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Our investment advice is that your in-the-limelight holdings are the ones you need to watch most closely. When investor expectations are high, it pays to be skeptical and wary.

Pat McKeough responds to many requests from members of his Inner Circle for specific stock picks 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. Last week we had a question from an Inner Circle members about one of the rare pharmaceutical stocks in Canada. Valeant Pharmaceuticals was purchased in 2010 by Biovail, then Canada’s largest pharmaceutical firm, and the new company adopted the Valeant name. The company has an aggressive policy of growing by acquisition—it made over a dozen in 2012 alone—and Pat examines several of its recent acquisitions and assesses the overall risks and rewards of this growth strategy. ...

PEYTO EXPLORATION & DEVELOPMENT CORP. $31.51 (Toronto symbol PEY; Shares outstanding: 148.5 million; Market cap: $4.7 billion; TSINetwork Rating: Extra Risk; Dividend yield: 3.1%; www.peyto.com) produces and explores for oil and natural gas in Alberta. Its average daily production of 56,343 barrels of oil equivalent is 89% gas and 11% oil.

In the quarter ended September 30, 2013, Peyto’s cash flow rose 24.1%, to $0.67 a share from $0.54 a year earlier. That’s because Peyto raised its production by 22.4%. Gas prices also gained 16.0%, to an average of $2.97 per thousand cubic feet from $2.56, while oil prices rose 17.8%, to $89.46 a barrel from $75.88.

The company has started up three gas plants since the quarter ended. That has let it activate 25 new wells, pushing up its production from 60,000 barrels a day to 70,000.
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PENN WEST PETROLEUM $9.14 (Toronto symbol PWT; Shares outstanding: 488.1 million; Market cap: $4.4 billion; TSINetwork Rating: A v e r a g e ; D i v i d e n d y i e l d : 6 . 1 % ; www.pennwest.com) is one of Canada’s largest oil and gas producers.

Penn West continues to shore up its finances and take steps to boost its value since appointing Rick George as chairman and Allan Markin as vice-chairman. These moves include cutting staff, selling assets and lowering its dividend.

The company now plans to sell a further $1.5 billion to $2 billion of assets by the end of 2014. It expects to close about $485 million of these deals by the end of this year. The company will use the proceeds to further pay down its debt.
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BCE INC. $46.67 (Toronto symbol BCE; Shares outstanding: 775.9 million; Market cap: $36.2 billion; TSINetwork Rating: Above Average; Dividend yield: 5.0%; www.bce.ca) is selling four of its specialty TV channels: Family Channel, Disney XD and the English and French Disney Junior stations. The buyer is DHX Media (Toronto symbol DHX).

The company acquired these channels as part of its $3.3-billion purchase of Astral Media in July 2013. Selling them will help BCE comply with conditions that regulators imposed as part of that deal.

If regulators approve, BCE will receive $170 million for these four channels. The company aims to complete the sale in 2014.
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ISHARES MSCI CANADA INDEX FUND $28.59 (New York symbol EWC; buy or sell through brokers; ca.ishares.com) holds the stocks in the Morgan Stanley Capital International Canada Index. The fund has a 0.49% MER.

The index’s top holdings are Royal Bank, 7.4%; TD Bank, 6.5%; Bank of Nova Scotia, 5.7%; Suncor Energy, 4.0%; CN Railway, 3.7%; Bank of Montreal, 3.5%; Manulife Financial, 2.7%; Canadian Natural Resources, 2.7%; CIBC, 2.7%; Valeant Pharmaceuticals, 2.7%; and Enbridge, 2.5%.

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POWERSHARES QQQ ETF $85.49 (Nasdaq symbol QQQQ; buy or sell through brokers; www.invescopowershares- .com), formerly called Nasdaq 100 Trust Shares, holds stocks that represent the Nasdaq 100 Index, which consists of the 100 largest shares on the Nasdaq exchange, based on market cap.

The Nasdaq 100 Index contains shares of companies in a number of major industries, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies. The fund’s expenses are about 0.20% of its assets.

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SPDR DOW JONES INDUSTRIAL AVERAGE ETF $158.76 (New York symbol DIA; buy or sell through brokers; www.spdrs.com) holds the 30 stocks that make up the Dow Jones Industrial Average.

The fund’s top holdings are Visa, IBM, The Goldman Sachs Group, ExxonMobil, Chevron, 3M, McDonald’s, Johnson & Johnson, United Technologies and Boeing. The fund’s expenses are about 0.17% of its assets.

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SPDR S&P 500 ETF $179.73 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. companies that are chosen based on their market cap, liquidity and industry group.

