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If you feel stocks have become overpriced lately, you might want to take advantage of this by short selling stocks — that is, selling borrowed shares in hopes of a drop in price. We advise against this strategy, mainly because of the perennial drawbacks of short selling. Short selling is when you borrow stock from a broker and then sell it. However, you eventually have to buy back the stock on the market to return it to its owner. If the stock falls in price while you are “short,” you can buy it back at a lower price. You have then made a profit. But if the stock rises in price, you must buy it back at a higher price than you sold it, and you lose money. [ofie_ad]...

When building your portfolio, it’s crucial to follow our stock investing advice of downplaying stocks that seem to be near-universally recommended by brokers and are getting a lot of favourable media coverage. That’s because, in investing, familiarity can breed excessive feelings of comfort, security and performance. After all, brokers get information from the media, investment journalists spend a lot of time talking to brokers, and company managers listen to both. A feedback loop can develop that spurs high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes. You may get the feeling that these are can’t-miss investments, and that it’s safe to buy and forget them. That’s exactly the wrong thing to do with these stocks. Our stock investing advice is that your in-the-limelight holdings are the ones you need to watch most closely....

We noted with interest (and some amusement) the unveiling of the prototype of “The Rationalizer,” a new device that aims to sense day traders’ stress levels and alert them when it may be time to step back from trading. The idea is to ensure that traders avoid the mistake of trading based on emotion. The device is made by Philips Electronics (symbol PHG on New York), one of the blue chip stocks we’ve taken a close look at in the most recent issue of Wall Street Stock Forecaster (see below for a full update on this Netherlands-based electronics firm). The Dialogues Incubator, an initiative of Dutch bank ABN AMRO, also played a role in its design. Users of the device wear an “Emo Bracelet,” which senses a trader’s stress level and makes the accompanying EmoBowl, which sits on the traders’ desk, change from yellow to red as the trader becomes more stressed....

If you need steady income and want to hold bond funds, we advise you to focus on those with short-term maturity dates (see below for more on bond funds). That’s because bonds with shorter terms face a lower risk from interest-rate increases. You should also avoid funds that take part in any kind of speculative trading. The iShares Canadian Short Bond Index Fund (symbol XSB on Toronto) is a bond exchange-traded fund (ETF) that’s a long-time recommendation of our Canadian Wealth Advisor newsletter. The fund cuts risk by avoiding speculative trading and emphasizing government bonds.

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Warren Buffett’s Berkshire Hathaway Inc. recently announced that it will buy the 77% of U.S.-based railway Burlington Northern Santa Fe Corp. that it doesn’t already own. The company will pay $44 billion U.S. to complete the takeover. Burlington Northern owns one of the largest railroad networks in the U.S., with about 51,500 kilometres of track. ...

NASDAQ-100 TRUST SHARES $41.33 (Nasdaq symbol QQQQ; buy or sell through brokers), or “Qubes,” hold the stocks that represent the Nasdaq 100 Index, which is made up of the 100 largest, most heavily traded stocks on the Nasdaq exchange. The Nasdaq 100 Index contains firms from a number of major industries, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies. The shares’ expenses are about 0.20% of assets. The index’s 10 highest-weighted stocks are Apple, Microsoft, Qualcomm, Google, Cisco, Intel, Research in Motion, Gilead Sciences, Oracle and Teva Pharmaceuticals....

IBM $121.29 (New York symbol IBM; Shares outstanding: 1.3 billion; Market cap: $159.3 billion; SI Rating: Above Average) is the world’s largest computer company, with operations in over 170 countries. IBM specializes in making large mainframe computers for governments and corporations. The company is also the world’s second-largest software maker, after Microsoft Corp. IBM gets 22% of its revenue from sales of software. IBM’s service division now supplies almost 60% of it’s revenue. As well, long-term contracts for designing and maintaining computer systems provide steady revenue streams. This cuts the company’s risk. In the three months ended September 30, 2009, the slower economy pushed down revenue by 6.9% to $23.6 billion from $25.3 billion a year earlier. However, IBM’s earnings rose 13.8%, to $3.2 billion from $2.8 billion, because of its shift to services and software, which generate higher profit margins. Earnings per share rose 17.6%, to $2.40 from $2.04, on fewer shares outstanding from share buybacks....

