The Canadian economy showed signs of firming during the third quarter, though it remains to be seen whether it can sustain these gains. According to Statistics Canada, gross domestic product (GDP) grew at a 2.7 percent annualize rate, nearly a point above the Bank of Canada’s (BoC) forecast and the fastest growth in nearly two years.

The headline number is significant not only for the apparent acceleration in growth from the prior quarter’s 1.7 percent, but also because the central bank had previously identified 2.5 percent annualized growth as the minimum threshold necessary to remove excess capacity from the economy. However, it should be noted that, based on its most recent statement, the BoC does not expect the economy to consistently perform at this level until late 2015.

Similar to third-quarter results for the US, the Canadian economy benefitted from a substantial build-up in inventories. In fact, according to economists with CIBC World Markets, absent the inventory ramp-up, the economy would have grown by around 1.8 percent annualized, which is more consistent with previous quarters.

The question is whether demand in each respective economy will be sufficient to absorb this extra stock in subsequent quarters. After all, a rise in inventories suggests businesses are more confident about future demand, but confidence alone doesn’t translate into future sales.

Indeed, the conventional wisdom among economists seems to be that the inventory build merely pushed some of the growth that might have occurred during the fourth quarter forward to the third quarter. As such, they’ve been revising forecasts for fourth-quarter growth lower for both economies. According to a Bloomberg survey of institutional economists, the average forecast for fourth-quarter GDP growth is 2 percent annualized for Canada and 1.8 percent annualized for the US.

Recent trade data for October also featured a promising headline number, whose details were somewhat less than reassuring. Canada’s trade balance produced a surplus of CAD75 million, its first since December 2011. That performance blew past economists’ consensus forecast for a deficit of CAD770 million.

However, this result was largely due to the fact that imports dropped by 1.2 percent, to CAD40.4 billion, while exports declined by 0.3 percent, to CAD40.5 billion. In terms of volume, imports were essentially flat, while exports fell by 0.6 percent.

Of particular concern to economists was the fact that imports of industrial machinery and equipment dropped by 4.5 percent, to CAD3.6 billion. Electronic and electrical equipment also declined by 3.3 percent, to CAD4.7 billion. On a year-over-year basis, the former is down by 4 percent, while the latter is up by 7.7 percent.

These figures are considered important indicators of whether businesses are investing in productivity-enhancing equipment. As such, additional context is in order.

Imports of industrial machinery have averaged CAD3.6 billion over the trailing three-year period, with a high of CAD3.9 billion in June 2012. Meanwhile, imports of electronic and electrical equipment have averaged CAD4.6 billion over that same period, with a high of CAD4.9 billion in May of this year. So at the very least, the most recent results are roughly in line with their medium-term averages, even if the near-term trend is disappointing.

As we’ve frequently noted in past articles, business investment is one of the two key areas that the BoC expects to lead the transition of Canada’s economy away from consumer-driven growth. In its latest interest rate announcement, the bank noted that while business investment is up from prior lows, it’s still recovering “more slowly than anticipated.”

The BoC is also hoping for a rise in export activity, which we believe will likely precede an increase in business investment, as companies will remain conservative in deploying their capital until they see a clear jump in demand. The latter, of course, is largely contingent on growth in the US economy, which is Canada’s largest trading partner. In its statement, the bank said that non-commodity exports “continue to disappoint.”

Of perhaps greater consequence, given the central bank’s primary mandate, the BoC cited a worrisome decline in inflation to well below its target of 2 percent. In particular, pricing competition from recent foreign entrants in the country’s retail sector has held back core inflation. Retailers up north have historically enjoyed fatter margins than their counterparts in the US, and that, along with the relative strength of the Canadian consumer, finally caught the attention of companies such as Target Corp (NYSE: TGT), which has aggressively expanded into Canada.

In the past, inflation at these levels might have warranted another rate cut. Unfortunately, circumstances have constrained the BoC’s policy choices. Its benchmark overnight rate remains at 1 percent, where it’s been since late 2010. And while the central bank has abandoned its formerly hawkish stance on future rate hikes, policymakers are worried that a rate cut would merely cause already overextended consumers to take on more debt.

