U.S. stocks, on average, get more trading volumes (and coverage) than their Canadian counterparts. Thus, many TSX exclusive stocks don’t get the attention, nor the respect, that they deserve. If such stocks also traded on a U.S. exchange, there’s a possibility that their multiples and share price would jump, as more U.S. investors were granted the opportunity to participate without having to venture outside of their comfort zones.
The U.S. dollar has been weak of late, after all, but then again, so has the loonie. But that’s beside the point, many retail investors just don’t want the hassle of going to a foreign exchange and converting currencies, getting dinged in the process, while there are suitable alternatives that already exist on the NYSE!
Moreover, many retail investors probably don’t want to take the effort to research Canadian stocks, since they may not be familiar with Canadian culture or markets. For example, many U.S. malls have tumbleweeds rolling through them, whereas many Canadian malls are as packed as ever (at least the ones in Vancouver are!)
There are few incentives for many U.S. investors to jump on board the TSX and get excited about Canadian stocks. Most wouldn’t know where to start. But I believe there’s one huge reason why a U.S. investor may want to consider a U.S. stock’s Canadian counterpart (or competitor): to take advantage of more attractive valuations!
I believe Canadian stocks, on average, remain far better “value” bets that their potentially fairly valued or overvalued U.S. counterparts.
Consider Canadian Tire Corporation Limited (TSX:CTC.A), a retailer that’s a household name across Canada. Many investors in the U.S. may not have heard of the name. They may even think that the chain only sells tires! But many Canadians know that this isn’t the case, as Canadian Tire has been a go-to brick-and-mortar chain for do-it-yourselfers looking to fix up their own homes or autos for decades.
The in-store expertise, the largeness of many items, and the “try-before-you-buy” nature of these items favour a brick-and-mortar sales channel versus a digital one. As such, the rise of digital disruptors has had a minimal impact on the business or the stock!
Despite Canadian Tire’s applaud-worthy performance, many investors believe the stock is richly valued, because traditional valuation metrics are higher than the company’s five-year historical average. Versus the industry average, though, shares still trade at a remarkable discount at just 14.7 times forward earnings.
Sure, Canadian Tire may not be as exposed to the home improvement space as Home Depot Inc. (NYSE:HD), whose shares are substantially more expensive, but given Canadian Tire’s dominant position in the Canadian market and its resilience as a brick-and-mortar player, I think shares deserve to be trading at a premium multiple and may have commanded a much higher price point if it were traded on the NYSE.
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Fool contributor Joey Frenette owns shares of CANADIAN TIRE CORP LTD CL A NV. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot.