Gordon Pape: The key stocks I’ll be watching in 2018

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Here are five stocks I'm going to be watching especially closely in 2018, and the reasons why:

Enbridge Inc. (NYSE, TSX: ENB)

Enbridge has always been a highly dependable utility stock, with steady annual dividend increases and a gradual gain in share price. But in 2017, it took a hit after completing the purchase of Houston's Spectra Energy in February.

Investors became concerned about the stock dilution that flowed from the deal, the doubling of the company's long-term debt and disappointing financial results. The stock fell from a high of $58.28 in late January to a low of $43.91 in November.

The company responded by raising its dividend by 10 per cent, effective in February, and announced asset sales and the issuing of new shares to strengthen the balance sheet.

The stock recovered to some extent, but is still well below its 52-week high.

Investors seem to be concerned the company has bitten off more than it can chew with Spectra.

Amazon.com (NDQ: AMZN)

It was a great year for tech stocks. The S&P information technology index ended 2017 up an amazing 37.8 per cent.

I expect the sector to be ahead again this year, but not to the same extent as in 2017. The bellwether stock to watch here as far as I'm concerned is Amazon because it is the most overpriced on a fundamental basis. The trailing p/e ratio is a breathtaking 289.5, which suggests that, if the sector falters, this stock will be hit harder than the others.

I recommended Amazon in my Internet Wealth Builder newsletter last January at $817.14 (U.S.), noting at the time the stock had a high p/e ratio of 182.8. The shares are up 43 per cent since then and, as earnings have not kept pace, the p/e today is more than 100 points higher. If a correction hits the tech sector, Amazon will be the first to feel it and will probably be one of the hardest hit.

Suncor Energy (TSX, NYSE: SU)

Energy stocks made a strong comeback in the final months of 2017, although, as a group, they still finished the year deeply in the red, off 12.6 per cent. Suncor was one of the companies that bucked the trend. It began 2017 trading in Toronto at $44.11 (Canadian). It dipped as low as $36.09 in July, but recovered strongly to finish on Dec. 29 at $46.15. By comparison with the rest of the energy sector, that's an impressive performance.

Suncor is the largest integrated energy company in Canada. It is perhaps best known for its oil sands operations, including a majority position in Syncrude. But it also has conventional oil-and-gas operations in Canada and abroad, four refineries (three in Canada) and markets its products under the Petro-Canada brand, which it acquired several years ago. As well, it has an expanding renewable-energy portfolio.

Although Suncor outperformed the sector in 2017, I see it as a bellwether stock for the industry. If oil prices hold firm or move up, the stock should react positively and the rest of the sector should follow.

Teck Resources (TSX: TECK.B, NYSE: TECK)

The Globe and Mail quoted an analyst last week as proclaiming that "commodities are screaming to be bought." That is typical of the late stages of a business cycle. The economy is expanding, demand is increasing and manufacturers are willing to pay higher prices for the raw materials they require. Add to that the fact that China is closing down some of its copper production because of high pollution and you have ideal conditions for a company such as Vancouver-based Teck Resources.

The company had a boom year in 2017. Third-quarter adjusted profit was $621-million ($1.08 a share) compared with $152-million ($0.26 a share) in the same period a year ago. The stock has responded accordingly. It began the year at $26.59 and dipped as low as $19.27 in June. But it has moved steadily higher in the past two months, finishing 2017 at $32.87.

The stock has an incredibly volatile history. It was trading at over $49 a share when the crash of 2008 hit. In the space of only eight months it lost 90 per cent of its value, dropping to $4.74. By Dec. 1, 2010, it was back up to $61.79, only to go into another deep slide that took it down to $5.34 five years later. Now it is on the upswing again. For how long is anyone's guess, but if the economy keeps strengthening, commodity prices will follow and $50 a share this year is not beyond the realm of possibility.

But be on your guard with this one. When the downturn comes, it will be swift and brutal and will signal that the entire mining sector is finished for this cycle. History tells us that with stocks such as this, taking part profit along the way is a good strategy.

Torstar (TSX: TS.B)

Nobody wants to invest in newspapers. They're losing print advertising at an alarming rate and, in most cases, their digital platforms have not been able to offset the losses. So it's not surprising that this company, which publishes Canada's largest-circulation newspaper, the Toronto Star, has been a market disaster in recent years. In 2014, the shares traded for more than $8 in Toronto. As I write, they are at $1.71. The latest quarterly results showed more losses, despite stringent cost-cutting.

However, reader Dave Lester, a retired investor with a background in finance, has been actively following the stock and notes there are some unusual things happening behind the scenes. Fairfax Financial, run by canny investor Prem Watsa, recently spent $11.8-million to increase its holding of Torstar's non-voting shares to 40.6 per cent. Why? Good question. Fairfax has not asked for a board seat, but says it is willing to consult with management on turning the company around. There are suggestions the ultimate goal is to take Torstar private.

Meantime, Torstar has been doing deals with another troubled media giant, Postmedia, one of which involved swapping a series of community papers, most of which were promptly closed. Could that be the precursor to a merger that would combine their most valuable assets, while shedding the rest?

Despite recent losses, Torstar has more than $60-million in cash and no bank debt. The stock continues to pay a small quarterly dividend of $0.025, to yield 5.8 per cent. This stock could conceivably go to zero. But if Fairfax successfully applies its turnaround and/or a deal emerges with Postmedia, this stock could soar.