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CANADIAN NATIONAL RAILWAY CO. $45 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 468.4 million; Market cap: $21.1 billion; Price-to-sales ratio: 2.5; SI Rating: Above Average) operates the largest freight-rail network in Canada. It also serves 16 U.S. states. In the three months ended March 31, 2009, CN’s revenue fell 3.5%, to $1.86 billion from $1.93 billion a year earlier. The recession cut freight volumes, and CN lowered its fuel surcharges in response to the drop in oil prices. Earnings rose 0.7%, to $302 million from $300 million. Earnings per share rose 3.2%, to $0.64 from $0.62, on fewer outstanding shares. These figures exclude several one-time items, including a gain on the sale of a Toronto rail line and expenses related to CN’s recent takeover of a Chicago-area railway. Still, the company benefitted from a lower income-tax rate and a weaker Canadian dollar, which increased the contribution of its American operations....

Over the years, we’ve met a number of investors who favour investing in stocks only when economic and financial conditions seem good, if not ideal. If these investors hear talk of a drawn-out recession or rising interest rates, for example, they are inclined to stay out of the market, or get out if they’re in. In contrast, when they think conditions are ripe, these same investors are relatively casual about what they buy. They readily accept recommendations from brokers, or they buy stocks that are spotlighted by public-relations firms. They give dicey insiders the benefit of the doubt. You might say these investors are highly sensitive to stock market timing risk, but relatively insensitive to investment-quality risk. This is pretty much the opposite of our approach to investing....

We’ve always believed that investors should sell a stock if they have any doubts about the integrity of the people who are in charge of the company. In other words, if you think a company is run by crooks, you should sell the stock right away, no matter how attractive it seems as an investment. As the Madoff scandal so clearly shows, there are no limits to the ways in which unscrupulous operators can abuse and cheat you if they are inclined to do so. Over the years, we’ve refrained from recommending, or advised selling, a number of stocks, including blue chip stocks because we felt their capital structure or promotional materials were designed to make it easy for insiders to mislead or take advantage of the investing public. We didn’t miss much as a result; in fact, we sidestepped some ugly situations. To profit from this rule — that is, to use it to enhance your long-term returns, not just avoid losses — you need to apply it in a moderate fashion. That is, you need to distinguish between lack of integrity on one hand and naiveté, or poor judgment, on the other....

Members of my Inner Circle service often ask me for stock advice about picks they are thinking of buying that we don’t cover in our newsletters. A large number of these stocks fall into a grey area. Sometimes my stock advice is that they are “okay to hold,” but we wouldn’t advise buying them. When Inner Circle members ask about one of these companies, that’s what my stock advice would be: it’s “okay to hold.” Others don’t inspire our confidence at all, and our advice would be to avoid them or sell them if you own them. Here are three recent examples of our Inner Circle stock advice: YELLOW PAGES INCOME FUND (Toronto symbol YLO.UN) is the largest telephone-directory publisher in Canada, where it owns the Yellow Pages and Pages Jaunes trademarks. Aside from phone directories, it prints free, advertising-based publications, including Auto Trader, Buy & Sell and Renters News, through 98%-owned Trader Corp. It also operates web sites devoted to classified advertising....

MANULIFE FINANCIAL $20.19 (Toronto symbol MFC; Shares outstanding: 1.6 billion; Market cap: $32.5 billion; SI Rating: Above Average) sells life and other forms of insurance, as well as mutual funds and investment-management services. It operates in 19 countries and territories worldwide, including the U.S. and Asia. Manulife reported a loss of $1.1 billion, or $0.67 a share, in the three months ended March 31, 2009, compared to a gain of $869 million, or $0.57 a share, a year earlier. Excluding one-time charges, it would have earned $803 million, or $0.50 a share, in the latest quarter. The loss was largely caused by stock-market declines. Manulife also devoted $1.1 billion to strengthening its reserve for segregated-fund guarantees. This is the OSC’s main focus. The OSC may find that Manulife should have anticipated that the big drop in stock markets late last year would hurt its ability to meet those guarantees. Manulife subsequently issued debt and shares to boost reserves for those contracts, which pushed down its stock price. Either way, any OSC ruling shouldn’t hurt Manulife’s positive outlook....

TRIMARK CANADIAN RESOURCES FUND $13.58 (CWA Rating: Aggressive) (Invesco Trimark, 5140 Yonge Street, Suite 900, Toronto, Ontario M2N 6X7. Tel: 1-800-631-7008; Web site: www.invescotrimark.com. Buy or sell through brokers.) includes firms with Successful Investor Ratings of “Speculative” in its top picks. However, we like Trimark Canadian Resources Fund’s value-seeking, conservative approach to picking stocks in the volatile resource sector. The $428.9-million fund’s top holdings are EnCana Corporation, Canadian Natural Resources, Inmet Mining Corp., Husky Energy, Nexen, Cameco Corp., Mayr-Meinhof Karton AG, Goldcorp Inc., Talisman Energy and Addax Petroleum Corp. Trimark Canadian Resources Fund holds 50.3% of its portfolio in the Energy sector, 26.4% in Metals & Minerals and 6.3% in Industrials....

TD RESOURCE FUND $22.44 (CWA Rating: Aggressive) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario, M5W 1P9. Tel: 1-800-386-3757; Web site:www.tdcanadatrust.ca. No load: deal directly with the bank.) invests in companies which it sees as having strong asset bases, proven management and the ability to internally finance growth. The $173.1-million TD Resource Fund’s top stock holdings mostly have Successful Investor Ratings of “Average” or higher. They include EnCana, Suncor Energy, Talisman Energy, Goldcorp, Yamana Gold, Petro-Canada, Red Back Mining, BHP Billiton, Husky Energy, Chevron, Marathon Oil and Nexen. TD Resource Fund holds 59.1% of its portfolio in Energy and 38.1% in Metals & Minerals. It has an MER of 2.15%....

RIOCAN REAL ESTATE INVESTMENT TRUST $15.28 (Toronto symbol REI.UN; Units outstanding: 233.1 million; Market cap: $3.6 billion; SI Rating: Average) is Canada’s largest REIT. It has interests in a portfolio of 247 shopping malls across Canada, including 13 under development. In all, these contain over 59 million square feet of leasable area. RioCan’s occupancy rate stands at 97.5%. In the three months ended March 31, 2009, RioCan posted revenue of $191.1 million, up 4.2% from $183.4 million a year earlier. Cash flow per unit was unchanged, at $0.32. RioCan’s annual distribution of $1.38 gives the units a 9.0% yield. RioCan recently raised $150 million by issuing new units at $14.50 each. The trust didn’t need to raise capital, but will now have the funds to buy other companies, likely at low prices, as opportunities arise....

CANADIAN REIT $24.60 (Toronto symbol REF.UN; Units outstanding: 66.2 million; Market cap: $1.6 billion; SI Rating: Extra Risk) owns more than 160 properties. These consist of retail, industrial and office buildings located across Canada and in the Chicago, Illinois, area. Canadian REIT’s occupancy rate is 96.5%. The trust buys properties in prime locations, usually near major cities, that attract strong tenants, maintain high occupancy rates and deliver a reliable stream of rental income. In the three months ended March 31, 2009, Canadian REIT’s revenue was $85 million, up 9.9% from $77.4 million a year earlier. Cash flow per unit rose 10%, to $0.55 from $0.50. The units yield 5.5%....

H&R REAL ESTATE INVESTMENT TRUST $10.98 (Toronto symbol HR.UN; Units outstanding: 147.8 million; Market cap: $1.6 billion; SI Rating: Extra Risk) owns interests in 35 office properties, 123 industrial properties and 120 retail properties. Together, these contain over 41 million square feet. Over half of H&R’s properties are in the Greater Toronto Area. The rest are in other parts of Ontario, as well as in Quebec, western Canada and the U.S. H&R has an occupancy rate of 96.3%. In the three months ended March 31, 2009, H&R’s revenue was $160.1 million, up 8.3% from $147.9 million a year earlier. Cash flow per unit rose 2.6%, to $0.40 from $0.39. H&R’s units yield 6.6%. H&R REIT is a buy.

Lately we’ve heard from some investors who are unhappy with some of their investments, particularly their more aggressive investing picks. They want to rebuild their portfolios, but are reluctant to sell anything at today’s lower prices. We think that’s a mistake. Obviously you want to think things through and make sure you are not holding low-quality investments, or investments that are wrong for your portfolio. Once you’ve done that, our view is that you should switch to higher quality and more appropriate investments right away. You have nothing to gain by making back any losses you may have in the same aggressive investing selections that gave you those losses. Nor are you any more likely to regain your losses by holding on to the same stocks. In fact, if your investments are genuinely poor quality (rather than simply a bad aggressive investing choice for you), there’s a risk that they will cost you even more money, the longer you hold them....

A stock with a high corporate profile may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, owning a lot of in-the-limelight stocks can work against safe investing. Lots of smart people work in the public relations and the brokerage business. They do a highly effective job of publicizing and promoting their clients’ stocks. Many stocks in the broker/public relations limelight go up more-or-less steadily for years at a time. But when they come down, they can fall much further than you ever thought possible. That’s why it’s a mistake to stuff your portfolio full of them. On the other hand, at any given time, lots of prosperous, well-established companies are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight....

In our Financial Question of the Week, we recently asked TSI Network users how many stocks they own. The results were as follows: 33% of users owned 16 to 30 stocks, 29% owned five to 15, 21% owned less than five and 17% owned more than 30. So what is the right number of stocks to own? It’s a piece of investing advice we are asked about often, so it’s just one of the questions we answer in our free report: Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada....

