No matter how you slice it, Canada’s hot–and America’s not. For starters, the Northern Tiger’s economy grew twice as fast as the US in the first quarter, following a now more than two-year-old trend.

Canada’s currency–the loonie–is in the midst of an historic bull market at the expense of the US dollar. Canada’s natural resource exports are booming, while the US economy is struggling under the weight of higher food and gasoline prices.

As Associate Editor David Dittman makes clear in this issue’s Canadian Currents, the Canadian banking system is as sound as any in the world. Loan activity is healthy, as is wealth management. And thanks to a history of conservative mortgage lending, Canada’s property market is also strong. That’s a stark contrast to the still soft US banking system and housing market, which, except for a few areas of the country, continues to slide.

Finally, the Canadian government is the very model of stability, with a Conservative Party majority locked in place for at least the next four years. Corporate tax rates, already the lowest in the developed world, are slated to fall to just 15 percent, less than half US rates. Meanwhile, the country is near fiscal balance, despite extensive social welfare spending that includes a national healthcare system.

Contrast that to the increasingly dysfunctional US government, which is so polarized on partisan lines it still hasn’t been able to agree to raise its borrowing limits. That’s despite the fact that the business community that finances political campaigns is pleading with politicians to find some agreement to avoid a potentially catastrophic and unprecedented default this summer.

As for investing, the Canadian market indexes continue to outperform most US stocks by a wide margin. And that margin is expanded for US investors, whose gains in Canadian stocks as well as dividends are magnified by currency appreciation.

Throw in increasingly unpredictable US regulation–from the environment to the financial sector–and there would seem to be little reason for Canadian companies to invest here. Yet that’s exactly what a growing number of companies are doing across a wide range of industries. And the pace appears to be accelerating.

Buying Power

Why head south now? The sheer size of the US economy and markets alone has always been attractive to Canadian companies desirous to expand.

So has common history and common language, at least for most of the population. NAFTA has broken down many of the formal barriers to direct investment as well.

What really makes the US attractive right now to Canadians, however, is buying power. The loonie today sells for about USD1.03.

That’s a 34 percent boost in purchasing power from early 2009.

As successful investors know, almost anything can be a good buy at the right price. And the appreciating Canadian dollar has made everything significantly cheaper in the US for Canadian companies, just at the time when balance sheets are back in order and local revenue and profits are strong. Moreover, though housing in particular continues to weigh down the US economy, there are sectors of strength. If Canadian companies can buy in cheaply, they can rev up their growth for many years to come.

Of course, some Canadian companies have already seen the downside of this strategy. Former CE Portfolio holding CML Healthcare Inc (TSX: CLC, OTC: CMHIF), for example, seemed ideally suited to making a big splash in the US market for radiological testing.

The company had extensive experience with regulated health care, having previously built a solid franchise in Canada. Testing was popular, and reform legislation in the US seemed to ensure a whole new group of insured Americans would visit the company’s centers.

Unfortunately, things turned out quite differently. The Obama administration and a then-Democratic majority in Congress did wind up passing sweeping health care legislation, with a mandate that all Americans purchase health insurance as they would auto insurance to drive. But the Democrats’ wipeout in November 2010 elections immediately called into question whether the legislation would be ever be implemented, as Republicans worked immediately to defund the new law.

At the same time, the recession left more Americans out of work and without health insurance. And insurance companies themselves have been increasingly pressed to cut costs, while consumers have had other needs for their money besides testing. As a result, there’s been a sharp drop-off in demand for a full range of testing and a corresponding decline in company revenue.

The sudden resignations of CML’s CEO and Chief Operating Officer–both of whom were closely identified with the US expansion plan–is clearly a tacit admission from management that the strategy has failed. The company is now feverishly cutting costs to the bone in the US, even as revenue plunged 30.6 percent in the first quarter from year-earlier levels.

Other Canadian companies in recent years have seen the value of their US investments plummet with the sinking US dollar, which has devalued their revenue as well as made it far more difficult to compete. Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSFF), formerly Swiss Water Decaffeinated Coffee Income Fund, has repeatedly been hit with both since its inception in August 2002.

The company’s dividend history tells the story all too well. Starting at an initial payout of CAD0.1085 per month, management was forced to cut the rate to CAD0.078 by January 2006. The company bumped it back up to CAD0.075 in April 2007, before slashing it again to CAD0.03 a month in July 2009.

That rate held until corporate conversion in January 2011, at which point the payout became a quarterly rate of CAD0.0625, an 81 percent decline from the initial rate. And Ten Peaks isn’t out of the woods yet, as competition and the rising Canadian dollar continue to threaten its payout.

So what if anything makes this round of Canadian investors in the US any more promising? Being able to buy in more cheaply because of the currency is certainly a major plus.

More important, however, is the type of asset being acquired this time around. Mainly, these are not distressed operations but solid companies that proved themselves during the 2008-09 recession. They’re cheap because of the weak US dollar and, in many cases, the weakened state of their owners, not because they’re shaky assets.

In some cases, it’s taken longer for purchases to pay off. The major Canadian banks that purchased US counterparts in the past couple years, for example, have had to weather a still-depressed housing market that’s kept those operations in the red, or at best marginally profitable.

Happily, earnings finally turned the corner in the first quarter. For example, Toronto-Dominion Bank (TSX: TD, NYSE: TD) has suffered losses south of the border repeatedly but management stuck to its investment strategy. The result: a 37 percent jump in US banking earnings for Big Six’ fiscal 2011second quarter.

Better, the banks’ turnaround now promises to be repeated in a string of industries, from generating electricity to transportation. Below, I look at several of the most promising examples of what should be a continuing and highly profitable trend, with a special focus on Canadian Edge Portfolio Holdings.

In my view, Canadian companies aren’t guaranteed success or failure investing in the US. Rather, how they fare is up to the skills of their management teams, what they invest in, how conservatively they finance their moves and if they can successfully navigate regulatory and economic trends in the US, which though similar to Canada’s are nonetheless different enough to wreak havoc on a company’s financial health if approached imprudently.

For investors, picking the winners from the losers is much the same task as differentiating what are good companies in general from poorly run ones. You’ve got to view each situation on its own merits. Happily, despite the risks of investing in the US now, there are a handful of companies that look set to do the job right. I focus on them below.

Note the both June High Yields of the Month selections–IBI Group Inc (TSX: IBG, OTC: IBIBF) and Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–have sizeable investments in the US. See that section for a full discussion.

Driving South

“The US is a market of consumers and producers, whereas Canada is a market for producers and no consumer. It’s a much more solid bet in the US, so this is where my focus will be.” So says Alain Bedard, CEO of rapidly growing transportation and logistics firm TransForce Inc (TSX: TFI, OTC: TFIFF).

The longtime Canadian Edge Portfolio holding has grown rapidly over the past decade by consolidating the diffuse Canadian freight transport business in eastern and now western Canada. It continues to move in that direction, buying assets from DHL Canada and entering a comprehensive alliance with that company. It’s grown its geographic reach and has also expanded into high margin services, which now comprise 40 percent of revenues.

This year’s biggest move by the company, however, was the USD247.9 million purchase of Dynamax, a Dallas-based parcel and same-day logistics company, which closed in February. TransForce was able to outbid two other would-be buyers, gaining a window into what Bedard calls “the highly fragmented US market.”

TransForce’s strategy is “asset light,” meaning it’s focused on expanding its network rather than simply acquiring more trucks, for example.

This has the impact of leveraging capital spending, which in turn makes for faster growth.

As I pointed out in a May 20 Flash Alert, TransForce’s first -quarter revenue rose 20 percent and cash flow 35 percent.

That was the first reporting period in which the company had significant US assets. Impressively, the performance was achieved despite the impact of the weak US dollar, which has the effect of reducing the Canadian dollar value of US revenues.

Managing this risk will be key in coming years, given my view that the loonie will at least gradually strengthen against the greenback over time. But first-quarter results demonstrate the potential growth of this business far outweighs the risk.

In a recent interview Mr. Bedard stated he expects the company will double its revenue in the US oil drilling rig business alone to USD200 million in three years. That’s more than a third of TransForce’s current total revenue.

Operations will include shipping oil and waste management as well as moving and dismantling equipment, a critical function in many areas where infrastructure lags behind the rapid development of shale oil and gas. Plans call for expanding from the current border-state focus south to energy-rich Texas, Oklahoma and Louisiana, where the company doesn’t yet have a presence. And because the winter is less severe the drilling season in the US is year-round.

The upshot: Driving south will open up a whole new avenue of growth for the company. The stock is rapidly moving back towards its all-time high of around USD17, which it achieved in early 2006 as an income trust. Now a far more valuable company despite its lower dividend, TransForce is a buy up to USD15.

Power Players

Fortis Inc (TSX: FTS, OTC: FRTSF) is Canada’s largest energy distribution utility, with CAD13 billion in total assets and a customer base of 2.1 million customers in five Canadian provinces. It’s an attractive business, demonstrated by the company’s consistently strong earnings, solid balance sheet and reliable dividend growth.

The company’s latest move, however, is a USD700 million takeover of Central Vermont Public Service Corp (NYSE: CV), announced May 30. And it’s paying top dollar–a 44 percent premium to Central Vermont’s pre-deal share price–to buy into a state with sluggish growth and a reputation for contentious regulation.

So why do this deal? To be sure, it’s a departure from Fortis’ reputation under CEO Stan Marshall for never paying up for acquisitions. The company does have unregulated generation assets in upper New York State that could provide some synergies. And Central Vermont as a pure distributor of power has a reasonably good relationship with Mountain State regulators, though allowed return on equity is just 9.45 percent. The deal is also not a game changer for Fortis, as it will boost overall assets by only about 7 percent.

Nonetheless, 44 percent is a pretty high premium to pay for a less-than-prime asset. Moreover, the Vermont utility faces a potential challenge replacing roughly a third of its purchased energy in 2012, should the state win its battle with Entergy Corp (NYSE: ETR) to permanently shutter the Vermont Yankee nuclear plant.

This deal does make sense to Fortis, however, for several reasons. First, it’s a relatively simple way to boost its stake in the US, and “a foundation for Fortis to grow our utility business in the US,” according to Mr. Marshall. Fortis’ greater size will improve Central Vermont’s access to capital, which should boost efficiency, though Mr. Marshall claims there will be no job cuts.

Most important, however, is this deal will immediately add to Fortis’ earnings once it wins regulatory approval, a process expected to take six to 12 months. Regulated utilities’ cash flow grows only slowly–very slowly in Vermont. But it is remarkably predictable. And Fortis is using highly valued Canadian dollars to buy in, cutting its costs substantially.

Fortis’ move is aggressive, and until we get a better read on the regulatory process in Vermont I’m rating the stock a hold. But it is a pretty clear demonstration of the appeal utility properties hold for their Canadian counterparts, and the ability of these acquisitions to lift earnings.

Conservative Holding Atlantic Power Corp (TSX: ATP, NYSE: AT) is one company that’s taken advantage of its ability to raise capital in Canadian dollars to expand its US asset base. The close of a stake in an Idaho wind farm and the ongoing construction of a biomass plant in Georgia will lift cash flow substantially starting in the second half of 2011. And CEO Barry Welch has implicitly promised more of the same in coming years.

Because Atlantic essentially earns all of its revenue in US dollars but pays its distribution in Canadian dollars, the company has essentially hedged all of its receipts to protect against a further drop in the US dollar. During the company’s first-quarter conference call Mr. Welch responded to a question about that policy, stating the company had a “base model of 105” (95 US cents per Canadian dollar) for its hedging assumptions, but had “tested at parity and it was still fine for the guidance.”

That’s a point a bit above the US dollar’s current level of roughly USD1.02 per Canadian dollar. And should the greenback continue to weaken, Atlantic will have to adjust its hedges.

The point, however, is the company is constantly managing its currency exposure. A continued slip in the dollar would be a drag on profit, forcing Atlantic to hedge at lower rates. Because of systematic hedging, however, the impact will be gradual with no surprises. Meanwhile, a higher Canadian dollar means cheaper capital to invest in new projects, which ultimately will have a much greater impact on profits than currency erosion.

Atlantic’s biggest challenge is rolling over a series of contracts coming due the next few years. Until there’s visibility on price, there will be no dividend increases. Until that happens my buy target remains USD15 for those who don’t already own Atlantic Power.

The biggest Canadian power empire in the US at this point belongs to former Portfolio Holding Algonquin Power & Utilities Corp (TSX: AQN, OTC: AQUNF), in alliance with Emera Inc (TSX: EMA, OTC: EMRAF). Formerly an income trust, Algonquin elected in mid-2008 to slash its distribution from a rate of CAD0.07666 per month to just CAD0.02 per month, in anticipation of converting to a corporation. That occurred in early 2010, at which time the company began paying dividends at a quarterly rate of CAD0.06.

