In this episode of “The 5-Minute Major,” Motley Fool Canada’s Senior Analyst Nick Sciple hosts Chief Investment Officer Iain Butler to discuss whether it is an opportune time to invest in Canadian stocks.
Amid anxieties surrounding tariffs and economic instability, Canadian stocks are trading at a significant discount compared to the US S&P 500. Iain argues that now appears particularly promising to invest in Canadian stocks due to the concentrated nature of the US market in the technology sector.
One opportunity Iain brings to the table is Amerigo Resources (TSX: ARG): a small-cap, dividend-paying Canadian company focused on copper production. With its solid free cash flow and strategic dividends, it stands out as a viable investment option amidst global attention primarily fixated on American technology giants.
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada, senior analyst Nick Sciple, and this is the 5 min major – here to make you a smarter investor in about 5 min. Today we’re asking the question everybody is thinking, “Is now the time to invest in Canadian stocks?” My guest today is Motley Fool Canada Chief Investment Officer, Ian Butler. Ian. Thanks for joining me.
Iain Butler: Great to be here, Nick. It’s been a couple of weeks since we’ve done one of these so excited to get back at it.
Canadian market vs. US market: A decade of divergence
Nick: I’m excited to be here with you, Ian, according to a Bank of America note released this week. TSX stocks today trade at their steepest ever discount to the US S&P 500 benchmark, driven by tariff fears and just overall uncertainty in the economy today. Ian, is now the time to invest in Canada, in your opinion?
Iain: Well, I’m a bit biased. So as someone that spent the bulk of their career snooping around the Canadian market for stock ideas, I can say that now is always the time to invest in Canadian companies, but sometimes certainly are better than others, and from an index standpoint, as you mentioned, Nick, Canadian market is looking especially appealing relative to the top-heavy US Market these days. So top heavy is key there. So, and because a big reason for this is just how the US Market has evolved over the past decade or so. So I started with the Fool back in 2012.
Iain: It was remarkable, despite vastly different compositions, how closely the S&P. TSX Composite, and the S&P 500 had performed over the long term, and by long term I’m talking 30 years or so. Over the past decade, however, the S&P 500 has just turned on the gas turbo boost, really. It’s tripled the performance of the Canadian market, blowing that long term track record right out of the water and a lot of that outperformance has been largely attributed to one sector, and that is technology.
US Market has a technology sector, Canadian market does not. And this has really changed the composition of the US Market. And again, when I started with the fool, one of the primary reasons to invest in the US Market was because of just how diversified it was relative to the Canadian index top. 3 sectors of the US Accounted for about 48% of the S&P 500, whereas the top 3 sectors in the Canadian market, namely, energy financials and materials totaled about 72%. So when you bought Canadian, you were buying 3 sectors. When you bought the US, you’re buying a more diversified basket. Today, however, technology makes up 31% of the S&P 500.
How Market Concentration Shapes Investment Opportunities
That’s more than double of the next largest sector, which is financials at 14% in the US. Canadian market is still concentrated. Financials and energy continue to dominate less so materials because it’s been a bit of a lost decade there. But the 3 now account for 61.5% of our market versus 72% a decade or so ago. So when we’re considering the 2 markets again, Canadian market remains somewhat concentrated. But the US market has really come down to a play on the technology sector.
Nick: Yeah, if you look at the US market, it’s really become the popular place to invest, not just for US investors, but investors around the world has really pushed up those valuations. By contrast, Canadian market hasn’t seen those type of global inflows which maybe has created some opportunities in those less followed companies.
A Small-Cap Canadian Stock Flying Under the Radar: Amerigo Resources
Nick: So, Ian, that brings us to the next question, what is one Canadian stock on your radar right now that you think is not getting the love it deserves?
Iain: Totally. And I think we can put these into a couple buckets. Actually, I think Small Cap Canadian companies are being very much ignored as our dividend paying companies. And we’ve got one that actually combines the 2 qualities into one here. So a tiny little company by the name of Amerigo resources. Ticker symbol is ARG on the TSX.
This is a company that is essentially a copper factory. They own a factory that sits adjacent to one of the world’s largest underground copper mine in Chile, and this factory just processes the tailings from this mine. In go the tailings which are essentially the discarded dirt from the mine, and out comes processed copper that is inconsequential to Cadelco, the owner of the mine, but very much material to Amerigo. So Amerigo is very, very sensitive to the price of copper. When copper does well, Amerigo does really well. They just released their 2024, 4th quarter, and full year results.
A Cash Flow Powerhouse in the Copper Market
Iain: This is a free cash flow printing machine when the price of copper is essentially over $3.50 a pound. So 50 million dollars in free cash flow during 2024. That’s against a market cap of 300 million dollars. and they have very little to do with that cash. They pay a dividend. They pay special dividends and they buy back shares, and they’re going to be debt free by the end of 2025, which means they’ll have even more cash to give back to shareholders.
So tiny company, dividend payer: 2 areas that I think are very attractive in the Canadian market and a resource play that that you just can’t really, necessarily find when you’re shopping south of the border which is filled with all the giant technology companies of the world.
Nick: Yeah. So in an environment where all eyes are on the US, there’s 1 example of an under-followed Canadian company, we think, offers some value for you today. Ian. Thanks so much for joining us for this edition of the 5 min Major. We hope to see everybody next time.
