These Four Aggressive Portfolio Options Have Strong Rebound Potential

Stocks in our Aggressive Portfolio, such as these four, tend to be more highly leveraged and more volatile than those in our Conservative Growth or Income-Seeking Portfolios. These four also operate in the Manufacturing sector, which is generally more risky than, say, Utilities. As well, they serve narrow markets or cyclical industries.

Due to the recent stock market turmoil, many investors will consider selling stock from their aggressive portfolio. We feel you should resist the urge to sell high-quality companies, even if they are in your aggressive portfolio, just because you feel they could go lower. We still have a high opinion of these four companies from our Aggressive Portfolio, and they should all rebound strongly as the economy improves. However, only three are buys right now.

GENNUM CORP. $6.65 (Toronto symbol GND; Aggressive Portfolio, Manufacturing & Industry sector; Shares outstanding: 35.6 million; Market cap: $236.7 million; SI Rating: Above average) makes equipment that lets broadcasters store, manipulate and transport video signals without losing picture quality. This business accounts for 80% of Gennum’s total sales. The remaining 20% comes from making chips that improve the speed and reliability of transmissions in computer networks.

The company continues to enjoy the benefits of its recent restructuring, which included selling its slow-growing hearing aid and headset businesses. In its third fiscal quarter ended August 31, 2008, it earned $0.18 a share (total $6.4 million) compared to a loss of $0.04 a share ($1.5 million) a year earlier (all amounts except share price and market cap in U.S. dollars). However, the year-earlier quarter included a $0.04 a share ($6.8 million) loss from discontinued operations. Sales in the quarter rose 31.4%, to $33.5 million from $25.5 million, partly due to an acquisition. Gennum also continues to successfully launch new products. Research spending in the latest quarter rose to 28.1% of sales, up from 22.4% a year earlier.

Gennum’s stock has moved down from its recent peak of $12.50 in January, 2008 due to fears of a slowing economy. That could cut spending by advertisers, which would in turn prompt Gennum’s broadcasting customers to invest less in new video equipment. However, the planned switchover by U.S. broadcasters from analog to digital transmissions in February, 2009 should spur sales. As well, Gennum should benefit as broadcasters add more TV programs to their Internet sites.

Gennum should earn $0.63 U.S. a share in its current fiscal year, and the stock trades at 9.4 times that estimate. It also holds cash of $55.1 million U.S. ($1.55 U.S. a share), and has low debt. The $0.14 (Canadian) dividend yields 2.1%. Gennum is a buy.

LINAMAR CORP. $9.00 (Toronto symbol LNR; Aggressive Portfolio, Manufacturing &Industry sector; Shares outstanding: 67.1 million; Market cap: $603.9 million; SI Rating: Extra risk) is Canada’s second-largest maker of automobile parts after Magna International Inc. It specializes in precision-machined components, assemblies and systems for the North American and European car and truck markets.

The stock has dropped from $17 in June, mainly due to slowing North American car and truck sales. That has hurt demand for its transmissions and other auto parts, which provide about 85% of its sales. However, the company’s recent expansion in China and Europe helps cut its exposure to the North American auto industry. For example, Linamar recently paid an undisclosed sum for a plant in Wales. This is the company’s 38th plant, and first in the UK.

Linamar has also diversified into non-automotive operations. It owns Skyjack, which makes selfpropelled, scissor-type elevating work platforms. The company is also applying its design and manufacturing expertise to other products, such as lawnmowers, drilling equipment and wind turbines.

In the three months ended June 30, 2008, Linamar’s earnings grew just 2.1%, to $32.0 million from $31.3 million a year earlier. Earnings per share rose 6.7%, to $0.48 from $0.45, on fewer shares outstanding. Sales rose 0.2%, to $625.4 million from $624.4 million.

Linamar’s strong balance will continue to shield it from the cyclical swings of the auto industry. Long- term debt of $326.6 million is less than one year’s cash flow. It also has cash of $66.9 million ($1.00 a share).

The stock now trades at 6.8 times its projected 2008 earnings of $1.33 a share. The $0.24 dividend yields 2.7%.

Linamar is a buy.

SNC-LAVALIN GROUP INC. $33 (Toronto symbol SNC; Aggressive Portfolio, Manufacturing & Industry sector; Shares outstanding: 151.0 million; Market cap: $5.0 billion; SI Rating: Average) is a leading engineering and construction company. North America supplies 60% of its revenue.

SNC’s stock hit a new peak of $62 in June, 2008. That was partly due to its strong second-quarter earnings. In the three months ended June 30, 2008, SNC’s earnings jumped 83.3%, to $75.4 million from $41.1 million a year earlier. Earnings per share rose 81.5%, to $0.49 from $0.27. However, the big increase was mainly due to the costly bankruptcy of a key supplier to its power plant operations in the year-earlier quarter. Revenue crept up to $1.70 billion from $1.69 billion.

The company’s expertise is helping it win new contracts, particularly in overseas markets. For example, SNC has agreed to build a new airport in Libya’s second-largest city for $500 million. It’s also expanding its overseas operations through acquisitions of small engineering firms. SNC recently paid an undisclosed sum for two Romanian engineering companies that specialize in industrial and public infrastructure projects.

Despite these positive developments, SNC’s stock has moved down sharply in the past few weeks. That’s because the problems in the financial markets could make it difficult for companies to finance big new engineering projects. Engineering and construction projects are also cyclical, and it looks like we’re approaching the end of the current economic cycle.

The stock now trades at 16.9 times its likely 2008 earnings of $1.95 a share. However, the stock will make little progress until the credit crisis subsides. Falling prices for metals and other resources will also slow construction of new mines. The $0.48 dividend yields 1.5%.

SNC-Lavalin is a hold.

SHAWCOR LTD. $17 (Toronto symbol SCL.A; Aggressive Portfolio, Manufacturing & Industry sector; Shares outstanding: 71.0 million; Market cap: $1.2 billion; SI Rating: Average) makes sealants and coatings that protect onshore and offshore oil and natural gas pipelines from corrosion.

Thanks to high oil prices and a surge in new pipeline construction, ShawCor’s stock jumped to $40 in October, 2007. However, the stock has moved down since then, partly due to the rise in the Canadian dollar. Overseas markets account for about 75% of ShawCor’s revenue, and a strong dollar hurts the contribution of these foreign operations to the company’s overall earnings. As well, rising raw material and labour costs have also weighed on its profit growth.

In the second quarter of 2008, earnings fell 24.4%, to $0.31 a share (total $22.2 million) from $0.41 a share ($30.3 million) a year earlier. Revenue rose 6.8%, to $295.1 million from $276.4 million. The higher Canadian dollar cut revenue in the latest quarter by $12.9 million. ShawCor is now expanding its capacity to take advantage of several promising opportunities, including the development of Canada’s oil sands and new offshore oil discoveries near Brazil. The costs of this expansion have hurt ShawCor’s recent earnings, but should pay off in the next few years.

The company should earn $1.63 a share in 2008, and stock trades at 10.4 times that figure. The $0.26 dividend yields 1.5%.

ShawCor is a buy.