3 Canadian Stocks to Sell

These names are looking a little expensive right now.

Andrew Willis 11 August, 2021 | 2:35AM
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Sale

Broad markets have made a strong recovery from the depths of early 2020, but some names have rebounded a bit too much. In Canada, a few companies have already started correcting this year, and with no – or only narrow – economic moats to fend off competition, they may need to correct further to find buyers.

Tailwinds to gold prices, declining cost advantages and a limited auction market for expensive equipment have caught the attention of investors in these names year to date:

Name

Total Return YTD (Daily)

Price to Fair Value

Uncertainty

Moat

Agnico Eagle Mines (AEM)

-12.10 %

1.54

Very High

None

Saputo Inc (SAP)

3.29%

1.34

High

None

Ritchie Bros Auctioneers Inc (RBA)

-13.21%

1.27

Medium

Narrow

Source: Morningstar Direct, July 26, 2021

Investors holding gold as a safe haven asset or hedge against equity markets may have been disappointed by the dip last spring, and enjoyed the growth that followed. Agnico Eagle Mines (AEM)’s stock rose with gold prices last fall – but began to descend with wider economic policy aspects put into play.

“The U.S. central bank's extreme moves to minimize the economic impact have provided a significant tailwind to gold prices. However, while investment demand can support higher near-term prices, it's unlikely to remain strong in a midcycle environment,” says sector director Kristoffer Inton.

Gold’s demand from its role in jewelry among Chinese and Indian consumers isn’t particularly strong either, according to Inton. Agnico Eagle, he notes, however, may be able to improve the supply side of the situation in the medium term with a boost in production thanks to a portfolio of development projects.

For Canadian cheese and dairy lovers out there, it may come as a surprise that industry giant, Saputo (SAP), may not be as big as it once was. “We believe Saputo’s cost position, supported by its large scale, has diminished in recent years. As dairy producers continue to consolidate and become larger themselves, pricing power has shifted away from processors like Saputo,” says sector director Erin Lash.

“We’re lowering our moat rating for Saputo to none from narrow as we believe it faces significant headwinds due to consolidation among dairy producers, high exposure to volatile raw milk prices, and a lack of differentiation between its products and those of competitors and private labels,” says Lash.

Looking forward, Lash is intrigued by the company’s development of plant-based products: “Although management has acknowledged that it missed the opportunity to enter the plant-based beverage market (which is now highly saturated with a plethora of almond, soy, and oat alternatives, among others), Saputo is choosing to focus on the plant-based cheese market, which it estimates makes up CAD 1 billion out of the CAD 7 billion plant-based market.”

Lastly, the secondary market for heavy equipment in Canada this year is looking a bit crowded, and Ritchie Bros Auctioneers Inc (RBA) may not grow as much as investors expect right now. “Our fair value estimate is based on the assumption that Ritchie Bros. will successfully juggle online and live auction offerings but not significantly increase its overall share of the high-dollar-value secondary equipment market,” says sector director Brian Bernard.

Ritchie Bros does have some lasting power, however, thanks to a narrow moat rating for its network effect thanks to over 700,000 bidder registrations, a strong brand and an extensive database of historical pricing information, Bernard adds. “Ritchie Bros. has demonstrated that it can innovate to address competitive threats.”

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Agnico Eagle Mines Ltd70.21 CAD-0.41
Ritchie Bros Auctioneers Inc59.24 USD-0.07Rating
Saputo Inc25.46 CAD3.08Rating

About Author

Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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