Quirky Ruled Canada Stocks in 2014; Diversity Seen in ’15

A quirky collection of companies selling everything from online gambling to Teletubbies propelled Canadian stocks to their third annual gain in 2014. Expect more diversity in 2015 as a range of industries hitch a ride on the U.S. recovery, investors say.

With a global commodity rout hammering energy and material stocks, the traditional workhorses of the Canadian market, the gain for the Standard & Poor’s/TSX Composite Index relied on the fewest number of companies for a positive year since 2007. The index climbed 7.4 percent for the year, driven by outsized gains from companies such as Amaya Inc., the world’s biggest publicly held online-gambling company, and DHX Media Ltd., owner of the Teletubbies children’s television franchise.

“The world has always been a bizarre place, and this year was a little more bizarre than usual,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto, which manages about C$8 billion ($6.9 billion). “Stock picking is going to be a very important theme.”

Mergers and acquisitions played a big role in stoking the top Canadian stocks in 2014. Canadian firms were involved in $229 billion worth of transactions through Dec. 29, the highest annual tally since 2007 and a 45 percent increase from a year ago, according to data compiled by Bloomberg.

Amaya surged 259 percent to become the best-performing stock in the S&P/TSX this year after the Pointe-Claire, Quebec-based company agreed to acquire PokerStars for $4.9 billion in June.

Teletubbies Episodes

Alimentation Couche-Tard Inc. surged to a record on Dec. 19 after agreeing to buy The Pantry Inc. for an enterprise value of $1.7 billion, including debt. The Laval, Quebec-based convenience-store operator, the fourth-best performing stock on the benchmark index this year, has more than 6,300 stores in North America and would add about 1,500 more in the U.S. with the transaction.

DHX Media, a Halifax-based creator and licensor of family entertainment programs, said in June it would produce 60 new episodes of the children’s show Teletubbies after acquiring the program in 2013. The stock has gained 73 percent this year.

Smartphone maker BlackBerry Ltd. ended the year the ninth-best stock in the S&P/TSX with a 61 percent advance. BlackBerry has advanced as Chief Executive Officer John Chen stoked hopes for a recovery with his focus on software and security for governments and corporations.

Of the 250 companies S&P/TSX, 140 were up for the year. That’s the lowest number of stocks gaining in any of the five years the index has advanced since 2007. Canadian stocks slumped in 2008 and 2011.

Economic Growth

Consumer staples, led by Couche-Tard, and technology, paced by Sierra Wireless Inc., which was the third-best performing Canadian stock, drove the benchmark index in 2014. The 10 worst stocks, meanwhile, were all related the the energy industry, led by an 80 percent slump in oil producer Lightstream Resources Ltd.

The U.S. economy, forecast to outpace Canadian growth in each of the next two years, will drive gains in 2015, according to Gluskin Sheff’s Rosenberg.

“The companies that are hitched to the only game in town, which is U.S. domestic demand growth, and can take advantage of the weak Canadian dollar, will be good places to be,” he said. “That can span the gamut of transport, technology, industrials that service the U.S. market. It packs a powerful punch.”

Rosenberg forecasts “high single-digit growth” for the S&P/TSX next year.

‘Less Panic’

Takeovers may drive consolidation in the energy industry in 2015 after the 46 percent plunge in crude this year makes smaller producers vulnerable to larger buyers both in and outside of Canada, said fund manager David Cockfield at Toronto-based Northland Wealth Management. The group accounts for about a fifth of the S&P/TSX.

“With the present pricing, pencils have been sharpened,” he said. His firm manages about C$300 million. “People are starting to take a more long-term view on oil, less panic.”

The S&P/TSX Energy Index slumped 7.8 percent this year, the worst performer among 10 industries in the broader benchmark and the biggest decline since 2011. Raw-materials shares, which account for more than 10 percent of the S&P/TSX, had the only other loss as a group, declining 4.5 percent.

Deals in the oil patch are happening, with Talisman Energy Inc. agreeing to sell itself for $13 billion to Repsol SA in December. The deal was the cheapest among the five largest oil and natural gas purchases on the continent in 2014, including debt.

“Talisman was definitely badly wounded,” Cockfield said. “Some of the intermediates could get picked off. I think people are waiting to see.”

Inverse Storm

Brian Belski, chief investment strategist with BMO Capital Markets, isn’t holding his breath for an energy rebound.

There is “an inverse perfect storm hitting commodities,” Belski said in a year-end Canadian outlook report. “Investors are underestimating the potential depth of the current pullback and attempting to call the bottom.”

Belski compares the current environment for commodities -- high prices, high capacity and decelerating growth in emerging markets, especially China -- to the opposite conditions at the turn of the century that precipitated the rally.

He suggests investors emphasize investments in telephone stocks, which offer improving earnings, and financials, with stable growth, dividends and U.S. exposure.

Whether returns come from energy or from other areas, next year is sure to be a more volatile one for the Canadian market, Rosenberg said.

“Canada being a stock market that’s highly exposed to the crosswinds of global economic, financial and political activity, it will be another roller-coaster ride next year,” he said.

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