The Canadian stock market has been wary of a on-again, off-again trade war with the United States ever since Donald Trump recently won reelection.
Motley Fool Canada analysts Iain Butler and Nick Sciple see opportunity amid the volatility and share two stock ideas that look undervalued among all the confusion.
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada senior analyst, Nick Sciple, and this is “The Five-Minute Major,” here to make you a smarter investor in about five minutes. Today we’re discussing tariffs and how investors can respond to them. My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me.
Iain Butler: Always awesome to be here, Nick.
Canadian tariff situation as of March 4
Nick: As I’m sure many of our viewers have seen, at midnight on March 4, the United States enacted 25% tariffs against both Canada and Mexico, along with additional tariffs on China. In response, Canadian Prime Minister Justin Trudeau announced a 25% tariff levy on CAD$30 billion worth of U.S. imports effective immediately, with tariffs on another CAD$125 billion in U.S. goods set to take effect in 21 days. Iain, tariffs have been a topic of debate ever since Donald Trump was elected United States’s president. Now they’re here.
How are you responding to this escalating trade war as an investor in Canada?
How Canadian investors can respond to the tariffs and the trade war chaos
Iain: Well, part of what I’m doing is shaking my head out of confusion because it’s really not clear what the end goal here is, but we do as we always do: We look for opportunities when these situations hit, and I mean uncertainty is the name of the game here, Nick.
As you say, March 4, the tariffs came through just before we were about to record this.
Headlines are hitting that they’ve paused auto tariffs for the next 30 days. Now I don’t know what the magic behind 30 days is, but it just goes to show that I don’t know that anybody really has a clear game plan in mind for where we’re headed. It reminds me of a number of situations over the course of my career. I can think of an accounting change that happened to Canadian companies, where it seemed like a very, very big deal at the time.
But [the situations] just kind of tend to melt away into nothing. These companies are adaptable. They do need to know the rules of the game. So there’s some confusion over that right now, but I think once the once the rules get sorted, companies will adapt, and they’ll carry on. These are living, breathing entities with smart people behind them, and they can adjust to whatever comes their way. So we look for opportunities. If there are market wiggles in this situation, fantastic, because again, companies will adapt. And all this tends to mean is that we’re able to buy them at cheaper prices than we otherwise would be able to do.
How investors can cope with market uncertainty
Nick: Hey, Iain, you mentioned uncertainty. The market hates uncertainty. It makes the market fearful. Warren Buffett, a famous investor, always says investors should be greedy when others are fearful. I don’t know about you; seems like the fear meter is a lot higher than it’s been in a long time. What opportunities are you seeing to buy amid this chaos and fear in the market?
Iain: The go-to strategy for me whenever the fear meter jumps like this (and I might just also add to that, that uncertainty is another name of the game we’re dealing with. The future, after all, is entirely uncertain), but when these schisms occur, high-quality companies can go on sale. High-quality companies rarely ever go on sale just based on their own fundamentals, just because they’re consistently strong. But when the entire market goes through a wiggle, you can get some really great companies for better than you otherwise would be able to get.
2 stocks to buy when everyone’s talking about a trade war and tariffs
Iain: One that I’ve got my eye on is CN Rail (TSX: CNR), one of the dominant rail companies in North America. Obviously they are impacted by North American trade.
Nobody’s sure how they might be impacted. But right now you’re able to buy that stock for about 17 times forward earnings. That’s lower than the 10-year average, and during that 10-year period there was a pandemic, if you recall. So 17 times forward earnings. 10-year average is 19 times.
This is a company that pays a 2% to 2.5% yield right now, which again, is better than usual. It’s a dividend grower, stock buyer-backer, a great company. I know that you’ve got another along those lines as well, Nick, to put forward.
Nick: Yeah, again, just attractive assets in the Canadian market that for a decade-plus has been able to invest and return capital to shareholders, and I think those assets are going to be valuable 10 and 20 years down the line. The company that’s on my radar is Canadian Natural Resources (TSX: CNQ), ticker CNQ in both the U.S. and on the Canadian exchange. It’s the No. 1 oil producer in Canada and the second-largest natural gas producer in Canada.
Obviously, with these tariffs in place, and Canadian oil and gas being a significant part of Canadian exports to the U.S., there’s some concerns around how tariffs are going to affect the business. However, you look at the stock today in response to some of that uncertainty, it has traded down to the point where you’re looking at a double-digit free-cash-flow yield. The dividend is up close to 6%. This is about as cheap as you’re going to get this company in a kind of a normal operating environment. Obviously, the pandemic a few years ago was a not normal operating environment.
If I look out long term, I don’t think these tariffs on Canadian oil and gas are going to be in place for a significantly long time, because of how important they are to the U.S. refinery system and how unpopular it will be to impose additional higher gas prices to American consumers. So I think Canadian Natural Resources is kind of getting thrown out with the bathwater because of some of this concern around tariffs. I think now is an opportunity to buy a really high-quality Canadian company at a cheaper price.
Iain, I’m getting played off here — getting the Oscars music. This is all the time we have for this edition of “The Five-Minute Major.” Thank you for joining me, and we hope everybody will see us next time.