The index’s highest-weighted stocks are Apple, ExxonMobil, Microsoft, Procter & Gamble, Johnson & Johnson, J.P. Morgan Chase, IBM, Chevron, General Electric, Pfizer, Berkshire Hathaway, Google, AT&T and Wells Fargo. The fund’s expenses are just 0.10% of its assets.

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ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND $23.86 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of its assets. The fund’s MER is 0.55%. It yields 4.1%.

The fund’s top holdings are CIBC, 6.8%; National Bank, 6.4%; Bonterra Energy, 6.4%; TD Bank, 5.9%; Bank of Montreal, 5.7%; Telus, 4.7%; Royal Bank, 4.6%; IGM Financial, 4.5%; Bank of Nova Scotia, 4.3%; and BCE, 4.0%.

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ISHARES S&P/TSX 60 INDEX FUND $19.25 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way to buy the top stocks on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.

The index mostly consists of high-quality companies. However, it must ensure that all sectors are represented, so it holds a few we wouldn’t include.

The index’s top holdings are Royal Bank, 8.3%; TD Bank, 7.3%; Bank of Nova Scotia, 6.4%; Suncor Energy, 4.5%; CN Railway, 4.1%; Bank of Montreal, 3.9%; Manulife Financial, 3.1%; Canadian Natural Resources, 3.1%; CIBC, 3.0%; BCE, 3.0%; Enbridge, 3.0%; Valeant Pharmaceuticals, 2.9%; TransCanada Corporation, 2.7%; Potash Corp., 2.4%; CP Rail, 2.1%; Telus, 2.0%; and Cenovus, 1.9%.
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TELUS $37.34 (Toronto symbol T; Shares outstanding: 623.2 million; Market cap: $23.3 billion; TSINetwork Rating: Above Average; Dividend yield: 3.9%; www.telus.com) continues to benefit from heavy investments in its wireless networks.

Thanks to rising demand for smartphones and wireless data, Telus’s earnings rose 18.4% in the third quarter of 2013, to $0.58 a share from $0.49. It also increased its dividend by 5.9%. The new annual rate of $1.44 yields 3.9%.

However, Ottawa’s plan to cut wireless roaming fees adds to its risk. As well, the new free trade deal with Europe could open up Canada’s wireless industry to more foreign competition.
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GUGGENHEIM CHINA SMALL CAP ETF $27.17 (New York Exchange symbol HAO; buy or sell through brokers; www.guggenheimfunds.com) aims to track the AlphaShares China Small Cap Index, which is made up of all Chinese stocks that are legal for foreign investors and have market caps between $200 million and $1.5 billion.

The $264.2-millon fund’s top holdings are Youku Tudou, 2.0%; Tsingtao Brewery, 1.4%; BYD Co., 1.4%; China Everbright International, 1.4%; China Resources Gas Group, 1.3%; GCL Poly Energy International, 1.3%; Haier Electronics, 1.3%; Wuxi Pharmatech, 1.3%; Sino Biopharmaceutical, 1.2%; and Xinyi Glass Holdings, 1.3%.

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SPDR S&P CHINA ETF $79.24 (New York Exchange symbol GXC; buy or sell through brokers; www.spdrs.com) aims to track the S&P China BMI Index, which is made up of all publicly traded Chinese stocks available to foreign investors. Right now, SPDR S&P China ETF holds 239 stocks.

The $888.0-million fund’s top holdings are China Construction Bank, 6.8%; Tencent Holdings, 6.2%; China Mobile, 5.8%; Industrial & Commercial Bank, 5.8%; Baidu, 4.6%; Bank of China, 3.5%; CNOOC Ltd., 3.4%; PetroChina, 2.6%; China Life, 2.6%; and China Petroleum & Chemical, 2.2%.

The ETF was launched on March 19, 2007. It has a 0.59% MER and yields 2.1%.
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TRANSCANADA CORP. $46.71 (Toronto symbol TRP; Shares outstanding: 707.0 million; Market cap: $33.4 billion; TSINetwork Rating: Above Average; Dividend yield: 3.9%; www.transcanada.com) now estimates that it will cost $5.4 billion U.S. to build the Keystone XL pipeline, which would pump crude from the Alberta oil sands to refineries on the U.S. Gulf Coast. That’s up from $5.3 billion U.S.

TransCanada hopes the U.S. government will approve Keystone XL in early 2014. If so, it could start up in 2016.

If the company has to cancel Keystone XL, it will probably have to write off the $2.0 billion U.S. that it has already invested in it. That’s equal to about 50% of the company’s annual cash flow, but it’s still a manageable amount.
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VERESEN $13.86 (Toronto symbol VSN; Shares outstanding: 200.9 million; Market cap: $2.8 billion; TSINetwork Rating: Average; Yield: 7.2%) owns pipelines, power plants and gas-processing facilities across North America. A major holding is 50% of the Alliance gas line, which runs 3,000 kilometres between Chicago and Fort St. John, B.C. Enbridge owns the other 50%. Veresen also owns the Alberta Ethane Gathering System, and Veresen and Enbridge together hold 85.4% of the Aux Sable NGL plant.

