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Mathew Ingram

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Over the hedge

Mathew Ingram


TORONTO (GlobeinvestorGOLD) — The rising value of the Canadian dollar is great if you happen to be planning a trip south of the border and are looking to do some shopping, but it has ripple effects on the entire economy that are worth taking into account when it comes to your portfolio. A stronger loonie has a beneficial effect on some companies, but for others — those whose costs are in Canadian dollars and whose sales are in U.S. dollars, for example — the result is far from salutary. In some cases, in fact, it can mean the difference between making a profit and turning in a string of ever-increasing losses.

You can obviously take advantage of the beneficial part of this equation by buying stock in companies that do a lot of importing (either of goods or services), since they will be able to get more bang for their loonie now than they have in the past. But you can also take advantage of the negative effects of a stronger dollar as well, and hedge your portfolio at the same time against a change in the value of the loonie, by short-selling stock in some of those companies that are hardest hit by a stronger currency.

Just to review, in order to sell a stock "short," you borrow shares of a company from a bank or brokerage firm (most are quite happy to lend them for this purpose) and sell them, in hopes that the share price will go down. If it does, you buy back enough shares to repay the loan — at a lower price than you sold them for — and pocket the difference.

If the stock goes up instead, however, you can wind up having to repay the borrowed shares with stock bought at a higher price, which is why most investment advisers recommend that you not make short-selling a large part of your investment portfolio.

That said, short-selling can be a useful way of balancing or "hedging" a portfolio, and the rise in the Canadian dollar makes for an obvious opportunity. So what should you consider short-selling? Take a look at a company like Domtar as an example. The pulp and paper producer — along with the rest of its industry — is being slammed by a combination of slowing demand for its products and higher costs in the form of a stronger loonie. Forestweb, a consulting firm based in California, said recently that producers such as Domtar have either shut down or will have to close plants that account for almost two million tonnes of Canadian paper capacity.

Domtar lost $24-million in the first quarter, in part because of those higher costs, compared with a $10-million profit in the same quarter the year before. In the last quarter of 2005, the company reported a loss of $348-million, its largest quarterly loss in a decade, a result of a one-time charge for closing its mill in Cornwall, Ontario and other mills in Ottawa and Vancouver. Short-selling it about 18 months ago would have been a brilliant move, since it fell from the $12 range to about $4, but it has rebounded to the $7 level and could easily have further to fall if the dollar remains high.

Another industry that is hard hit by a higher currency is the tourism industry, since one of the selling points in the past has been that U.S. tourists get more for their dollars in Canada than at home. Now that the loonie is hovering near the 90-cent range instead of the 65-cent range, there isn't quite as much oomph to the U.S. greenback as there used to be, and that has been felt by tourist operators across the country over the past year. One of the companies that has been hit by the fallout is Intrawest, the ski and golf resort operator best known for its Whistler-Blackcomb resorts in B.C.

In its latest quarterly report, Intrawest said that while its revenue rose by 18 per cent in the period, its profit fell by 3 per cent, in part because of the stronger Canadian dollar. According to one recent estimate, trips by Americans to Canada are running at their lowest levels in 25 years, and that trend is not expected to change as long as the loonie remains in the 90-cent range. "When it gets up to where it is now, we are starting to see the impact" on tourism, said Paul Vallee of Tourism Vancouver. In many cases, tourism operators like Intrawest were only just starting to see their business recover from the attacks of September 2001 when the SARS epidemic hit, and then the Canadian dollar began to gain in value soon after.

One wild card to keep in mind with Intrawest in particular is that the company has hired Goldman Sachs to look at ways of enhancing its share price, including a possible sale. It was pressured to do so by a hedge fund called Pirate Capital, which holds almost 15 per cent of the stock. If there is a sale of the company, that could push the shares up higher than they are now, which would be a risk for any short-seller. At the same time, however, the financial pressure that the higher dollar puts on the company is undeniable.

There are other companies you might want to consider as possible short-sale candidates, including Maple Leaf Foods — a major exporter of meat — and George Weston, another food exporter. A higher dollar has also been having a negative impact on Torstar Corp., specifically its Harlequin romance novel subsidiary, which exports books around the world. As a general rule of thumb, if a company has costs that are in loonies and revenue that comes in U.S. dollars, then a stronger Canadian dollar makes it a potential short.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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