Launching the Canadian Buy the Dips Portfolio: Identifying the Leading Energy Companies – Part 1

Summary

  • The Canadian Dollar is much weaker than the US Dollar from a year ago.
  • As a result, some Canadians may want to invest in Canadian stocks instead of US stocks for now.
  • The main strategy of this portfolio is to buy leading companies after some form of pullback.
  • 2 Canadian leading Energy companies can be bought with at least 31% and 38% potential gain in 2 to 3 years, not including dividends.

Why I’m Launching the Canadian Buy the Dips Portfolio

With more than $1.14 Canadian Dollar needed to convert to $1 U.S. Dollar (not to talk about added conversion fees), do-it-yourself Canadian investors may want to stay in their domestic currency and invest in Canadian companies instead of US ones. A reader asked me how to build a Canadian stock portfolio that is conservative and have the goal of income and steady growth. One strategy is to buy companies in a specific sector which has pulled back. A classic of buying low and possibly selling high. I say “possibly” because it might be wiser to buy low and sell high in certain sectors or companies more than others.

To remain conservative though, let’s first identify leaders in their respective sectors and industries. One way of doing this is finding the companies with the largest market capitalization in a particular sector. They are able to grow big (relative to their peers) because they are doing something right. These companies generally have more solid balance sheets and pay a growing dividend.

A Couple of Canadian Leaders in the Energy Sector

A stock portfolio can only be built one company at a time. The Energy companies have pulled back with the oil price decline. This fits the pull back criterion. Let’s take a look at some of the Canadian leaders in the Energy sector. They are Suncor Energy Inc. (TSX:SU)(NYSE:SU), and Canadian Natural Resources Ltd (TSX:CNQ)(NYSE:SU). They are the companies with the largest market capitalization in their respective industries.

Industry Leaders *Market Cap S&P Credit Rating *Yield
Integrated Oil and Gas Suncor Energy 52.4B A- 3.1%
Oil and Gas E&P Canadian Natural Resources 41.4B BBB+ 2.4%

* As of the close of Nov 28, 2014 on the TSX

Introducing Suncor Energy

Suncor logo

Suncor Energy is Canada’s largest integrated energy company, having a balanced portfolio of high quality assets. Its oil sands business is located in Alberta, Canada having 6.9B barrels of reserves and 23.5B barrels of contingent resources. Suncor estimates to have a compounded annual growth rate of 10 to 12% in oil sands and 7 to 8% overall until 2020. Suncor has been publicly traded since 1992. Since its high of $46 in June 2014, Suncor Energy has dropped to $36, a 21.7% decline.

SU Chart

SU data by YCharts

Even as the oil price dropped like a rock in the financial crisis, Suncor maintained its dividend. In fact, since 2011, it has increased it from $0.10 per share to its current $0.28 per share, a 180% increase. Its current yield is sitting around 3.1%, which is higher than the index’s (TSX:XIU) 2.34%.

Currently, this industry leader can be bought around $36. Rated 4-star by Morningstar, it is undervalued with a fair value estimate of $50, which is a potential 38% gain.

Introducing Canadian Natural Resources

Canadian Natural Resources logo
Canadian Natural Resources is the biggest oil producer, and the second largest natural gas producer in Canada. It also has operations in oil sands, and is involved with crude oil opportunities in the North Sea Core Region and Offshore Africa. Since its high of $49 earlier this year, it has retreated to around $38, a 22.4% decline.

CNQ Dividend Chart

CNQ Dividend data by YCharts

Canadian Natural currently only yields around 2.4%, but it has a long history of growing dividends, having paid its first dividend in 2001. It has increased the dividend every year since then. Its last year’s 80% increase was especially impressive. However, it currently sits at its highest payout ratio of the decade at 30.5%.

Currently, this industry leader can be bought around $38. Rated 4-star by Morningstar, it is undervalued with a fair value estimate of $50, which is a potential 31% return on capital gains alone.

About the Canadian Buy the Dips Portfolio

The Canadian Buy the Dips Portfolio is a portfolio for demonstrative purposes. It will indicate when it maybe a good time to add certain companies in certain sectors. Prices go up and down based on the emotions of Mr. Market, so please act in caution and think in terms of your own situations when you make a move in your own portfolio.
Ideally, the Canadian Buy the Dips Portfolio wouldn’t want to allocate more than 25% of its portfolio to any sector for the reason of portfolio protection. Assuming the Canadian Buy the Dips Portfolio had $100,000 Canadian dollars to invest, it could not allocate more than $25,000 in the Energy sector. Additionally, when buying, the CBDP will not allocate more than $5000 to any company. In a $100,000 portfolio, $5000 represents 5% weight.

For your own situation, you will want to review how much cash you have on hand and your current portfolio weighting. You can also decide whether you want the cap at the 5% weight or adjust that to another number.

The CBDP will start off with having positions in Suncor, and Canadian Natural Resources since they were identified to be leaders in their industries. To attempt to buy on the dip, the CBDP would have used charts as an aid. Here is the Canadian Natural Resources chart as an example.

CNQ chart for Nov 20, 2014
Consider buying on the dip in a quality company you’ve identified when it hits RSI 30 or lower. Since we do not know how low the RSI will go, the strategy is to grab shares when it crosses over the 30 again. There’s actually more to using technical indicators. One strategy is combining the use of RSI, MACD, and the SMA which I recently learned from a book. Here is an article from eHow and CMSForex to learn more. Anyhow, using the above chart, the CBDP might have picked up some shares at $38. Using the same technique, CBDP might have picked up some Suncor Energy shares at $38. Notice that CBDP didn’t buy at the recent absolute lows. For new investors, it might take time to accept that as the absolute truth.

In application, it can be difficult to wait for a company to hit below RSI 30 before consider buying. What happens if it comes close to RSI 30, and seem to bounce off of it as shown in the Canadian Natural Resources graph above in early August? It didn’t get confirmation from the SMA 50 because the candlestick did not cross over the SMA subsequently. Instead, the RSI went past 50 before going back down past RSI 30 in mid October. With the price action crossing over the SMA 50 today indicates short-term bullish. What happens if you’re not there when RSI crosses from below 30 to above 30, and now RSI sits at 50? These are some situations to ponder about. Anyhow, I’m just learning to read graphs myself. And I want to emphasize that I only use charts on companies which I’ve identified beforehand to be fundamentally sound. Reading charts better will only come with experience just like learning about the world of investing.

CNQ chart for Nov 28, 2014

As the above chart shows, just because you missed the day the price crossed over RSI 30, doesn’t mean the price wouldn’t get close to it again.

The Canadian Buy the Dips Portfolio Holdings

CBDP-Nov282014

The average yield of the holdings in the CBDP is currently at 2.47%.

A Surprise
In researching the biggest integrated oil & gas companies in Canada, I was surprised to find Imperial Oil (TSX:IMO) to have a S&P credit rating of AAA, the highest possible rating. However, the yield of 1% maybe too low for consideration for some investors.

In Summary
Because we can’t catch the bottom, the idea is to buy chewable bites of shares when there’s a drop in quality companies that you identified. It’s important to identify quality industry leaders ahead of time so that you’re not buying emotionally because a company has dropped 10% in a month so it seemingly looks like a good buy.

Going Forward
In a future article, we shall explore some higher yielding Energy companies for our Canadian Buy the Dips Portfolio for a higher income. Up next, we will talk about the Canadian pipeline companies.

I will see whether there’s enough interest in this Canadian Buy the Dips Portfolio to decide if it’s worth it to continue on with it. In the meantime, I’m open to suggestions about leaders, and other solid companies. Comments, constructive criticism, and suggestions about the portfolio are also welcome.

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Disclosure: At time of writing, I’m long TSX:SU.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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4 thoughts on “Launching the Canadian Buy the Dips Portfolio: Identifying the Leading Energy Companies – Part 1

  1. Cutter

    Great start and I will be watching your Canadian Buy the Dips Portfolio with great interest.

    Another source that I use as a starting point for Canadian companies is stockchase.com to follow what the ‘experts’ are saying about a particular company and markets.

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