When it made its initial dividend cut, management pledged to apply the capital saved toward acquiring power and water utility assets, principally in the US. At the time, I sold it from the Conservative Holdings on the basis that it no longer provided a substantial enough yield. And I’ve plenty of reason to regret that decision ever since.

Management has proven true to its word. The stock bottomed in late 2008 around USD2 but has since nearly tripled. Meanwhile, the company has returned to dividend growth, boosting its payout 8.3 percent in April. And it appears clearly headed for more growth going forward.

Algonquin’s latest deal is the USD124 million acquisition of Midwest natural gas distribution utility assets in Missouri, Iowa and Illinois. The operation currently serves roughly 84,000 customers and represents rate base of USD112 million.

The purchase price is extremely low at 1.106 times book value. Seller Atmos Energy Corp (NYSE: ATO) has a reputation for efficient operations and is attempting to centralize its own business.

That suggests Algonquin will have few if any operating problems when regulatory approvals are achieved, probably in early 2012.

The new assets will be held under Algonquin’s rapidly growing Liberty Energy subsidiary, which earlier this year completed the acquisition of the California power distribution operations of NV Energy Inc (NYSE: NVE). That deal also featured a motivated seller in need of cash to invest in its core Nevada properties, allowing Algonquin to buy in at a price to ensure accretion.

Algonquin’s partner in that deal was Emera, which operates Nova Scotia Power and owns pipeline and regulated utilities in Maine. Since the California deal closed, Emera has swapped its 49.9 percent stake in the venture for 8.2 million more shares of Algonquin. That, in turn, is part of a strategic agreement between the two companies to invest in the US, with the first focus a venture to build up to 370 megawatts of wind power capacity in the Northeast in conjunction with First Wind. Emera now owns 25 percent of Algonquin, raising the possibility of a full takeover down the road.

Algonquin is also buying the New Hampshire natural gas and energy infrastructure assets of Britain’s National Grid (NYSE: NGG). That deal is still undergoing some regulatory scrutiny. That’s not surprising, given the seller’s tarnished reputation in the US and its obvious attempt to exit a fair chunk of its empire. But the deal appears set for an early 2012 close nonetheless.

US expansion has lit a fire under Algonquin’s growth. First-quarter revenue surged 46.7 percent, and cash flow picked up 48.3 percent, even with the erosion in the US dollar. The payout ratio based on distributable cash flow surged over 100 percent. That, however, is due to seasonal factors, which have become more pronounced as the company has acquired assets in the southern US. The Midwest gas assets should leaven out some of that volatility by providing winter peaking earnings when that deal closes.

Yielding a bit under 5 percent, Algonquin Power & Utilities remains a buy up to USD6.

Emera, meanwhile, yields slightly less but has grown its dividend at a faster pace as well, lifting the payout 15 percent over the last 12 months. The company owns US assets directly, including two regulated Maine utilities. But it also has a greater portion of assets in Canada, where it’s boosting earnings by adding renewable power investment to rate base. That makes it a somewhat less aggressive bet on US investment than Algonquin. Buy Emera up to USD33.

Going for Shale

For the most part, Canadian oil and gas companies have chosen to invest at home, rather than cross the border to the US. And there’s plenty of opportunity, as oil sands deposits are developed and companies apply the same directional drilling techniques in Canada now being used to tap into US shale.

Two that stand out for going in the other direction are producer Enerplus Corp (TSX: ERF, NYSE: ERF) and driller PHX Energy Services Corp (TSX: PHX, OTC: PHXHF). Enerplus has two strategic plays in the US.

The most important to current production is its position in the Bakken Shale, a key element of the company’s plan to expand liquids to 50 percent of total output by 2012.

Average daily production in the region hit 13,595 barrels of oil equivalent per day (boe/d), more than 40 percent of the company’s overall liquids output. And drilling activity continues to point to major new potential production. In addition, average decline rates at the Bakken wells are 30 to 45 percent less than management had expected, with a payout in less than a year in the current price environment.

Bakken output was a major factor in Enerplus’ solid first-quarter cash flows and ability to continue financing these properties’ growth. The other major development is in the Marcellus Shale trend in the Appalachian Region of the US, mainly in Pennsylvania and West Virginia. Drilling results here have also been above expectations. And development is likely to accelerate, as proceeds from the sale of a portion of Enerplus’ Marcellus lands net USD575 million in cash.

Even with all of this development, Enerplus remains among the most conservative of Canadian oil and gas producers paying outsized dividends. Buy Enerplus up to USD33, which is roughly the value of its assets in the ground.

PHX enjoyed a major turnaround in its first quarter, as revenue surged 46 percent and funds from operations per share rose 52 percent. The company is a pure play on directional drilling rigs and has rapidly expanded in recent years, particularly in the US.

Rapid growth actually caused a strain on fourth-quarter 2010 results, as new business literally grew faster than the company’s ability to provide assets. First-quarter results indicate it’s met that that challenge, even as it continues to take its leading edge business to Eastern Europe and South America.

Worries about global growth and the pullback in oil prices from recent highs have triggered a pullback in services stocks like PHX. But the business case is stronger than ever. Now yielding around 4 percent, PHX Energy Services is a buy up to USD14 for those who don’t already own it.

Property Plays

Canada’s real estate market never hit the heights the US did in the last decade. Neither did lenders dish out sub prime loans in volume nor borrowers ask for financially unsound arrangements to shoot for big gains.

As a result, the country was spared the worst of the carnage of 2008. And in stark contrast to the still sliding US market Canadian properties are in a serious bull market mode.

If Canadian real estate investment trusts (REIT) did have a beef over the past couple years, it’s that property values never plunged to real recession levels in Canada.

First-rate REITs did launch a wave of acquisitions, largely thanks to a plunging cost of capital that’s made even moderate bargains very profitable. Many, however, have been looking south for real fire sale values.

There are plenty of examples of foreign investors losing their shirts in the US property market–the Japanese in the 1980s with Rockefeller Center and other places come to mind. Thus far, however, the Canadian invasion is proceeding at the same prudent man pace that’s characterized Canadian REITs’ financial and operating policies for years.

That’s definitely true of two southern expanders in the CE Conservative Holdings: Artis REIT (TSX: AX-U, OTC: ARESF) and RioCan REIT (TSX: REI-U, OTC: RIOCF). As Canada’s biggest REIT with a CAD6.52 billion market capitalization, shopping mall/center-focused RioCan dwarfs other Canadian REITs. It’s small potatoes, however, compared to US giants like Simon Property Group (NYSE: SPG), which has a market cap of more than USD34 billion.

Therein, however, lies RioCan’s opportunity. It can move the profit meter significantly with deals that may be too small for big US firms. With the US property market still sinking, there’s plenty going for cheap. And management can take its time and pick only the very best deals for its needs.

RioCan’s venture with Cedar Shopping Centers Inc (NYSE: CDR) in the US is already paying dividends, as the company continues to purchase good properties from distressed owners. The REIT has US acquisitions under contract to add 734,000 square feet to its portfolio, all of which are expected to be completed by the end of the month. RioCan currently has an 80 percent interest in 31 grocery anchored and “new format” retail centers in the US and owns 14 percent of Cedar Shopping Centers.

First-quarter results were robust, as funds from operations per unit rose 9 percent and the company realized solid occupancy rates and rent growth. The US investments promise to fire things up even more the rest of the year. RioCan REIT is a strong on dips to USD25.

Artis’ move south is part of a diversification push that’s dramatically reduced its dependence on its original Alberta market. That’s been a major plus for profitability in recent years, as the energy patch comes back from the debacle of 2008 and the market in cities like Calgary absorb excess supply.

Management completed USD53.3 million in purchases of retail and office properties in the US last month and announced a couple of new ones, an office park and shopping center portfolio in suburban Minneapolis, Minn.

Artis has made Minnesota a focus for growth in the US, which now accounts for 21.8 percent of its overall portfolio. Buy Artis REIT up to USD15.

Like all companies investing in the US, Canadian REITs also have to watch the impact of currency swings. So far, however, the effect of the dropping dollar on profits has been minimal for both REITs, in part because costs as well as revenues are in US dollars.

Meanwhile, the lofty loonie affords the best US entry prices in Canadian dollar terms since the 1970s. That’s a calculus that’s bound to keep Canadian companies looking south for profit growth in coming years–with the best companies finding it and sharing it with us in rising profits and dividends.

That’s not a story you’ll hear from a US financial press that’s currently obsessed with signs of decline and malaise heading into national elections next year. But it’s another good reason why when it comes to investing, the best approach is always to focus on the companies themselves. That’s where the action is and, more important, it’s where the money is as well.