The Bank of Canada has been a lot more dovish than the U.S. Federal Reserve (the Fed) despite problematic inflation that’s lingered, especially in the grocery aisle. Undoubtedly, further rate cuts could weigh quite heavily on the loonie, especially as its latest rally versus the U.S. dollar runs out of steam. Either way, I think investors should expect the Bank of Canada to keep going its own way as it weighs everything (inflation and tariffs) up until its next decision day. Either way, I think lower rates could be in the cards if inflation continues to fall back to earth.
In such a scenario, the loonie may experience a round-trip right back below the US$0.70 mark. In any case, investors worried about a weakening loonie should be ready to adjust their portfolios with names that stand to get an earnings boost as the U.S. dollar gains ground over the loonie. Of course, any Canadian company with significant business in the U.S. would be a name to watch. In this piece, we’ll look at a pair that I think could be in for a win if the Bank of Canada keeps trimming away at rates.
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Alimentation Couche-Tard
Shares of Alimentation Couche-Tard (TSX:ATD) could be a great pick-up if you see pain ahead for the Canadian dollar. Undoubtedly, the convenience retailer behind such names as Circle K does a lot of business in the U.S. market. Additionally, lower rates could be conducive to more acquisitions, especially now that 7 & i Holdings (the 7-Eleven owner) is off the table. As we move into year’s end, I’d look for management to set their sights on another acquisition prospect. Though not nearly as hefty as the likes of a 7 & i, I do think the next deal (or series of them) could get Couche-Tard back in the earnings growth fast lane.
With a lower loonie in the mix, I’d look for ATD stock to potentially make up for lost time, especially since its stock pretty much gave back all the gains when it was announced that the 7 & i Holdings acquisition would not be happening. I think the reaction was rash and perhaps a tad irrational.
For self-guided investors, I view the dip as a buying opportunity, regardless of where the Bank of Canada goes next with interest rates.
CN Rail
CN Rail (TSX:CNR) also does lots of business south of the border. Lower rates and the potential for a lower loonie bode well for CNR stock as it aims to bottom out and get out of its bearish downward spiral. Indeed, the tailspin may be far from over as tariffs continue to disrupt the track ahead. Personally, I think CN Rail has serious issues as shares flirt with a 30% fall from peak to trough.
On the bright side, the dividend yield is nearly 3%, making the dividend growth gem an excellent fit for long-term value investors willing to brace for more of the same over the near term. Finally, CN Rail may have a nudge to get in on a U.S. rail takeover as rumours surrounding rail mergers soar. Indeed, the rail scene is ripe for consolidation. And CN Rail has enough financial firepower to make a deal. And lower rates would be one more incentive.
