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Rate Hike Reflects Canada's Economic Strength: 5 Picks

On Jul 12, Canada‘s central bank hiked its key interest rate for the first time in seven years. The move was widely expected and a reflection of the Bank of Canada’s confidence in the economy. A long stretch of encouraging data on GDP, employment and business confidence has led to the decision to tighten monetary policy.

At a time when economies across the globe are recovering or exhibiting sluggish growth, this is welcome news for investors. Buying Canadian stocks looks like a profitable option at this point in time.

First Rate Hike Since 2010

The Bank of Canada has decided to increase its key rate from 0.50% to 0.75%, the first such hike since 2010. At that time, the central bank had raised the key rate by 1%. But after the central bank’s current governor Stephen Poloz assumed office, the rate was actually cut on two occasions in 2015. Up to the current increase, the overnight rate, which is the rate at which leading financial institutions offer one-day loans to one another, had remained at 0.5%.

In recent times, reports emanating from Canada have repeatedly indicated that the economy has successfully emerged from the aftermath of a devastating oil shock. This had led to rate hike calls from several quarters, but Poloz possibly stayed away in order to protect the competitiveness of Canadian exports.

According to several experts, signs of a strong economic rebound are so evident that Poloz could no longer put off this decision. In its statement made following its decision to hike the key rate, the Bank of Canada said that the economy is exhibiting considerable strength, powered primarily by household expenditure. The central bank said that nearly all of Canada’s unutilized economic capacity should disappear near the end of this year.

GDP, Employment, Business Confidence Remain Strong

On Monday, Canada’s finance minister Bill Morneau said that the country’s 45,300 job additions in June were a crucial sign of economic strength. Meanwhile, the country’s unemployment rate declined to 6.5%, the lowest level recorded since the Great Recession began.

But the unemployment report, released on Jul 3 was only the latest in a series of encouraging signals about the economy. On Jun 30, official data showed that Canada’s GDP had increased to 0.2% in April, marking its sixth successive month of expansion. Out of the 20 economic sectors under consideration, 14 expanded during this period, indicating that the improvement was broad based.

In fact, Canada is enjoying one its best stretches of growth since 2008-09. Over the last four quarters, the economy has expanded at a pace in excess of 3%. This is the highest level of growth among the countries which make up the Group of Seven, the world’s seven most advanced economies. 

Additionally, the Bank of Canada has raised its GDP forecast for the year. The central bank thinks GDP will now increase at a pace of 2.8% in 2017, higher than the projection of 2.6% released in April. To top it all off, the Bank of Canada’s business sentiment index touched its highest level since 2011 in April. Expectations of sales growth, investment and hiring intent all exhibited significant improvements.

Our Choices

Bank of Canada’s decision to hike the key rate has been triggered by a series of positive reports which serve to illustrate the country’s economic health. The central bank has also raised its GDP projections for the rest of this year.

Adding Canadian stocks to your portfolio looks like a smart option at this point. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

Crescent Point Energy Corp. CPG is engaged in the acquisition, exploration and development of oil and natural gas properties in Western Canada and the U.S.

Crescent Point Energy has a VGM Score of A. The company has expected earnings growth of 94.2% for the current year. Its earnings estimate for the current year has improved by 3.1% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

North American Energy Partners Inc. NOA is one of the largest providers of heavy construction, mining, piling and pipeline services in Western Canada.

North American Energy Partners has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 5% over the last 30 days.

Canadian National Railway Company CNI is engaged in the rail and related transportation business.

Canadian National Railway has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 10.7% for the current year. Its earnings estimate for the current year has improved by 2.1% over the last 30 days.

Rogers Communications Inc. RCI provides cable television, high-speed Internet access, and video retailing through its wholly-owned subsidiary, Rogers Cable and Telecom.

Rogers Communications has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 21.1% for the current year. Its earnings estimate for the current year has improved by 2.7% over the last 30 days.

Manulife Financial Corp. MFC is one of the three dominant life insurers within its domestic Canadian market and possesses rapidly growing operations in the U.S. and several Asian countries.

Manulife Financial has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 9.1% for the current year. Its earnings estimate for the current year has improved by 0.9% over the last 30 days.

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Canadian National Railway Company (CNI): Free Stock Analysis Report
 
Rogers Communication, Inc. (RCI): Free Stock Analysis Report
 
Manulife Financial Corp (MFC): Free Stock Analysis Report
 
Crescent Point Energy Corporation (CPG): Free Stock Analysis Report
 
North American Energy Partners, Inc. (NOA): Free Stock Analysis Report
 
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