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PASON SYSTEMS $22.28 (Toronto symbol PSI; TSINetwork Rating: Speculative) (403- 301-3400; www.pason.com; Shares outstanding: 82.1 million; Market cap: $1.8 billion; Dividend yield: 2.5%) rents equipment for monitoring and managing land-based oil and gas rigs throughout Canada, the U.S., Mexico and Argentina. It also provides communication systems to remotely collect data from drilling operations.

In the quarter ended September 30, 2013, Pason’s revenue rose 8.1%, to $104.0 million from $96.3 million a year earlier. Strong international sales and slightly higher revenue in Canada offset slower activity in the U.S. Cash flow per share jumped 51.1%, to $0.68 from $0.45.

Pason holds cash of $198.1 million, or $2.41 a share, and has no debt.
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CIMAREX ENERGY $99.54 (New York symbol XEC; TSINetwork Rating: Extra Risk) (303-295-3995; www.cimarex.com; Shares outstanding: 86.9 million; Market cap: $8.7 billion; Dividend yield: 0.6%) produces and explores for natural gas and oil. Gas makes up 48% of its output.

Cimarex’s properties are in the Mid-Continent region of the U.S., which includes Oklahoma, Kansas and Texas (47% of production); the Permian Basin of western Texas and southeastern New Mexico (49%); and the Texas Gulf Coast (4%).

In the three months ended September 30, 2013, Cimarex’s production averaged 716.8 million cubic feet of natural gas equivalent per day (including oil). That’s up 12.8% from 635.1 million cubic feet a year earlier.
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DEVON ENERGY CORP. $59.34 (New York symbol DVN; TSINetwork Rating: Speculative) (405-235- 3611; www.dvn.com; Shares outstanding: 406.0 million; Market cap: $24.2 billion; Dividend yield: 1.5%) is one of the largest U.S.-based oil and natural gas explorers and producers. Its production mix is 57% gas and 43% oil.

In 2011, Devon sold all of its international and Gulf of Mexico properties, which it saw as risky and expensive to develop. The company is now focused on its North American projects, which include conventional production, shale oil in Texas and oil sands in Alberta.

To further increase its North American output, Devon recently agreed to pay GeoSouthern Energy $6 billion for oil-producing assets and other properties in Texas’s Eagle Ford shale formation.
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DUNDEE REIT $28.18 (Toronto symbol D.UN; TSINetwork Rating: Extra Risk) (416-365-3535; www.dundeereit.com; Units outstanding: 104.9 million; Market cap: $3.0 billion; Dividend yield: 8.0%) owns and manages 24.3 million square feet of office and retail space across Canada.

As the Canadian economy improves, interest rates will likely rise. That increase—or the anticipation of it—can push down prices of REITs and high-yielding stocks, such as utilities. That’s largely why a number of REITs, including Dundee, have declined.

When interest rates rise, REITs may suffer because they have a lot of mortgage debt, and it’s more expensive to raise money and refinance existing loans. As well, their units, which typically offer high yields, compete with fixed-income instruments for investor interest.
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TELUS CORP. $37 (www.telus.com) continues to benefit from heavy investments in wireless networks. Thanks to rising demand for smartphones and wireless data, earnings in the third quarter of 2013 rose 18.4%, to $0.58 from $0.49. Telus also increased its dividend by 5.9%....

EMERA INC. $30 (www.emera.com) earned $0.29 a share before unusual items in the three months ended September 30, 2013, down 17.1% from $0.35 a year earlier. That’s mainly due to higher income taxes and maintenance costs at its main Nova Scotia Power subsidiary....

THOMSON REUTERS CORP. $40 (Toronto symbol TRI; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 827.2 million; Market cap: $33.1 billion; Price-to-sales ratio: 2.5; Dividend yield: 3.4%; TSINetwork Rating: Above Average; www.thomsonreuters.com) gets 55% of its revenue by selling news and information to professionals in the banking industry. The remaining 45% comes from providing specialized information products to clients in the legal, accounting and scientific research fields.




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TIM HORTONS INC. $63 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 148.9 million; Market cap: $9.4 billion; Price-to-sales ratio: 3.0; Dividend yield: 1.7%; TSINetwork Rating: Average; www.timhortons.com) continues to draw customers to its coffee-and-donut shops with successful new menu items, such as panini sandwiches. It has also raised its prices to cover higher ingredient costs.

