloney, chief investment officer for M&R Capital Management, a New York-based money manager with a large-cap value orientation.

“I’m not selling our U.S. positions, but at these prices there needs to be a compelling reason to put new money to work in U.S. equities,” he pointed out.  

Indeed, when compared to the S&P 500 index, the S&P/TSX Composite index (covering the Toronto exchange) certainly looks cheap on a price-to-book value basis.

Rather than buy an index, discerning investors could be better served identifying the more attractively priced individual stocks.

However, before contemplating an investment outside the U.S., investors should keep in mind the foreign exchange risk. The U.S. dollar has been rising in value in anticipation of higher domestic interest rates, with one U.S. dollar now equivalent to $1.33 Canadian dollars, up from $1.25 Canadian dollars in 2015, so rates are currently benefiting U.S. investors.

But continued strengthening of the U.S. dollar would hit the translation value of earnings for non-U.S. companies, noted M&R Capital’s Maloney.

While the Toronto exchange is home to many commodity resource companies in the energy and mining sectors, investors would do well to consider stocks in industries less well identified with Canada because they’re below the radar of most U.S. investment pros.

Here are two stocks trading on the Toronto exchange that represent attractive opportunities, one large-capitalization stock and one mid-cap (and for good measure, we’ll also offer one riskier micro-cap possibility). The large-cap is Metro, a major food distributor in Quebec with annual sales of more than (Canadian) $12 billion. The mid-cap is AutoCanada, the country’s largest publicly traded car dealership. On the Toronto exchange, their tickers are MRU and ACQ, respectively.

Founded in 1947, Metro operates 340 supermarkets under the Metro and Metro Plus brands and has over 200 discount stores operating under the Super C and Food Basics names. Metro is also a food distributor, servicing modest-size food emporiums and convenience stores.

It also acts as franchisor and distributor for over 180 franchised Brunet Plus, Brunet, Brunet Clinique and Clini Plus drugstores. In addition, the company operates over 70 drugstores under Metro Pharmacy and Drug Basics logos.

“Metro is a well-oiled machine,” said Michael Van Aelst, who follows the stock for TD Securities, “demonstrating years of consistently strong execution.” The shares are currently trading at $40.30, and the consensus one-year target price is $46.71 among the 14 analysts following the stock.

Mid-cap company AutoCanada operates 60 locations in eight provinces. This year has been a challenge for it due to the downturn in commodity pricing, which crimped consumer spending. But with the commodities having largely bottomed out and expected to firm up next year, investors could benefit from an upswing in demand for new cars.

In the meantime, AutoCanada, with annual revenues last year of $2.9 billion, has been trimming expenses and seeking to capitalize on the downturn, buying smaller dealerships in a consolidation bid. It’s a strategy apt to further benefit investors with the coming rebound in commodity pricing.

Stephen Kammermayer, an analyst with Clarus Securities in Toronto who rates the stock a buy, expects AutoCanada to make more acquisitions in 2017. His target price on the stock, which closed yesterday at $20.24, is $28.  

Lastly, investors who have a rather high tolerance for risk might take a look at NeuLion, a more speculative opportunity (its Toronto Stock Exchange ticker is NLN). For the past 12 years, it has been building out a global footprint in digital video streaming for the sports and media industries.

Based in Plainview, New York, NeuLion opted to list in stock on the Toronto Exchange after it had acquired a publicly traded Canadian company. Still tiny, NeuLion garnered 32 percent of its $112 million (U.S.) in revenues from outside the U.S.

NeuLion has provided live video streams in 2016 for the UFC 200, college football’s Big Ten Network, NBC Sports and the National Football League. Over 50 percent of NeuLion’s network usage is now accessed through smartphones and other mobile devices.

Ralph Garcea, analyst at Cantor Fitzgerald, rates the stock a buy and notes that recurring revenues account for 69 percent of the total. The stock closed recently at 96 cents, but he has a 12-month target price of $2.15 (Canadian).  

As with all micro-cap stocks, investors must be cognizant that the risks can be considerable. Just one bad bit of news could wipe out any gains or worse. In NeuLion’s business of video streaming, for instance, mobile carriers that impose data caps on customers who use streaming services could stifle growth.