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3 Canadian Stocks for Safety and Returns

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As the U.S. debt talks intensified over the past few days, some observers have suggested that Canada could be a safer bet for investors than the United States is. Canada's economy hasn't experienced as deep a recession as the U.S., its unemployment is lower, and its banking system is considered to be among the soundest in the world. But the True North isn't immune to world events, especially not ones pertaining to its largest trading partner -- the United States.

Case in point: The Canadian economy shrank in May, partly because of troubles in its energy and materials sector, and partly because the strong Canadian dollar has negatively affected the manufacturing sector. Commodities-heavy Canadian markets also slumped recently, reacting to overall weakness in the sector.

When it comes to Canada, it seems the question is which will win over: the flight to relative safety or the implication of a weaker U.S. economy? For now, just as credit agencies are contemplating lowering the U.S. credit rating, Moody's has renewed Canada's triple-A  rating, citing "economic resiliency, very high government financial strength, and a low susceptibility to event risk."

Regardless of the world's turmoil, the following three stocks should be able to withstand any tumult and offer decent returns in the event of more positive outcomes.

PotashCorp (NYSE: POT  )
On Thursday, the world's largest fertilizer producer reported a record quarter that beat Wall Street's estimates. The company raised its full-year earnings guidance, predicting that the same conditions that contributed to the 75% profit jump should persist: tight fertilizer stocks, production limitations, and increased demand (from China and India), all contributing to rising fertilizer prices.

With PotashCorp, it's all about the industry's fundamentals. People need food, and the world, it seems, needs more food than ever. The company says that using fertilizers to improve crop yields is crucial to meet those growing food needs, and that's why it's seeing strong demand for its nutrients. PotashCorp operates a fifth of the world's potash capacity and a third of the phosphate and nitrogen, according to The Wall Street Journal. It has been working hard on increasing its production capacity, too.

PotashCorp was the target of a $39 billion hostile takeover offer by BHP Billiton (NYSE: BHP  ) last year. CEO Bill Doyle said the offer was too low and predicted that the fertilizer market was set to boom. Seems he was right, at least so far. The company's market cap today exceeds $49 billion.

Tim Hortons (NYSE: THI  )
What's left to say about the ubiquitous Canadian coffee and doughnut shop that hasn't been said recently in the wake of the Dunkin' Brands (Nasdaq: DNKN  ) IPO? Tim's is cheaper than Dunkin' or Starbucks (Nasdaq: SBUX  ) .

Like Dunkin', Tim Hortons is more of a blue-collar, cheaper offering than Starbucks. And like Dunkin', the Canadian company is geographically concentrated in its domestic market -- Dunkin's stores are mostly on the East Coast, Tim's along the Canadian border -- with much room to grow in the rest of the country. The fast-food chain even made a deal with Cold Stone Creamery and now offers ice cream … you guessed it, just like Dunkin'. Perhaps, then, like Dunkin', its P/E should expand?

As of April 3, Tim Hortons had 3,782 stores, most of them in Canada, with only 613 in the United States. Compared with Dunkin's 6,800 stores, Tim's has barely scratched the surface when it comes to U.S. growth.  Although the company has met with some resistance in the States, if it could duplicate the success it has had in Canada, the stock could fly. Perhaps it should try expanding where Dunkin's not dominating, too. Meanwhile, it's not doing so bad at home, with decent revenue growth and comp sales in the first quarter. Oh, and to boot, it pays a solid 1.5% dividend yield.

BCE, or Bell Canada Enterprises, is the largest phone company in the country. It's not an exciting growth-story stock, but it offers a nice dividend and some stability to a portfolio because of its lower price volatility. BCE's stock crashed after a failed leveraged buyout by the Ontario Teachers' Pension Plan and some other partners at the height of the financial crisis.

But in preparation for the buyout, Bell had enacted a massive restructuring plan that included large layoffs and improvements to its business and profitability. The stock has since recovered, although not fully yet, suggesting that it still has room to grow. True, its landline business continues to slide, but its wireless and TV operations seem to be growing. BCE is also rolling out its IPTV business, which could be a source of new growth.

But what BCE really offers is continually higher dividends -- it increased its dividend six times since Q4 2008. Its dividend yield now stands at a respectable 5.5%.

Foolish bottom line
Canada isn't immune to the world's events, but these three stocks could help any portfolio: If you believe global food needs are only growing, PotashCorp will help capitalize on that trend. If you're impressed with Dunkin', why not go for a similar story for cheaper? And who doesn't need some income these days when money markets offer such low yields?

Melly Alazraki owns no shares in any of the companies mentioned. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Tim Hortons. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2011, at 8:00 AM, drklein wrote:

    I am a former Cold Stone Creamery franchisee and I cannot for the life of me see why Timmy’s would risk sullying their name by co-branding with Cold Stone with all the bad publicity that Cold Stone has received recently about its unprofitable franchises. Cold Stone has been promising to fix its franchisee profitability problems since at least 2005, but it has only gotten worse. Their stores are closing and their franchisees are filing bankruptcy in large numbers throughout the nation because they cannot make a profit.

    Cold Stone’s business model is broken. It was revealed in the Wall Street Journal and in the CNBC documentary several months ago “Behind the Counter: The Untold Story of Franchising”, that Kahala, Cold Stone’s parent company, took more than $13 million in kickbacks in just one year. After losing our entire savings, we ended up losing our home too.

    I question Timmy's judgment in venturing into this partnership. A word of warning: Stay away from Cold Stone. You risk losing all you have worked for throughout your life. That’s exactly what we lost and now we’re starting all over again.

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