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Without takeover potential, stocks wilt Add to ...

It is certainly true that investors have begun to shy away from Canadian energy stocks, now that Ottawa has apparently put them out of reach from foreign suitors. On Friday, the government killed a $6-billion deal between Malaysia’s state-owned Petronas for Canada’s Progress Energy Resources Corp., leaving investors waiting with bated breath over the weekend.

The result isn’t pretty: Progress shares fell 12 per cent in early trading on Monday, and dragged down just about everything else in the sector as any takeover premium built into share prices quickly disappeared. Advantage Oil and Gas fell 4.4 per cent, Birchcliff Energy fell 4.3 per cent and Crew Energy fell 3.5 per cent. Nexen Inc., involved in its own takeover deal by China’s CNOOC Ltd., fell 6.1 per cent.

The bigger energy stocks held up considerably better, presumably because the market hadn’t anticipated takeovers among the mega-caps. Suncor Energy Inc. was unchanged and Canadian Natural Resources Ltd. fell just 0.5 per cent. Interestingly, EnCana Corp., no pipsqueak, fell 3.3 per cent – there seem to have been some takeover hopes dashed there.

The rest of the S&P/TSX composite index held up reasonably well. The benchmark index was unchanged soon after the start of trading. And some resource stocks – particularly materials stocks – showed impressive gains: Niko Resources rose 5.7 per cent and Aurizon Mines rose 3 per cent.

The bigger issue here is what investors are going to make of the Canadian market in general. Dividends, buybacks, profits and gains in underlying commodity prices are good boosters of stock prices. But so, too, is the prospect of a takeover – and if Ottawa is putting up resistance to deal-making, share prices could suffer. Stock valuations could slide.

However, this might be an overstated concern. The scuttlebutt is that in interfering with deals, Ottawa is nervous mostly about takeovers by state-owned entities, which leaves plenty of takeover potential for other areas of the market.

The other point to consider is that Canadian resource stocks, over the longer term, have been suffering from concerns about the health of the global economy, not deals. Energy stocks have tumbled 22 per cent since the first quarter of 2011. Materials stocks have fallen nearly 25 per cent over the same period.

Deals are nice for investors. But an improvement in the underlying fundamentals might be a lot better.

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