The one area where the BoC could have a positive effect on the economy while standing pat on interest rates is with regard to the country’s currency. Until this year, the Canadian dollar had enjoyed a period of unusual relative strength compared to other developed-world currencies, even trading above parity with the US dollar. That finally came undone earlier this year in February, and the loonie currently trades near USD0.94, down about 7.8 percent from its trailing-year high.

While current BoC Governor Stephen Poloz seems loath to directly intervene in the exchange rate, he could still engineer a decline in the currency by hinting at a future rate cut. A further decline in the exchange rate would help Canadian exports be more competitive in the US and other markets at a time when the global economy’s return to robust growth remains uncertain.

Bay Street Beat

The vast majority of Portfolio companies had reported earnings by last month’s issue, so there are relatively few updates this time around.

Bank of Nova Scotia’s (TSX: BNS, NYSE: BNS) results for its fiscal fourth-quarter (ended Oct. 31) exceeded analysts’ expectations by 0.1 percent on earnings per share, but fell short of the consensus forecast for revenue by 0.8 percent.

The mix of analyst sentiment remains largely unchanged, with 10 “buys,” six “holds,” and two “sells.” The consensus 12-month target price increased to CAD66.52 from CAD65.24. The new target price suggests a potential return of 4 percent above the current share price.

Two brokerages lowered their ratings for Bird Construction Inc (TSX: BDT, OTC: BIRDF) since last issue. EVA Dimensions downgraded the stock to “overweight” from “buy,” though both ratings are treated as equivalent when it comes to sentiment. And Dundee Securities Corp lowered its rating to “neutral,” or “hold,” from “buy.”

The mix of analyst sentiment now stands at three “buys” and four “holds.” However, the consensus 12-month target price climbed to CAD12.92 from CAD12.79, suggesting a potential return of 4.5 percent above the current share price.

EnerCare Inc’s (TSX: ECI, OTC: CSUWF) third-quarter numbers blew past analysts’ expectations by 66.7 percent on earnings per share and 11 percent on revenue.

However, the response among analysts was muted, as the ratings mix remains at five “buys” and two “holds.” The consensus 12-month target price did inch up to CAD11.00 from CAD10.83, suggesting a potential return of 12.6 percent above the current share price.

Ag Growth International Inc’s (TSX: AFN, OTC: AGGZF) third-quarter results beat analyst estimates by 15.7 percent on earnings per share and 11.9 percent on revenue.

In response, National Bank Financial raised its rating to “outperform,” or “buy,” from “sector perform,” or “hold.” And EVA Dimensions upped its rating to “underweight” from “sell,” though both ratings are treated as equivalent for sentiment purposes. Finally, Laurentian Bank Securities lowered its rating to “hold” from “buy.”

The mix of analyst sentiment now stands at seven “buys,” two “holds,” and one “sell.” The consensus 12-month target price jumped to CAD43.97 from CAD41.00, suggesting a potential return of 8.8 percent above the current share price. Among the larger increases in target price, Cormark Securities Inc boosted its 12-month target to CAD47.00 from CAD42.50, while TD Securities raised its 12-month target to CAD47.00 from CAD43.00.

Chemtrade Logistics Income Fund’s (TSX: CHE-U, OTC: CGIFF) third-quarter numbers beat analysts’ forecasts by 31 percent on earnings per share, but fell short of expectations by 7.2 percent on revenue.

In response, the mix of analyst sentiment improved to three “buys” and two “holds.” Scotia Capital raised its rating to “sector outperform,” or “buy,” from “sector perform,” or “hold.” And EVA Dimensions boosted its rating to “hold” from “underweight,” or “sell.”

The consensus 12-month target price also jumped to CAD20.92 from CAD18.13, suggesting a potential return of 13.4 percent above the current share price.

