3 Currency-Sensitive Companies to Buy in the Face of NAFTA Risks

Why investors betting on a weaker Canadian dollar should consider Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN), Canfor Corporation (TSX:CFP), and Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP).

| More on:
The Motley Fool

With a number of Canadian industries highly sensitive to exchange rate movements, and changes in the CAD/USD exchange rate, investors attempting to value said companies in the face of NAFTA concerns certainly have a significant amount of homework to do. While it appears that progress is currently being made in recent NAFTA talks between Canada, the U.S., and Mexico, the risk that NAFTA is eliminated remains a significant question mark for investors in thinking about how such a move would potentially affect Canadian companies.

With many believing the risk of a NAFTA pullout from the U.S. remains low, this is a risk which should certainly be considered by investors in companies with significant operations in the U.S. market, as changes in the exchange rate between Canada and the U.S. is likely to drive profitability north of the border.

In companies such as Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN), for example, which have the vast majority of their revenues originating in the U.S. but have earnings displayed in Canadian dollars, a rising U.S. dollar as compared to the loonie will positively impact earnings for investors holding shares of AQN traded on the TSX.

Companies such as Canfor Corporation (TSX:CFP), with a similar revenue profile and heavy ties to the U.S. market for its softwood lumber products, will also benefit from a strengthening Canadian dollar. As the U.S. economy is expected to continue to improve, a stronger U.S. economy benefiting from the recent tax changes put in place by the Trump Administration would further the case that housing starts would continue to pick up steam, and Canadian softwood lumber producers would benefit in the near to medium term.

Another company with positive upside in a weakening Canadian dollar environment would be Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) due to the significant percentage of the company’s revenues that originate in the U.S., given the company’s strong business relationships and ties to cross-border freight. CP Rail would be another beneficiary of a strengthening American economy coupled with a weak Canadian dollar.

Bottom line

While companies such as Algonquin also carry interest rate risk related to future Bank of Canada interest rate hikes, a weakening Canadian dollar would be a good thing for these three companies, and I would suggest investors bearish on the medium- to long-term outlook for the Canadian dollar should consider exposure to these companies or the industries they operate in.

Stay Foolish, my friends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chris MacDonald has no position in any stocks mentioned in this article.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »