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Pat McKeough responds to many requests for specific advice on what stocks to buy and other questions on investment strategy and the economy from the members of his Inner Circle. 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 the popular online movie and TV service Netflix. A pioneer in sending DVD’s by mail and offering online entertainment at a low monthly fee, the company has seen its share price rocket by over 360% in less than a year. Pat examines the company’s aggressive thrust into producing original content as it seeks to maintain its dominant position in an increasingly competitive industry. ...

CHEMTRADE LOGISTICS INCOME FUND (Toronto symbol CHE.UN; www.chemtradelogistics.com) is one of North America’s largest providers of removal services for resource firms, such as oil refineries and base-metal processors. These companies create sulphur, acid and other by-products as part of their activities. Chemtrade converts these substances into useful chemicals, like sulphuric acid. Chemtrade’s Marsulex subsidiary provides a range of environmental services, including improving air quality and treating and handling industrial waste....

Every Wednesday, we publish our “Investor Toolkit” series. Whether you’re a new or experienced investor, these weekly updates are designed to give you our specific advice on successful investing. Each Investor Toolkit update gives you a fundamental piece of investing advice and shows you how you can put it into practice right away. Tip of the week: “Index-linked GICs are one of the newer investment products that promise safety but usually deliver more in fees and commissions than in profits for investors.”...

FEDEX CORP. (New York symbol FDX; www.fedex.com) delivers packages and documents in the U.S. and over 220 other countries and territories. The stock has moved up in the past few weeks, partly due to speculation that activist investment firm Pershing Square Capital Management will soon make a significant investment in FedEx....

DUNDEE CORP. $22 (www.dundeecorp.com) has completed the spinoff of subsidiary DREAM Unlimited Corp. $12 (Toronto symbol DRM) as a separate, publicly traded firm. DREAM, which was formerly 70%-owned Dundee Realty Corp., develops and manages commercial and residential real estate in North America and Europe. Insiders still control 50% of DREAM.

DREAM gets half of its revenue from selling land, mainly in western Canada, to housing developers. It also develops its own housing and condominium properties, and holds stakes in Toronto’s King Edward Hotel and the Arapahoe Basin ski area in Colorado.

Dundee shareholders received one share of DREAM for each Dundee share they held. That’s why Dundee’s stock dropped from over $36 after the spinoff.
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POTASH CORP. OF SASKATCHEWAN $41 (Toronto symbol POT; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 865.1 million; Market cap: $35.5 billion; Price-to-sales ratio: 4.3; Dividend yield: 3.6%; TSINetwork Rating: Average; www.potashcorp.com) is the world’s largest fertilizer producer. Its five potash mines in Saskatchewan and one in New Brunswick account for 20% of global potash capacity. Five of its mines have reserves of between 65 and 84 years. It also makes fertilizers from nitrogen and phosphate.




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ROYAL BANK OF CANADA $61 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $85.4 billion; Price-to-sales ratio: 2.4; Dividend yield: 4.1%; TSINetwork Rating: Above Average; www.rbc.com) is part of a consortium that plans to set up a new Canadian stock exchange. Other investors include pension funds and mutual fund company IGM Financial (see page 76).

A new company called Aequitas Innovations Inc. will operate this exchange, which will be mainly aimed at institutional investors. It will also limit high-frequency computer trading, which can distort stock prices. Aequitas plans to begin operating in late 2014.

IGM and Royal did not say how much they are contributing to this new business or how much they will own. Still, this new exchange aims to capture 20% of Canada’s stock-trading volumes over the next few years.
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SHAWCOR LTD. $45 (Toronto symbol SCL; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 58.8 million; Market cap: $2.6 billion; Price-to-sales ratio: 2.0; Dividend yield: 1.1%; TSINetwork Rating: Average; www.shawcor.com) continues to win new contracts for its underwater pipeline coating services....

TELUS CORP. $31 (Toronto symbol T; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 654.1 million; Market cap: $20.3 billion; Priceto- sales ratio: 2.0; Dividend yield: 4.4%; TSINetwork Rating: Above Average; www.telus.com) plans to build a new 58-storey office tower, called Telus Sky, in downtown Calgary. In addition to offices, the building will include retail stores and residential units. Telus will be the main tenant, occupying 20% of the building’s overall floor space.

This project will cost $400 million. That’s equal to 1.1 times the $362 million, or $0.56 a share, that Telus earned in the three months ended March 31, 2013. The company expects to finish construction in the fall of 2017.

Telus is a buy....

CAE INC. $11 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 259.7 million; Market cap: $2.9 billion; Price-to-sales ratio: 1.4; Dividend yield: 1.8%; TSINetwork Rating: Average; www.cae.com) has won several new contracts with 15 countries’ defence forces. Under these deals, CAE will build helicopter flight simulators and train pilots and aircraftsupport personnel.

In all, these deals are worth $100 million, or 5% of CAE’s annual revenue of $2.1 billion.

CAE is a buy....

CANADIAN TIRE CORP. $83 (Toronto symbol CTC.A; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 80.9 million; Market cap: $6.7 billion; Price-to-sales ratio: 0.6; Dividend yield: 1.7%; TSINetwork Rating: Above Average; www.canadiantire.ca) has a new four-year deal to sell Olympic-branded shoes and other sports equipment made by Adidas Group. The company will feature this merchandise in its main Canadian Tire stores and its SportChek and Sports Experts sporting good chains.

Offering exclusive products is a good way for retailers to draw customers to their stores. This new deal also builds on Canadian Tire’s current eightyear sponsorship agreement with the Canadian Olympic Committee.

Canadian Tire is a buy....

HOME CAPITAL GROUP INC. $57 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.6 million; Market cap; $2.0 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.8%; TSINetwork Rating: Average; www.homecapital.com) caters to borrowers who don’t meet the stricter standards of larger banks.

Even so, the company continues to do a good job of identifying problem loans before borrowers fall behind on their payments. In the latest quarter, loan-loss provisions rose just 3.8% from a year earlier. Home Capital also limits its risk by keeping its mortgage loans below 80% of a property’s market value.

Home Capital Group is a buy....

IGM FINANCIAL INC. $46 (Toronto symbol IGM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 255.1 million; Market cap: $11.7 billion; Price-to-sales ratio: 3.7; Dividend yield: 4.7%; TSINetwork Rating: Above Average; www. igmfinancial.com) is Canada’s largest independent mutual fund company. Power Financial owns 58.7% of IGM.

As of June 30, 2013, the company had $124.8 billion of assets under management, including mutual funds. That’s down 1.8% from $127.1 billion on May 31, 2013. Recent volatility in world stock markets is the main reason for the decline. However, IGM’s assets under administration are still up 5.8% from a year earlier.

IGM’s fee income rises and falls with the value of the securities it manages, so its revenue and earnings gain when the value of these assets rises.
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GREAT-WEST LIFECO INC. $31 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 951.4 million; Market cap: $29.5 billion; Price-to-sales ratio: 1.0; Dividend Yield: 4.0%; TSINetwork Rating: Above Average; www.greatwestlifeco.com) is Canada’s second-largest insurance company after Manulife, with $581.9 billion of assets under administration. It also sells mutual funds and retirement planning and wealth management services. Power Financial (Toronto symbol PFC) owns 68.2% of Great-West.

The company expects to complete its $1.75- billion purchase of Irish Life Group in the next few weeks. This business is Ireland’s largest pension manager and life insurance provider.

Meanwhile, Great-West continues to benefit from rising equity markets, which have raised the value of the assets it manages. Mutual fund sales at U.S. subsidiary Putnam Investments are also improving.
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CGI GROUP INC. $31 (Toronto symbol GIB.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 309.3 million; Market cap: $9.6 billion; Price-to-sales ratio: 1.5; No dividends paid; TSINetwork Rating: Extra Risk; www.cgi.com) is Canada’s largest provider of computer outsourcing services. CGI helps its clients automate routine functions, like accounting and buying supplies. That makes them more efficient and lets them focus on their main businesses.

CGI continues to profit from its August 2012 acquisition of Logica plc, a U.K.-based firm that provides computer-outsourcing services in 36 countries.

Thanks to this $2.7-billion purchase, CGI’s earnings rose 66.3% in its 2013 second quarter, which ended March 31, 2013, to $175.9 million from $105.7 million a year earlier. Due to more shares outstanding, earnings per share rose at a slower rate of 40.0%, to $0.56 from $0.40. These figures exclude unusual items, such as costs to integrate Logica.
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BCE INC. $43 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 775.9 million; Market cap: $33.4 billion; Price-to-sales ratio: 1.6; Dividend yield: 5.4%; TSINetwork Rating: Above Average; www.bce.ca) has completed its $3.2-billion purchase of Astral Media, which owns 22 TV stations, 84 radio stations and several pay TV and specialty channels, such as the Movie Network, Family Channel and Teletoon.

To win approval for the takeover, BCE agreed to sell several of Astral’s specialty TV channels and radio stations. Still, the new operations should immediately add to the company’s earnings.

BCE is a buy.

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CENOVUS ENERGY INC. $32 (Toronto symbol CVE; Conservative Growth Portfolio, Resources sector; Shares outstanding: 755.6 million; Market cap: $24.2 billion; Price-to-sales ratio: 1.4; Dividend yield: 3.0%; TSINetwork Rating: Average; www.cenovus.com) plans to ship more of the heavy bitumen from its Alberta oil sands projects by rail, in response to a lack of pipeline capacity and uncertainty over the Keystone XL project (see page 71).

By the end of 2013, the company expects to ship 10,000 barrels a day by rail, mostly lighter oil from its properties in Saskatchewan. It aims to boost that total to 30,000 barrels a day by the end of 2014. That’s equal to 17% of Cenovus’s current daily output of 180,000 barrels. The company has leased 800 railcars to support this expansion.

Cenovus is a buy....

EMERA INC. $33 (Toronto symbol EMA; Income Portfolio, Utilities sector; Shares outstanding: 147.9 million; Market cap: $4.9 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.4%; TSINetwork Rating: Average; www.emera.com) is Nova Scotia’s main power supplier. It also holds interests in electrical utilities in the U.S. and the Caribbean. Other operations include the Brunswick pipeline, which pumps natural gas from the U.S. to a liquefied natural gas plant in New Brunswick.

Emera aims to start working on a new hydroelectric project on Labrador’s Churchill River by the end of this year. It will invest $600 million for a 29% stake in a new regulated utility, which will transmit power from Churchill River to the island of Newfoundland.

In addition, Emera will spend $1.5 billion to build an undersea cable, called the Maritime Link, that will transmit 20% of the plant’s power to Nova Scotia. Emera will own 100% of this cable. These two projects should begin operating by 2017.
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FORTIS INC. $32 (Toronto symbol FTS; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 248.9 million; Market cap: $8.0 billion; Price-to-sales ratio: 1.7; Dividend yield 3.9%; TSINetwork Rating: Above Average; www.fortis.ca) is the main electricity supplier in Newfoundland and Prince Edward Island. It also operates power plants in other parts of Canada, the U.S. and the Cayman Islands. In addition, wholly owned FortisBC Energy distributes natural gas in B.C.

Fortis recently completed its takeover of CH Energy Group, which supplies gas and power in New York State. Fortis paid $1.5 billion U.S., including the assumption of $500 million U.S. of CH’s debt.

The company made several concessions to win regulatory approval, including freezing electricity rates until June 2015. It also extended the contract of CH’s main union by one year, to April 30, 2017. These moves will hurt CH’s contribution to Fortis’s earnings, at least in the short term.
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ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $44 and ACO.Y [class II voting] $44; Income Portfolio, Utilities sector; Shares outstanding: 115.2 million; Market cap: $5.1 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.7%; TSINetwork Rating: Above Average; www.atco.com) is a holding company. Its main subsidiary is 52.9%-owned Canadian Utilities (see left). It also owns 75.5% of ATCO Structures & Logistics, which builds temporary buildings for construction companies and energy exploration firms; Canadian Utilities owns the remaining 24.5%.

