Looking to invest in hot growth companies? One stock exchange is full of them -- and it’s not in New York.
Maybe Jim Cramer should move to Canada. After all, as the CNBC Mad Money host, he’s at his wild, crazy “booyah” best when the stock market is up and the bulls are running. And they haven’t been doing much of that lately on Wall Street. In Toronto, it’s a different story. The Toronto Stock Exchange, known as the TSX, has easily outpaced the gains in the S&P 500 index of United States companies in recent years. Really easily. As measured by the S&P/TSX Composite Index, over the past five years, the Toronto Stock Exchange has gone up from roughly 6,500 points to more than 13,400 (as of press time). Let’s say that with simpler math: It has more than doubled. Booyah, eh?
But even with Toronto on a tear, individual investors stateside can be forgiven for thinking of Canada more for its Mounties than for its markets. The TSX, though its history can be traced back 150 years, has only recently become a major player in North American trading. And even today, it is not a highly diversified exchange. More than half the firms listed on it are in the natural-resources business, in industries such as mining, oil and gas, energy, timber, and others that dominate Canada’s economy. Plus, many of the companies listed on the exchange are so small -- market capitalizations as low as $2 million are welcome on the smaller of the TSX’s two exchanges -- that they wouldn’t stand a chance of persuading the New York Stock Exchange (NYSE) to trade their shares.
But whether you see those things as limitations or as investment opportunities is a matter of perspective. “We do list higher-risk companies than a U.S. market might,” says Richard Nesbitt, former head of the TSX and the CEO of CIBC World Markets, a large financial-services firm based in Montreal. “But that being said, we are a fully regulated market with a very robust regulatory framework.”
That’s no small point. Though, in the art of investing, higher risk and higher reward can go hand in hand, and putting money into smaller, less mature companies can be disastrous for investors if they can’t get a handle on whether those companies are on a track to make real profits. But since the TSX requirements for businesses to disclose their financial numbers are nearly identical to the U.S. markets’, investors can make just as informed a decision about Vancouver’s Ainsworth Lumber Co. Ltd. as they can about U.S.-based giant General Electric.
“Structurally, there are a lot of things that make it comfortable for investors to put their money in Canada,” says David Darst, chief investment strategist of the Global Wealth Management Group at Morgan Stanley in New York. “That includes smaller things like a similar time zone and language, as well as more significant things like a strong rule of law and strong accounting rules.”
Those comforts have certainly helped to propel the TSX over the past several years. So, too, has Canada’s economy. Surging oil prices may be a pain when you’re filling up at the gas station, but they’re a boon to companies that are developing Canada’s vast oil reserves -- particularly to those that are pumping oil in the province of Alberta, where sandy soils cover hundreds of miles of black gold. Other commodities that have to be dug from the ground have been rising in price in recent years, too, helping to enrich Canadian firms from coast to coast. Big American institutional investors haven’t missed that run-up. Approximately 40 percent of TSX shares are traded by U.S.-based financial-services firms.
Other U.S.-based companies are getting in on the TSX’s gains, too, including many whose business is closely related to natural resources. Franconia Minerals, based in Spokane, Washington, went public on the TSX in 2005. Franconia is registered to do business in Alberta, but all of its mining operations are in the United States. “I think there is a Canadian appreciation for natural resources that finds a home on the TSX,” says Brian Gavin, Franconia’s CEO. “If you are doing well in Toronto, wise investors know that it is because you have passed the muster of the sophisticated natural-resources market there.”
Still, the TSX isn’t entirely devoted to these companies or to small companies. The exchange’s vast number of listings -- nearly 4,000 -- make it the second-largest stock exchange in the world when measuring by number of stocks listed for trading. (Several of the firms on the TSX also trade on the NYSE and are multibillion-dollar, multinational corporations.)
Among the TSX’s stocks are shares in companies you’ve likely heard of. Research in Motion? They make those addictive BlackBerrys. Nortel Networks? A Canadian “Baby Bell.” Tim Hortons? Doughnut holes. (Mmm, doughnut holes.) There are also companies on the exchange whose names might not be as familiar to Americans but whose business models are perfectly recognizable to them. Coastal Contacts, for example, is the biggest online seller of contacts based in Canada. The company, which also sells products in the United States, was a tiny start-up firm in 2000 but found money critical to its growth -- $8 million or so -- by going public in 2004 on TSX Venture Exchange, a part of the Toronto exchange reserved for early-stage, emerging firms. Coastal Contacts is now a worldwide business and has more than $100 million in annual revenue with offices in Europe and Singapore as well as in Canada and the United States. “We don’t really look at ourselves as being on a Canadian exchange,” says Terry Vanderkruyk, a vice president at Coastal Contacts. “We look at it as being on a North American exchange. And I think that’s the way a lot of investors see the TSX. Just like the world is becoming flat for business, it is becoming flat for investors.”
That’s certainly what officials with TSX Group, the for-profit company that operates the Toronto Stock Exchange, believe. They’ve just embarked on their second tour of U.S. cities, taking the message of what the TSX has to offer emerging firms to companies, especially smaller companies, across the United States. “If a company has a market cap anywhere below the $400 million to $500 million range and it lists on a U.S. exchange,” explains Nesbitt, “there is a strong risk that it may not get the attention of the trading community or of the analyst community. It may just become an orphan. But those types of companies are within our sweet spot. Those are the kinds of companies we like to attract and help grow.”
Nesbitt says small- and mid-size firms aren’t just in the TSX’s sweet spot, they are also the kind of companies that Canadian investors like. “The whole investment community in Canada feels very comfortable with emerging companies,” he says.
And increasingly, U.S. investors are starting to feel more comfortable putting their cash in Canada. The run-up of the Canadian dollar, the loonie, has helped to boost confidence in the economy to the north. So, too, has the boom in commodity prices and Canada’s somewhat reduced exposure to the housing slump that’s hit the United States. Plus, individual U.S. investors now have easier access to buy Canadian stock than ever before. For a hefty fee, investors can often buy individual shares on foreign exchanges through their current broker. More recently, and more cheaply, E-Trade’s Global Trading platform has given individual investors access to a host of individual Canadian stocks and other internationally traded shares. And, investors can put their money in exchange-traded funds (ETFs), which are single stocks that track the performance of a group of companies traded on a particular exchange. One ETF that tracks companies on the TSX is the iShares MSCI Canada Index Fund, which had risen 80 percent in the past three years as of April 1 -- that’s four times better than the S&P 500 over the same period. Whether that kind of performance will continue in these shaky economic times is anyone’s guess. But for now, at least, the Great White North is red-hot.
we give you the symbols for five different stock exchanges. you match them to the country in which they operate.
| 1. zse
| 2. bse
|b. united states
| 3. ttse
| 4. klse
| 5. azx
|e. trinidad and tobago
answers: 1. d, zagreb stock exchange (coincidentally, also the symbol for the zimbabwe stock exchange); 2. a, beirut stock exchange; 3. e, trinidad and tobago stock exchange; 4. c, kuala lumpur stock exchange; 5. b, arizona stock exchange
more trading trivia
1. which exchange is bigger, the nyse or the nasdaq?
2. how many companies did the dow jones industrial average first consist of -- four, 12, or 97?
3. of the companies originally included in the dow jones industrial average, how many are still operating under their original name(s)? bonus: what is/are they?
4. what is the oldest stock exchange in the u.s.?
5. what was the world’s first stock exchange?
answers: 1. it’s a trick question. the nasdaq has more companies listed, so it is bigger by that measure. the nyse, though, is the biggest stock exchange in the world, measured by value of all the shares traded. the exchange’s “market cap” is $13 trillion. 2. 12. 3. only one. general electric. 4. the philadelphia stock exchange, founded in 1790. it was acquired by nasdaq in 2007 and the merger of the exchanges is taking place in 2008. 5. though trading of stocks may date back to ancient babylon, the oldest formal exchange is widely thought to be the amsterdam stock exchange. it existed from 1602–2000 and is now part of the euronext exchange.