DIAMONDS TRUST SHARES $98.27 (New York Exchange symbol DIA; buy or sell through brokers) hold the 30 stocks that make up the Dow Jones Industrial Average. The fund’s top 10 holdings are IBM, Exxon Mobil, Chevron Corp., 3M, Procter & Gamble, McDonald’s Corp., Johnson & Johnson, Caterpillar Inc., United Technologies and Coca-Cola. The fund’s expenses are about 0.18% of its assets. Diamonds Trust Shares are a buy.

ISHARES CDN LARGECAP 60 INDEX FUND $16.46 (Toronto symbol XIU; buy or sell through a broker) (units split 4-for-1 in August 2008) is a good, low-fee way to buy the top stocks and income trusts 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. Most of the stocks in the index are high-quality companies. However, as it must ensure that all sectors are represented, the index holds a few we wouldn’t include, such as Yellow Pages Income Fund. The index’s top holdings are: Royal Bank, 8.2%; Suncor Energy, 5.9%; TD Bank, 5.7%; Bank of Nova Scotia, 5.0%; EnCana, 4.8%; Barrick Gold, 4.1%;Canadian Natural Resources, 3.9%; Manulife, 3.5%; Research in Motion, 3.2%; Potash Corp., 3.1%; Goldcorp, 3.1%; Bank of Montreal, 2.9%; CN Railway, 2.6%; and CIBC, 2.5%....

ISHARES MCSI CANADA INDEX FUND $24.64 (New York symbol EWC; buy or sell through brokers) is like a market-cap-based index fund, but its managers tinker with the index-fund formula in order to try and improve performance. They do this using their proprietary Morgan Stanley Capital International Canada Index. The fund has an MER of 0.52%. If you want to own a Canadian index fund, you should buy the iShares CDN LargeCap 60. You’ll pay about a third of the management fees. We don’t recommend iShares MCSI Canada Index.

S&P DEPOSITORY RECEIPTS $104.92 (New York symbol SPY; buy or sell through brokers) are commonly called “Spiders.” The fund holds the stocks in the S&P 500 Index, which consists of 500 major U.S. stocks that are chosen based on their market share, liquidity and industry group. The index’s 10 highest-weighted stocks are Exxon Mobil, Microsoft, Procter & Gamble, Apple, JP Morgan Chase & Co., Johnson & Johnson, IBM, Chevron, General Electric and AT&T. The fund’s expenses are just 0.10% of its assets. If you want exposure to the S&P 500 Index, S&P Depository Receipts are a buy.

ISHARES DIVIDEND INDEX FUND $17.74 (Toronto symbol XDV; buy or sell through a broker) holds the 30 highest-yielding Canadian stocks based on dividend growth, yield and average payout ratio. The weight of any one stock is limited to 10% of assets. The fund’s MER is 0.50%. iShares Dividend Index Fund has a yield of 4.0%. Top holdings are National Bank, 8.9%; Bank of Montreal, 8.0%; CIBC, 7.2%; TD Bank, 6.3%; IGM Financial, 5.0%; Bank of Nova Scotia, 5.0%; Royal Bank, 4.9%; Manitoba Telecom, 4.6%; TMX Group, 3.6%; Sun Life, 3.2%; Power Financial, 3.2%; Telus, 3.1%; and Russel Metals, 2.8%. iShares Dividend Index Fund is a buy.

The high Canadian dollar and lower U.S. house values have some investors, including members of our Inner Circle service, seeing opportunity in U.S. real estate investing, particularly in the “sunbelt” states, such as Arizona and Florida. Before you consider such a move, you should first make sure that buying a vacation property doesn’t leave your investments overweighted in real estate. What’s more, there are a number of other special risks and costs involved with buying and owning vacation property in the U.S. ...

Investors continue to look for ways to profit from rising commodity prices. Some are considering a unique kind of tax shelter: flow-through funds. Flow-through funds mainly invest in flow-through shares issued by junior mining and oil companies. The companies spend the money they receive for these shares on mineral exploration and development, which carries certain tax benefits, in the form of tax credits and tax deferral. These tax benefits “flow through” to investors in the fund. To take advantage of them, investors need to hang on to the funds for a fixed time, usually 18 months to two years. At the end of that period, flow-through funds convert into standard mutual funds. These tax shelters developed out of a Canadian government plan to encourage natural resource exploration and development....

