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Oct 22, 2020

Canada’s Fallen Giants Ideas For Value Investors

by Richard Morrison
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Richard MorrisonThe whole point of investing is to outperform the market and become rich. Once you’re rich, you’ll be able to stop working, fly to foreign destinations, take luxury cruises and eat in fine restaurants. Thanks to COVID, however, you may have already stopped working. Travel is difficult as borders are closed and there are few planes on which to fly nor cruise ships on which to sail. As for restaurants, if they’re still in business, you may have to dine at tables on the sidewalk. And keep your mask on.

While there may be less incentive to outperform the market, some Canadian investors have done just that this year if they held shares of Shopify Inc. and most gold mines. A few speculators and active traders with a high tolerance for risk have more than doubled their money in some penny mines and tech sector start-ups as well.

At the other end of the spectrum, falling oil prices, low interest rates and COVID-related travel restrictions have crushed the shares of some large, well-capitalized companies. In my opinion, in a few years, investors may wish they’d taken advantage of the misery and bought into some of these laggards.

The ongoing misery in Canada’s oil patch took a nasty twist this year. In late February 2020, the benchmark West Texas Intermediate (WTI) oil price began a plunge from about USD $63 and fell to near USD $12 by late April, just as COVID was spreading and motorists stayed home. Although the oil price has since rallied, extracting bitumen from Alberta’s oil sands is expensive, making production from the area a money-losing venture unless oil prices are high.

Politicians, meanwhile, have determined there are more votes to be had from environmentalists than capitalists and have no qualms about seeing the industry collapse, a sentiment reflected in Green Party leader Elizabeth May’s declaration this spring that “oil is dead.” In late September, California governor Gavin Newsom announced a plan to ban the sale of gasoline powered cars by 2035, following similar planned bans in France (by 2040) and Germany (by 2030).

In Canada, many producers are holding on for dear life. Among these are two former giants, Crescent Point Energy and Vermilion Energy, both down more than 90% over the past five years. This year the pain has spread to the two largest integrated companies in the sector, Suncor Energy and Imperial Oil, as both lost money as motorists made fewer trips despite lower prices at the pump.

The insurance sector has also suffered this year, as low interest rates reduced returns on the fixed-income securities held by insurers. Finally, you don’t need to be an analyst to figure out that quiet skies and deserted airports might be bad for airlines. Logic would dictate that if there are pockets of value anywhere in the Canadian market they would be found in these depressed sectors.

On a side note, for obvious reasons, publicly traded retirement home chains Extendicare Inc., Chartwell Retirement Residences and Sienna Senior Living have also plunged to what may look like bargain levels. However, many Canadians now regard profiting from elder care as evil and the sector may soon be entirely government-run. Investors who cling to these stocks can only hope some government reimburses them for their shares in the process.

Here are some giant, well-capitalized blue-chip Canadian companies whose shares have plunged in 2020. Their size and strong balance sheets indicate there is little chance of any of them going bankrupt, but anyone buying their stock must be patient.

Suncor Energy Inc. (SU)

Suncor is Canada’s largest integrated energy producer and the fifth largest in North America, responsible for 16% of Canadian oil production and 18% of its consumer gasoline and diesel market. Suncor started commercial production of the Athabasca oil sands in 1967 and has since added conventional and offshore oil and gas production, refining, and retail sales under the Petro-Canada banner. As of the end of 2019, Suncor had $89.4 billion in assets against $16 billion in net debt and $47.4 billion in total liabilities.

Between 2012 and 2018 Suncor’s shares traded in a range between $35 and $40, shot to a record $55 in the middle of 2018, then plunged along with the rest of the industry earlier this year. In February 2020, Suncor raised its quarterly dividend to 46.5 cents, only to cut it to 21 cents three months later. The new rate is half that of the 2019 payout.