As a result, sales rose 2.9% in the third quarter of 2013, to $825.4 million from $802.0 million a year earlier. Same-store sales rose 1.7% in Canada (3,500 stores) and 3.0% in the U.S. (817 stores). Tim Hortons also has 33 outlets in the Persian Gulf and plans to enter more countries in the next few years.

If you exclude a writedown and other unusual items, earnings per share rose 6.9%, to $0.77 from $0.72.
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BANK OF NOVA SCOTIA $65 (Toronto symbol BNS; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.2 billion; Market cap: $78.0 billion; Price-to-sales ratio: 3.7; Dividend yield: 3.8%; TSINetwork Rating: Above Average; www.scotiabank.com) is changing the name of its ING Direct subsidiary to Tangerine. That will let this business keep using the orange colour associated with the ING Direct brand.

ING Direct offers a variety of no-fee banking services, mainly over the Internet. It has over 1.8 million customers and $40 billion in deposits.

Bank of Nova Scotia bought ING Direct from its Netherlands-based parent, ING Group, for $3.1 billion in November 2012. The deal let it keep using the ING Direct name until May 2014.
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CAE INC. $12 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 261.4 million; Market cap: $3.1 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.0%; TSINetwork Rating: Average; www.cae.com) has sold four flight simulators and related services to Indonesia’s Lion Air Group. It also sold two additional simulators to unnamed customers.

The company has now sold 33 simulators in its 2014 fiscal year, which began April 1, 2013. To put that in context, it sold 35 simulators in all of fiscal 2013.

The total value of the latest sales—$90 million —is equal to 4% of CAE’s annual revenue of $2.2 billion.
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TORONTO-DOMINION BANK $97 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 918.4 million; Market cap: $89.1 billion; Price-to-sales ratio: 3.7; Dividend yield: 3.5%; TSINetwork Rating: Above Average; www.td.com) owns 42.24% of TD Ameritrade Holding Corp. (Nasdaq symbol AMTD), one of the largest online brokerage firms in the U.S.

Ameritrade will contribute $77 million to TD’s earnings in its 2013 fourth quarter, which ended October 31, 2013. That’s up 51.0% from $51 million a year earlier. To put these figures in perspective, TD earned $1.6 billion, or $1.65 a share, in its third quarter, which ended July 31, 2013.

Uncertainty over the U.S. government shutdown caused Ameritrade’s average number of trades per day to rise 16.3% from a year earlier. At the same time, Ameritrade continues to attract new clients: it opened 50,000 accounts in the latest quarter, up from 28,000 a year earlier.
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HOME CAPITAL GROUP INC. $79 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.7 million; Market cap; $2.7 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.4%; TSINetwork Rating: Average; www. homecapital.com) specializes in loans to borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks.

Low interest rates continue to fuel mortgage demand. As a result, the company’s earnings rose 15.2% in the third quarter of 2013, to $1.90 a share from $1.65 a year earlier. Revenue gained 5.7%, to $239.4 million from $226.6 million. Moreover, bad loans were just 0.32% of the company’s total loans, down from 0.33%.

Home Capital Group is a buy.

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IGM FINANCIAL INC. $55 (Toronto symbol IGM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 252.1 million; Market cap: $13.9 billion; Price-to-sales ratio: 5.4; Dividend yield: 3.9%; TSINetwork Rating: Above Average; www. igmfinancial.com) is Canada’s largest independent mutual fund company. Power Financial owns 58.7% of IGM.

Rising stock prices continue to spur mutual fund sales and the value of its clients’ holdings. As of September 30, 2013, IGM had $126.0 billion of assets under management, up 5.6% from $119.3 billion a year earlier. The company’s fee income rises and falls with the value of the securities it manages, so its revenue and earnings gain when the price of these assets rises.

In the third quarter of 2013, earnings rose 3.8%, to $193.4 million from $186.2 million a year earlier. Per-share earnings rose 5.5%, to $0.77 from $0.73, on fewer shares outstanding. Revenue increased 5.3%, to $667.5 million from $634.1 million.
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GREAT-WEST LIFECO INC. $32 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.0 billion; Market cap: $32.0 billion; Price-to-sales ratio: 1.3; Dividend Yield: 3.8%; TSINetwork Rating: Above Average; www.greatwestlifeco.com) is one of Canada’s largest insurance companies, with $705.1 billion of assets under administration. It also sells mutual funds and retirement planning and wealth management services. Power Financial (Toronto symbol PFC) owns 68.1% of Great-West.

In July 2013, the company completed its $1.75- billion purchase of Irish Life Group, Ireland’s largest pension manager and life insurance provider.

If you exclude costs to integrate Irish Life, Great-West would have earned $583 million in the three months ended September 30, 2013. That includes $41 million from Irish Life. This new business should contribute $215 million to Great- West’s annual earnings by the end of 2014.
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BOMBARDIER INC. (Toronto symbols BBD.A $4.62 and BBD.B $4.57; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.8 billion; Market cap: $8.2 billion; Price-to-sales ratio: 0.4; Dividend yield: 2.2%; TSINetwork Rating: Average; www.bombardier.com) recently began test flights of its CSeries jet, which seats 100 to 150 passengers. The new CSeries is quieter and 20% more fuel efficient than comparable aircraft.

The company now expects the CSeries’ development costs to total $3.9 billion, up 14.7% from its original 2008 estimate of $3.4 billion (all amounts except share prices and market cap in U.S. dollars). That’s because new accounting rules, which took effect in 2011, have forced Bombardier to include interest costs in the overall estimate.

Bombardier now has firm orders for 177 CSeries jets, plus options for 226 more. If the buyers exercise all these options, the resulting 403 orders would be worth $29 billion. The company aims to begin delivering the planes by the end of 2014.
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SAPUTO INC. $49 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 194.2 million; Market cap: $9.5 billion; Price-to-sales ratio: 1.4; Dividend yield: 1.9%; TSINetwork Rating: Average; www.saputo.com) has spent $2.4 billion on acquisitions in the past five years, mainly dairy producers in the U.S. It now wants to buy Warrnambool Cheese and Butter Factory Company, one of Australia’s largest producers of milk, cheese, butter and other dairy products.

Buying Warrnambool would add around $480 million to Saputo’s annual revenue of $7.3 billion. It would also give the company access to the fast-growing Asia-Pacific region. However, this firm continues to attract rival takeover offers, which is why Saputo recently raised its offer by 16.0% to $523 million. To put this figure in context, Saputo earned $133.3 million, or $0.67 a share, in the three months ended September 30, 2013.

Warrnambool’s shares are trading for more than Saputo’s new offer. This shows that investors expect an even higher bid.
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TECK RESOURCES LTD. $27 (Toronto symbol TCK.B; Conservative Growth Portfolio, Resources sector; Shares outstanding: 576.3 million; Market cap: $15.6 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.3%; TSINetwork Rating: Average; www.teck.com) will contribute $2.9 billion to the Fort Hills oil sands project (see Suncor at left).

Teck mainly produces coal, copper and zinc, so Fort Hills will help diversify its operations. Its mining expertise will also help keep Fort Hills’ operating costs down.

The company will probably sell some of its less important assets to free up cash for Fort Hills. For example, it has reportedly agreed to sell its 3% stake in Australian iron ore mining company Fortescue Metals Group for about $479 million.
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CENOVUS ENERGY INC. $30 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 755.7 million; Market cap: $22.7 billion; Price-to-sales ratio: 1.3; Dividend yield: 3.2%; TSINetwork Rating: Average; www.cenovus.com) gets 60% of its production from its three heavy oil projects in Alberta and one in Saskatchewan. Conventional oil and natural gas wells supply the remaining 40%. In all, Cenovus’s proved reserves should last at least 23 years.

U.S.-based ConocoPhillips (New York symbol COP) owns 50% of Cenovus’s main Foster Creek and Christina Lake oil sands projects in Alberta. These operations produce heavy bitumen, which Cenovus ships to its 50%-owned refineries in Illinois and Texas. Phillips 66 (New York symbol PSX) owns the other 50% of these refineries.

In the three months ended September 30, 2013, Cenovus produced 264,100 barrels of oil equivalent a day (67% oil and 33% gas), down 1.3% from 267,500 barrels a year earlier.
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IMPERIAL OIL LTD. $45 (Toronto symbol IMO; Conservative Growth Portfolio; Resources sector; Shares outstanding: 847.6 million; Market cap: $38.1 billion; Price-to-sales ratio: 1.2; Dividend yield: 1.2%; TSINetwork Rating: Average; www.imperialoil.ca) produces oil and natural gas, mainly from its oil sands projects in Alberta. It also owns three refineries and operates 1,800 Esso gas stations.

Imperial began operating its new Kearl oil sands project in April 2013. It owns 71% of Kearl. ExxonMobil (New York symbol XOM) holds the other 29%. Exxon also owns 69.9% of Imperial.