Starting in 2011, Ottawa will impose a tax on distributions of income trusts, including royalty trusts. This will put trusts on an equal tax footing with regular corporations. Many trusts are converting to corporations as a result. Some are even cutting their distributions. However, as we noted in a recent issue of Canadian Wealth Advisor, two royalty trusts have an enviable advantage when it comes to dealing with the new tax. Oil and natural-gas producer Enerplus Resources Fund (symbol ERF.UN on Toronto) has over $2.5 billion of tax losses on its books. It can use these to defer its conversion to a dividend-paying corporation until 2013 or later. Similarly, Pengrowth Energy Trust (symbol PGF.UN on Toronto), which also produces oil and gas, has $3.0 billion in tax losses that it can use to hold off the trust tax until at least 2013....

Companies in the highly competitive and fickle fast-food market are always looking for new ways to grow. Sometimes this involves introducing new products to try to take advantage of changing customer tastes. McDonald’s, for instance, has recently started selling premium coffee and healthier foods. Another way fast-food firms try to grow is through aggressive expansion into overseas markets. This is an area that Yum! Brands (symbol YUM on New York), which we’ve covered for some time in our Wall Street Stock Forecaster newsletter, has a particular talent for. ...

At Successful Investor Wealth Management, we sometimes get questions from investors who are looking for one great stock pick, or one big idea, that can quickly make them rich.

Beginning investors often start their portfolio investing with these types of ideas....

ARKANSAS BEST CORP. $26 (Nasdaq symbol ABFS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 25.0 million; Market cap: $650.0 million; Price-to-sales ratio: 0.5; WSSF Rating: Average) specializes in “less-than-truckload” shipping. This involves loading freight from a number of customers onto a single truck. Arkansas Best carries a range of goods, including food, textiles, clothing and furniture. The company operates in the U.S., Canada and Mexico. In the three months ended September 30, 2009, Arkansas Best’s total tonnage hauled fell 10.1% from a year earlier. However, it rose 5.8% from the previous quarter. As well, weak demand is forcing the company to lower its prices to stay competitive. As a result, Arkansas Best’s revenue fell 19.5% in the most recent quarter, to $399.0 million from $495.8 million a year earlier. The company lost $0.23 a share, compared to earnings of $0.60....

FEDEX CORP. $74 (New York symbol FDX; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 312.5 million; Market cap: $23.1 billion; Price-to-sales ratio: 0.7; WSSF Rating: Average) delivers packages and documents in the U.S. and over 220 other countries. FedEx earned $0.58 a share in its first quarter, which ended August 31, 2009. That’s down 52.8% from $1.23 a year earlier. Revenue fell 19.7%, to $8 billion from $10 billion. Like most shipping companies, FedEx added a surcharge to its fees when fuel costs were rising. But now that oil prices have fallen to around $77 a barrel from last year’s peak of $148, FedEx is getting less revenue from these surcharges. Despite the drop in fuel-surcharge revenue, lower fuel costs should help FedEx increase its profits as an economic recovery pushes up shipping volumes. As well, European-based courier DHL Express exited the U.S. domestic delivery market last year due to growing losses. This gives FedEx an opportunity to expand its market share....

INVACARE CORP. $23 (New York symbol IVC; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 32.1 million; Market cap: $738.3 million; Price-to-sales ratio: 0.4; WSSF Rating: Average) makes wheelchairs, motorized scooters and other mobility and home-care products. Invacare spends much less on research than Baxter, Bard and Beckman— typically less than 2% of its revenue. That’s because it mainly focuses on improving its current products, rather than developing new ones. Simplifying its products, along with shifting production to low-cost countries, has also lowered the company’s operating costs. In the three months ended September 30, 2009, earnings before restructuring costs rose 23.8%, to $0.52 a share from $0.42 a year earlier. Sales fell 6.0%, to $434.0 million from $461.8 million. If you exclude an acquisition and currency-exchange rates, sales would have fallen by 2.2%....

