Canadian stocks rated by Iain Fraser

Victory in Iraq

While it is only the first round today's election in Iraq is, nevertheless, a surprising and great victory for Iraq and for President Bush.

Most of us thought there would be mayhem and chaos on election day. Didn't happen that way. One of the clever moves of the security team was to get and keep all vehicles off all the roads, streets, and highways.

About eight million Iraqis voted and for all of them it took much courage to stand up to the insurgents who threatened them with death if they voted.  It is a victory for what is noble  in human beings over what is mean and corrupt.

Most of the time the market discounts the news but probably not this time; we think the NYSE will go up 100 or more points tomorrow.

Dollar Tree Stores

Dollar Tree Stores ($27.50) is an operator of discount variety stores where every item in the store sells for $1.00. The company operates 2,674 stores in 48 states. In both the Malls this writer goes to in Toronto and in Florida the only store in either Mall that always has a line up at the cashier is the Dollar Store. The information we have is that the average purchase is about $6.00. So 500 customers a day produces $3000 per day or $1,100,000 per year. Even selling at $1.00 it adds up. The stock is selling to-day at the same price it was in 1998 despite the earnings going from 73 cents to an estimated $1.90 this year; and the book value from $2.67 to $11.90. Dollar Tree gets a #1 rating from us and the rating number is 0.97; and the earnings have gone up every year (except one) for at least the past 11 years; our expectation is for a move to $70 to $75 in the 3-5 year term.

The trend is up!

Pay no attention - the primary trend is up!

Dow Theory

The Dow Theory rule is " once a major, or primary, trend is established the stock market will move in that direction for an extended period of time, viz. anywhere from six months to as much as three years." In our view the current bull market will be two years old this coming March. In the past 3-4 weeks we have seen a decline of 350 points on the Dow which is just a hiccup but even 3 1/2 % has been enough to bring out a lot of ever ready bears.

Suncor overvalued

While Suncor is overvalued the other three major oil stocks remain undervalued and the natural question is - would it be reasonable to underweight Suncor and equal or overweight Petro Canada; Talisman and CNQ? Worthwhile thinking about.

Suncor and PetroCanada

Comments and ratings for Suncor ($40.00); PetroCanada($63.50); Can. Natural Resources ($54.50) and Talisman ($36.50). Suncor has been one of the best performing stocks in this bull market. But at its present price the stock is substantially overvalued; its current rating is well over 2.00 and anything over just 1.50 is overvalued. Also, as we have shown on the charts for the past five months especially Suncor has lagged far behind the energy sector chart.

Top Topick

Since starting Fraser Quantitative Ratings in November of 2002 we have had 39 Canadian Stocks that were Topicks.

All of them have gone up!

We rather doubt that any other research organization equals this record.

The best performer of them all is Transat ($24.00) which was in our Report of March 3, 2003 when it was $4.55; we picked it then because it was so cheap in terms of book value and cash flow.

Of the 39 stocks (not steps) 10 are oil and gas and nine are financial, which combined, is just about in line with the weightings in the TSE Composite Index.

Precision Drilling

"One of the really dissappointing stocks recently has been Precision Drilling ($51.53 Cdn). Our rating number is at a bargain level of 0.68 which easily gives the stock a #1 rating. In recent months, the buyers have not been winning out and it is difficult to understand why this is happening."

We wrote the above on Nov.11, 2003 and as it turns out the market had it wrong at that time. Shortly after Nov.11 the stock started to move up and it is now over $80.00. Despite this huge move the stock is still undervalued.

This observer worked on a drilling rig many years ago; a miserably tough job. At that time the drilling bit was cooled and lubricated with mud; there was mud everywhere. To-day, instead of mud they probably use wireless and a chip.

Alcan and Inco not too good; CNQ and Talisman doublegood

Back in Canada there are three sectors that account for almost 70% of the S&P/TSX Composite Index; they are Financials; Energy; and Materials.

In the past three months, the Financials and the Composite Index are each up 8%.

But the big two in the Material sector, Alcan and Inco, are down 12% and 9.5% respectively; not too good.

On the other hand, the big two (in our view) Canadian Natural Resources ($54.20) and Talisman ($36.40) are up 30% and 17% respectively; extremely good, particularly if one was overweighted in energy and only equal or underweighted in materials.

In this three month period our rating system clearly favoured the oil and gas stocks. Hooray for the system!

Pills not working for Merck and Schering Plough

For most of the 20th century amongst the leading companies and stocks in the world were the U.S. pharmaceutical companies.

They were close to the ultimate growth stocks.  For many decades the growth rates were close to the 15% per annum level.  Growing up in Westmount, Montreal, one of the guys in the neighborhood last name was Frost and his family owned a pharmaceutical company by that name. The company was famous for its "222" pill. Sometime after WW 11 Frost was taken over by Merck, and if they got Merck stock I have often wondered what it would have been worth in the year 2000 when the stock hit its high at $80.00

In 2005, Merck is no longer a growth stock and in our model is now judged as a value stock.

In value terms, the stock is hugely overvalued selling at 3.5 times book and a whopping 11.9 times cash flow! Our model looks less than two times book and less than five times cash flow.

But the real wonder of this group is Schering Plough($20.30) which is selling at 4.7 times book and, it's hard to believe, 36.9 times cash flow.

For Merck, a possible redeemer is that the yield is 5.0%; for Schering Plough the yield is 1.1%

At the same time, and in this sector, there is Pfizer($25.25) which is still very much an undervalued growth stock and easily gets a #1 rating with our rating number at a very low 0.66.