In February 2012, Veresen paid Encana Corp. $920 million for the Hythe/Steeprock natural gas gathering and processing complex. Encana signed a long-term deal to buy most of this facility’s gas.

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PEMBINA PIPELINE $34.42 (Toronto symbol PPL; Shares outstanding: 313.0 million; Market cap: $10.8 billion; TSINetwork Rating: Average; Div. yield: 4.9%; www.pembina.com) owns pipelines that carry half of Alberta’s conventional oil, 30% of Western Canada’s natural gas liquids (NGLs) and almost all of B.C.’s conventional oil.

In the quarter ended September 30, 2013, Pembina’s revenue rose 34.9%, to $1.2 billion from $870.9 million a year earlier. The gains came from pipeline expansions and Provident Energy, which Pembina bought for $3.2 billion last year. Provident extracts, transports and stores NGLs.

Cash flow jumped 41.7%, to $188.7 million from $133.2 million. Cash flow per share gained 32.6%, to $0.61 from $0.46, on more shares outstanding.
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ENCANA CORP. $20.28 (Toronto symbol ECA; Shares outstanding: 740.2 million; Market cap: $15.0 billion; TSINetwork Rating: Average; Dividend yield: 1.4%; www.encana- .com) is one of North America’s largest natural gas producers.

However, rising shale gas production has cut prices from $11.50 U.S. per thousand cubic feet in 2008 to just $3.63 today.

That’s prompting Encana to cut its reliance on gas by narrowing 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).
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GREAT-WEST LIFECO $32.20 (Toronto symbol GWO; Shares outstanding: 999.5 million; Market cap: $32.7 billion; TSINetwork Rating: Above Average; Yield: 3.8%; www.greatwestlifeco.com) is Canada’s largest insurance company. It also offers mutual funds and wealth management. Power Financial owns 68.1% of Great-West.

Excluding costs to integrate Irish Life, Great-West’s earnings per share rose 7.3% in the three months ended September 30, 2013, to $0.59 from $0.55 a year earlier. The company ended the quarter with $705.1 billion of assets under administration.

Earnings at the Canadian division (which supplies 56% of the total) rose 18.6%, as higher sales of personal insurance offset lower demand for group policies. The value of the assets this business administers also rose, which increased its wealth management fee income.
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DEVON ENERGY CORP. (New York symbol DVN; www.dvn.com) is one of the largest U.S.-based oil and natural gas explorers and producers. Its production mix is 57% gas and 43% oil....

SUNCOR ENERGY INC. $36 (www.suncor.com) produced an average of 437,000 barrels of oil a day at its oil sands projects in November 2013. That’s up 16.5% from 375,000 barrels in October, when the company slowed production due to the temporary shutdown of a pipeline....

CANADIAN TIRE CORP. $95 (www.canadiantire.com) has developed a new all-season tire with a special sidewall that changes colour when the outside temperature falls below a certain point. That tells the driver it’s time to install snow tires. Unique products like this should give Canadian Tire an edge over big U.S....

ENBRIDGE INC. $43 (www.enbridge.com) has raised its quarterly dividend by 11.1%, to $0.35 a share from $0.315. The new annual rate of $1.40 yields 3.3%. The company expects to start operating several new oil pipelines in the next few months. As a result, its earnings should rise from a projected $1.79 a share in 2013 to between $1.84 and $2.04 a share in 2014....

CAE INC. $13 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 261.5 million; Market cap: $3.4 billion; Price-to-sales ratio: 1.5; Dividend yield: 1.8%; TSINetwork Rating: Average; www.cae.com) is the world’s leading maker of flight simulators for commercial airlines, with 70% of the market. It also makes simulators for military clients. The company began training pilots for its customers in 2001 and now has over 100 flight schools in 30 countries.




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METRO INC. $63 (Toronto symbol MRU; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 91.7 million; Market cap: $5.8 billion; Price-to-sales ratio: 0.5; Dividend yield: 1.6%; TSINetwork Rating: Average; www.metro.ca) plans to close its produce and dairy distribution facility in St-Augustin-de-Desmaures, Quebec, and shift these operations to its recently opened plant in Laval.

The company will complete this move in March 2014. It did not say how much it will have to pay in severance or other expenses. However, the plant closure will help Metro cut its operating costs and compete with larger supermarket chains.

Metro is a buy....