C.R. BARD INC. $76 (New York symbol BCR; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 96.5 million; Market cap: $7.3 billion; Price-to-sales ratio: 2.9; WSSF Rating: Above Average) makes medical devices in four main areas: urology products, such as drainage and incontinence devices (29% of 2008 sales); vascular products, such as stents and catheters (26%); oncology products that detect and treat various types of cancer (26%); and surgical tools (15%). Other medical products supply the remaining 4%. Bard is looking to add to the number of products it offers over the next few years. This should help it hang onto more of its customers, which mainly consist of hospitals and clinics. The company spends 8% of its revenue on research, and is increasing this spending to develop more new products. Bard also plans to buy other medical-device makers. The company’s strong balance sheet will help support both its research and its acquisition efforts. It holds cash of $632.1 million, or $6.55 a share, and its total debt is just $149.8 million. Bard earned $129.5 million in the three months ended September 30, 2009. That’s up 15.2% from $112.4 million a year earlier. Earnings per share climbed 20.2%, to $1.31 from $1.09, on fewer shares outstanding. Sales rose 3.3%, to $637.0 million from $616.8 million. Bard gets 30% of its sales from outside the U.S., so the higher U.S. dollar hurt the value of its overseas sales. If you disregard currency rates, Bard’s sales would have risen by 6%....

BECKMAN COULTER INC. $66 (New York symbol BEC; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 68.6 million; Market cap: $4.5 billion; Price-to-sales ratio: 1.6; WSSF Rating: Average) makes lab equipment that doctors and researchers use to detect substances in bodily fluids. Beckman gets 90% of its sales from hospitals and clinics. Research labs account for the remaining 10%. In August 2009, Beckman paid $780 million for the diagnostic-systems business of Olympus Corp. of Japan. This was a big purchase for Beckman, which earned $233.9 million, or $3.63 a share, in 2008. To help pay for this business, the company issued $495 million in new notes and sold $240 million of new common shares. As of June 30, 2009, Beckman’s long-term debt was just $1.3 billion (29% of market cap), so it has plenty of room for further borrowings....

BAXTER INTERNATIONAL INC. $55 (New York symbol BAX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 602.7 million; Market cap: $33.1 billion; Price-to-sales ratio: 2.7; WSSF Rating: Average) makes medical equipment through three main divisions. BioScience (43% of 2008 sales), makes vaccines and drugs; Medical Delivery (37%) makes intravenous equipment and systems; and Renal (19%) makes dialysis equipment. Other products account for the remaining 1% of sales. Baxter spends about 7% of its revenue on research. The resulting new products should help it maintain its leading position in key markets. The company is expanding its drug operations, which generate higher profits than its other products. A good example is Advate, a hemophilia drug that contains no human or animal proteins. This greatly cuts the risk of disease. Since its launch in 2004, Advate has claimed 70% of the U.S. hemophilia-drug market....

GENERAL MILLS INC. $65 (New York symbol GIS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 326.6 million; Market cap: $21.2 billion; Price-to-sales ratio: 1.5; WSSF Rating: Above Average) is the second-largest cereal maker in the U.S., after Kellogg. Its main brands include Cheerios, Wheaties, Lucky Charms, Total and Chex. The company also makes a wide variety of other foods. These include Yoplait yogurt, Green Giant canned and frozen vegetables, Betty Crocker baking mixes, Pillsbury frozen dough, Progresso canned soups and Haagen-Dazs ice cream. General Mills has three main divisions: The U.S. retail division (68% of sales) sells products to supermarkets and other mass merchandisers. (Wal-Mart accounts for around 20% of the company’s total sales.) The international division (18% of sales) manages General Mills’ overseas operations. The bakeries and food-services division (14%) mainly sells to restaurants, school cafeterias and vending-machine operators....

Investors often comment that we sometimes differ with the mainstream view on which stocks make good investments. That’s especially true with drug stocks. The general view on these stocks seems to be that they are can’t-miss investments because the baby boomers are reaching an age when they will need drugs for a number of medical conditions, and are willing to pay for them. As well, some investors feel that these companies stand to benefit from developing treatments for new diseases, such as the H1N1 influenza virus. (Below, we spotlight a stock that’s making a vaccine for H1N1, but faces fewer of the risks of drug companies. Read on for further details.)...