In the three months ended September 30, 2013, Imperial produced an average of 288,000 barrels of oil equivalent a day (88% oil and 12% natural gas). That’s up 1.1% from 285,000 barrels a year earlier.
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SUNCOR ENERGY INC. $36 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.5 billion; Market cap: $54.0 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.2%; TSINetwork Rating: Average; www. suncor.com) gets 70% of its production from its Alberta oil sands projects. The rest comes from conventional oil and natural gas properties. Suncor also operates four refineries and 1,500 Petro- Canada gas stations.

The company recently sold most of its Western Canadian conventional natural gas properties for $1 billion.

The cash will help Suncor develop its Fort Hills oil sands project in Alberta. Suncor owns 40.8% of Fort Hills and will operate it. France’s Total S.A. owns 39.2%, and Teck (see box this page) holds the remaining 20.0%. Fort Hills’ reserves should last 50 years.
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ENCANA CORP. $18 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 740.1 million; Market cap: $13.3 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.6%; TSINetwork Rating: Average; www.encana.com) is cutting its reliance on natural gas, as rising shale gas production has cut prices from $11.50 U.S. per thousand cubic feet in 2008 to just $3.60 U.S. today.

Encana now plans to narrow its focus from around 30 properties to five: Montney (B.C.), Duvernay (Alberta), DJ Basin (Colorado), San Juan Basin (New Mexico) and Tuscaloosa Marine Shale (Louisiana).

These five fields also produce significant amounts of oil and natural gas liquids (NGLs), such as butane and propane, and should last decades. Encana expects oil and NGLs to supply 75% of its cash flow by 2017, up from about 35% today.
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RIOCAN REAL ESTATE INVESTMENT TRUST $25 (Toronto symbol REI.UN; Aggressive Growth Portfolio, Manufacturing & Industry sector; Units outstanding: 303.2 million; Market cap: $7.6 billion; Price-to-sales ratio: 6.5; Dividend yield: 5.6%; TSINetwork Rating: Average; www.riocan.com) started up in 1993 and is now Canada’s largest REIT. It currently owns all or part of 295 retail properties, including 15 under development. These holdings account for 85% of its rental revenue. The remaining 15% comes from 51 malls in the U.S.

RioCan continues to expand beyond suburban big-box-style shopping centres. Mostly through joint ventures with other property developers, it has added mixed-use retail, office and residential buildings, mainly in densely populated urban areas.

RioCan’s revenue declined 0.8%, from $764 million in 2008 to $758 million in 2009. Some of the trust’s tenants went bankrupt during the recession, but it mostly offset that by adding new properties. RioCan’s revenue recovered to $882 million in 2010 and rose to $1.1 billion in 2012, as it took advantage of lower property values and interest rates to expand its portfolio.
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PENGROWTH ENERGY $6.57 (Toronto symbol PGF; Shares outstanding: 517.7 million; Market cap: $3.4 billion; TSINetwork Rating: Average; Dividend yield: 7.3%; www.pengrowth.com) has gained over 31% since early July 2013. That’s mainly because the company has successfully completed its plan to sell some of its less important oil and gas properties in Western Canada.

The cash from these sales will help Pengrowth speed up the development of its Lindbergh oil sands project in Alberta. As well, the company’s monthly dividend of $0.04 a share still seems safe and has a 7.3% annualized yield.

Pengrowth is a buy.
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ISHARES CDN REIT SECTOR INDEX FUND $15.46 (Toronto symbol XRE; buy or sell through brokers; ca.ishares.com) holds the 15 Canadian real estate investment trusts (REITs) in the S&P/TSX Capped REIT Index. The weight of each REIT is limited to 25% of the ETF’s value.

iShares CDN REIT’s expenses are 0.60% of its assets. The fund yields 5.0%.

The ETF’s largest holding is RioCan REIT at 19.5%, followed by H&R REIT (14.9%), Dundee REIT (8.0%), Canadian REIT (7.4%), Calloway REIT (6.7%), Allied Prop. REIT (5.9%), Boardwalk REIT (5.8%), Canadian Apt, REIT (5.7%), Cominar REIT (5.6%), Artis REIT (4.7%), Chartwell REIT (4.6%), Granite REIT (4.4%), Dundee Intl. REIT (2.3%), Northern Property REIT (2.3%) and Crombie REIT (1.8%).
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Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week an Inner Circle member asked us about a pharmaceutical firm whose shares recently had a strong run. Tekmira specializes in RNAi therapeutics which can “silence” disease-causing genes. The company is developing two drugs, one for Ebola and one for cancer. Pat looks at the progress of Tekmira’s drug trials and examines the company’s cash balance and its ability to continue developing its treatments in the years ahead. ...