In the three months ended March 31, 2013, ATCO’s revenue rose 5.6% to $1.1 billion from $1.0 billion a year earlier. That’s mainly due to the higher contribution from Canadian Utilities. Revenue at its Structures division fell 0.9% after it completed several major projects in 2012.

Earnings fell 1.7%, to $117 million, or $1.01 a share, from $119 million, or $1.03. (All per-share amounts adjusted for a 2-for-1 stock split in May 2013.)
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CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] $36 and CU.X [class B voting] $36; Income Portfolio, Utilities sector; Shares outstanding: 258.2 million; Market cap: $9.3 billion; Price-to-sales ratio: 3.2; Dividend yield: 2.7%; TSINetwork Rating: Above Average; www. canadianutilities.com) distributes electricity and natural gas in Alberta and Australia. It also operates 18 power plants in Canada, Australia and the U.K. ATCO Ltd. (see right) owns 52.9% of the company.

In the quarter ended March 31, 2013, Canadian Utilities earned $183 million, down 3.7% from $190 million a year earlier. Earnings per share fell 4.2%, to $0.68 from $0.71. (All per-share amounts adjusted for a 2-for-1 stock split in May 2013.)

Without unusual items, mainly deferred payments from or refunds paid to customers, earnings would have risen 3.4%. Revenue gained 8.0%, to $876 million from $811 million. Colder-than-normal winter weather increased demand for electricity and natural gas. Higher rates in Australia also contributed to the gain.
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CANADIAN PACIFIC RAILWAY LTD. $129 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 175.0 million; Market cap: $22.6 billion; Price-to-sales ratio: 3.9; Dividend yield: 1.1%; TSINetwork Rating: Above Average; www.cpr.ca) expects to ship 70,000 carloads of crude oil in 2013, up sharply from just 13,000 in 2011.

However, the crash could hurt the oil-by-rail boom. (Note: Montreal, Maine and Atlantic Ltd., operated the train involved in the crash, not CP.)

It seems likely that regulators will require railways to replace their current tanker cars with models that can better withstand collisions. They may also demand that railways place more workers on their trains, and install automatic-braking equipment.
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TRANSCANADA CORP. $46 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 707.0 million; Market cap: $32.5 billion; Priceto- sales ratio: 3.9; Dividend yield: 4.0%; TSINetwork Rating: Above Average; www.transcanada.com) operates a 57,000- kilometre pipeline network that pumps natural gas from Alberta to Eastern Canada and the U.S. The company’s pipelines supply 20% of North America’s natural gas. In 2012, they provided 53% of TransCanada’s revenue and 60% of its earnings.

The company also owns or invests in 21 power plants in Alberta, Ontario, Quebec and the northeastern U.S. In all, these facilities have over 11,800 megawatts of generating capacity. TransCanada’s electricity operations now supply 34% of its revenue and 21% of its earnings.

In 2011, the company started up its oil-pipeline division. This business mainly consists of the Keystone pipeline, which pumps oil from Alberta to refineries in Illinois, and a distribution hub in Cushing, Oklahoma. Oil pipelines supply the remaining 13% of TransCanada’s revenue and 19% of its earnings.
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CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer outsourcing services. CGI helps its clients automate routine functions, like accounting and buying supplies. That makes them more efficient and lets them focus on their main businesses. CGI is a long-term recommendation of our Successful Investor newsletter. We made it our #1 Canadian stock of the year in 2010 at $15. The stock has risen 107% for our subscribers since then. We also made it our stock of the year in 2011. The stock is up 73% since then....

ENBRIDGE INC. $44.53 (Toronto symbol ENB; Shares outstanding: 809.3 million; Market cap: $36.3 billion; TSINetwork Rating: Above Average; Dividend yield: 2.8%; www.enbridge.com) has shut down three of its oil pipelines near Fort McMurray, Alberta, after heavy rain weakened the ground beneath one of them, causing a minor spill.

The company has since reopened two of these lines and expects to restart the third in the next few days. The shutdown is costing Enbridge about $1 million a day in lost revenue. To put that in context, the company’s revenue was $8.0 billion, or over $89 million a day, in the first three months of 2013.

Enbridge is a buy.
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