Since last issue, the mix of analyst sentiment for Enerplus Corp (TSX: ERF, NYSE: ERF) has improved to 14 “buys” and four “holds.” BMO Capital Markets raised its rating to “outperform,” or “buy,” from “market perform,” or “hold.” And EVA Dimensions boosted its rating to “hold” from “sell.” Meanwhile, Desjardins Securities initiated coverage with a “buy” rating.

The consensus 12-month target price climbed to CAD22.34 from CAD20.54, suggesting a potential return of 14.8 percent above the current share price.

Late last month, Lightstream Resources Ltd’s (TSX: LTS, OTC: PBKEF) management finally succumbed to reality and halved the company’s dividend, for a new monthly payout of CAD0.04 and a forward yield of 8.6 percent.

As a result, shares of the stock plunged to a 52-week low and remain down about 45.9 percent from their year-to-date high. In the long term, however, this was a necessary step for the firm to shore up its finances.

In response, TD Securities boosted its rating to “buy” from “hold.” And Desjardins Securities initiated coverage with a “hold” rating. Otherwise, the mix of analyst sentiment remains largely unchanged for now, at one “buy,” 17 “holds,” and one “sell.”

The consensus 12-month target price fell to CAD7.15 from CAD7.69, which suggests a potential return of 28.4 percent above the current share price.

Peyto Exploration & Development Corp’s (TSX: PEY, OTC: PEYUF) third-quarter numbers fell short of expectations by 16 percent on earnings per share and 0.1 percent on revenue.

But the mix of analyst sentiment remained largely unchanged at 14 “buys,” four “holds,” and two “sells.” Desjardins Securities initiated coverage with a “hold” rating.

However, the consensus 12-month target price rose to CAD35.63 from CAD34.09, suggesting a potential return of 10.6 percent above the current share price.

In the listing below, the number of analyst “buy,” “hold” and “sell” ratings for each company are shown, followed by the average 12-month target price among the analysts for which we have access to such data.

Month-over-month variances in the number of analysts listed below for each stock are often due to those securities being on a brokerage’s restricted list for a brief period. A restricted list is a compliance measure that’s typically used during the period when the investment banking side of an analyst’s firm is involved in advising the company.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–5–3–1 (CAD42.25)
• Artis REIT (TSX: AX-U, OTC: ARESF)–7–3–0 (CAD16.70)
• Bank of Nova Scotia (TSX: BNS, NYSE: BNS)–10–6–2 (CAD66.52)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–3–4–0 (CAD12.92)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–0–1–0 (CAD14.50)
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, NYSE: BEP)–9–2–1 (CAD31.64)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–10–2–0 (CAD24.76)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–5–7–1 (CAD42.73)
• Davis + Henderson Corp (TSX: DH, OTC: DHIFF)–3–4–1 (CAD29.36)
• Dundee REIT (TSX: D-U, OTC: DRETF)–4–2–0 (CAD33.81)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–5–2–0 (CAD11.00)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–5–4–1 (CAD10.43)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–5–6–0 (CAD64.55)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–6–3–1 (CAD30.19)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–8–3–1 (CAD37.27)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–5–5–0 (CAD28.25)
• Shaw Communications Inc (TSX: SJR/B, NYSE: SJR)–5–11–3 (CAD25.06)
• Student Transportation Inc (TSX: STB, NSDQ: STB)–2–3–1 (CAD7.19)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–9–2–0 (CAD25.39)

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–0–1–1 (CAD12.50)
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–7–2–1 (CAD43.97)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–12–7–1 (CAD31.10)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–3–2–0 (CAD20.92)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–22–1–1 (CAD46.75)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–14–4–1 (CAD22.34)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–0–3–2 (CAD7.08)
• Lightstream Resources Ltd (TSX: LTS, OTC: PBKEF)–1–17–1 (CAD7.15)
• Newalta Corp (TSX: NAL, OTC: NWLTF)–7–2–1 (CAD18.95)
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–1–0–0 (CAD7.00)
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–6–4–0 (CAD20.03)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–14–4–2 (CAD35.63)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–13–6–1 (CAD63.15)
• Wajax Corp (TSX: WJX, OTC: WJXFF)–3–7–0 (CAD36.72)