In July 2020, Suncor announced dismal second-quarter results. Funds from operations were just $488 million or 32 cents per share, roughly one sixth of the $3.0 billion ($1.92) that had been reported in the same quarter of 2019. Similarly, Suncor posted an operating loss of $1.49 billion (-98 cents) compared to operating earnings of $1.25 billion (80 cents) in the same quarter of 2019. Finally, Suncor’s net earnings turned to a loss of $614 million (-40 cents) from a profit of $2.73 billion ($1.74) per share in the second quarter of 2019.

As of mid-October 2020, you could buy a Suncor share for less than $16, the lowest it has been since the summer of 2004—more than 16 years ago—and a price so low that even the reduced annual dividend of 84 cents still yields about 5.3%.

In an 8 September 2020 report, Morningstar senior equity analyst Joe Gemino said the stock remains highly undervalued, trading well below what Morningstar sees as a $27 fair value point.

BMO Capital Markets analyst Randy Ollenberger rated the stock outperform with a $32 target price in a 4 September 2020 report.

Manulife Financial Corp. (MFC)

Manulife is one of the largest financial services companies in the world, with more than 35,000 employees, 98,000 agents and thousands of distribution partners serving 30 million customers. Manulife offers individual and group life insurance, together with health, disability, and retirement products. Manulife’s wealth management division includes mutual funds, annuities, GICs and high interest savings accounts. As of 31 December 2019, Manulife had $809.1 billion in total assets and $759.0 billion in total liabilities, leaving $50.1 billion in total equity.

Manulife’s shares had outperformed the broad TSX Composite through the end of 2019 but plunged when COVID hit and interest rates were cut. While the rest of the market has largely recovered, Manulife has not. At a recent price of $18.71, Manulife stock trades at just 6.7 times the company’s 2019 earnings of $2.77 per share, while the annual dividend of $1.12 yields about six per cent. The price to book value is also low, as the shares trade at just 74% of book value of $25.14 per share.

The first half of 2020 was horrible for almost all aspects of Manulife’s businesses. Net income in the second quarter of 2020 was just $727 million or 35 cents per share, only half the $1.475 billion (73 cents) it had recorded in the second quarter of 2019. For the first half, Manulife’s net earnings were $2.023 billion ($1.00), down from $3.651 billion ($1.81) in the first half of 2019.

In an 11 September 2020 report, Morningstar equity analyst Rajiv Bhatia increased the estimated fair value for Manulife shares as USD $17.50 or CAD $23.10.

Tom MacKinnon, an analyst at BMO Capital, rated Manulife at outperform in a 28 August 2020 report, with a target price of $27.

Air Canada (AC)

Air Canada is Canada’s largest airline and among the 20 largest in the world.

The airline’s stock was the top performer on the TSX between 2009 and 2019, with a 3,575% return over 10 years, rising from a near-bankruptcy level of less than one dollar to $50 as CEO Calvin Rovinescu helped the company reduce debt and deal with problems involving labour, pensions and other headaches.

In 2019, the shares began a sharp climb, partly fuelled by its reacquisition of the Aeroplan frequent flyer plan. The stock hit a peak of $50 last November on its way to recording an 89% jump in 2019.

Air Canada posted a record $19.1 billion in operating revenues in 2019, with $1.65 billion in operating income, despite the grounding of the Boeing 737 Max aircraft. At the end of 2019, the company had unrestricted liquidity of $7.38 billion and net debt of just $2.37 billion.

Then came COVID and government-imposed travel restrictions, and Air Canada shares plunged to just $15 over the next three months. The airline was forced to suspend service on several routes, pulling out of airports and laying off thousands of employees.

In a 31 July 2020 report, Morningstar equity analyst Burkett Huey set a fair value for Air Canada’s shares at $22. “We expect Air Canada’s fundamentals will recover after a COVID-19 vaccine is distributed in 2021 and international travel subsequently resumes,” he wrote.


Low oil prices, interest rates near zero and a global pandemic have crushed the share prices of some solid, well-capitalized Canadian companies. If oil prices and interest rates rise and a vaccine for COVID is in widespread use, investors who took small stakes in these companies may be glad they did.


Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.