A member of my Inner Circle recently asked us whether a reverse mortgage would be a good way to tap into the equity she had built up in her home. Reverse mortgages in Canada typically let homeowners (age 60 or older) borrow on their home equity (maximum 40%). The loan and accumulated interest are repaid only if the house is sold (or if the borrower moves out) or from the proceeds of the estate. Generally, the borrower will get between 28% and 33% of the value of their home, depending on their age and the location and type of home. ...

TOYOTA MOTOR CO. ADRs $76 (New York symbol TM; Conservative Growth Portfolio, Manufacturing & Industry sector; ADRs outstanding: 1.6 billion; Market cap: $121.6 billion; Price-to-sales ratio: 0.6; WSSF Rating: Above Average) is the world’s largest carmaker. Japan accounts for 47% of its revenue, followed by North America (24%), Europe (12%) and Asia (10%). In the fiscal year ended March 31, 2009, Toyota sold 7.6 million vehicles, down 15% from 8.9 million in the prior year. As a result of the drop, Toyota lost $4.3 billion, or $2.55 per ADR, in fiscal 2009. (Each American Depositary Receipt represents two of Toyota’s common shares.) It earned $17.5 billion, or $8.77 per ADR, a year earlier. Revenue fell 9.1%, to $203.3 billion from $223.6 billion. Toyota’s sales will likely fall to 6.5 million vehicles this year. The company is lowering its costs in response. For example, its smaller cars will share the same platform and parts by 2012. That should save $1 billion a year....

HONDA MOTOR CO. ADRs $27 (New York symbol HMC; Conservative Growth Portfolio, Manufacturing & Industry sector; ADRs outstanding: 1.8 billion; Market cap: $48.6 billion; Price-to-sales ratio: 0.5; WSSF Rating: Above average) is Japan’s second-largest carmaker. It’s also the world’s largest motorcycle producer. Honda sold 3.5 million vehicles in fiscal 2009. That’s down 10.4% from 3.9 million in the prior year. However, motorcycle volumes rose 8.5%, to 10.1 million from 9.3 million. Revenue fell 14.9%, to $101.9 billion from $119.8 billion a year earlier. Earnings plunged 76.7%, to $1.4 billion, or $0.77 per ADR, from $6 billion, or $3.30 per ADR. (Each American Depositary Receipt represents one Honda common share.) The earnings drop was mostly because of lower sales, higher raw-material costs and the negative impact of the high Japanese yen. North America accounts for 45% of its sales, so it’s more vulnerable to currency movements than Toyota. Honda’s small, fuel-efficient cars should continue to appeal to cost-conscious consumers during the recession. Like Toyota, it also aims to lower its costs by building more models that use the same parts. This year’s earnings will probably drop to $0.37 per ADR, but should rebound to $1.15 in fiscal 2011. The stock trades at 23.5 times the 2011 estimate. The $0.46 dividend yields 1.7%....

KRAFT FOODS INC. $26 (New York symbol KFT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.5 billion; Market cap: $39 billion; Price-to-sales ratio: 0.9; WSSF Rating: Above Average) is the world’s second-largest food company after Nestle. Top brands include Kraft (cheese), Maxwell House (coffee), Nabisco (biscuits and cookies) and Oscar Meyer (meats). Kraft faces strong competition from private-label foods, particularly in some of its main product lines, such as cheese, coffee and processed meats. But it has been helped by lower costs for a number of its raw materials, especially dairy products. In the three months ended March 31, 2009, Kraft’s revenue fell 6.5%, to $9.4 billion from $10 billion a year earlier. However, if you account for last year’s sale of its Post cereals business and the negative impact of currency rates on overseas sales, Kraft’s revenue rose 2.3%. Overall earnings rose 21%, to $662 million from $547 million. Earnings per share rose 28.6%, to $0.45 from $0.35, on fewer outstanding shares....

DEL MONTE FOODS CO. $9.02 (New York symbol DLM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 197.7 million; Market cap: $1.8 billion; Price-to-sales ratio: 0.5; WSSF Rating: Average) makes a wide variety of canned fruits and vegetables, as well as sauces and soups. Del Monte also makes pet food under the 9Lives, Milk-Bone and Meow Mix brands. In the fiscal year ended May 3, 2009, Del Monte’s earnings rose 25.5%, to $147.7 million, or $0.74 a share. In the prior year, it earned $117.7 million, or $0.58 a share. If you exclude an $0.08-a-share charge related to job cuts in the prior year, per-share earnings would have risen 12.1%. Sales rose 14.1%, to $3.6 billion from $3.2 billion. Del Monte is raising the prices of its main brands, and spending more on marketing. It hopes these moves will make these products more profitable....

CAMPBELL SOUP CO. $29 (New York symbol CPB; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 350.3 million; Market cap: $10.2 billion; Price-to-sales ratio: 1.3; WSSF Rating: Above Average) is the world’s largest maker of canned soups. It also makes Prego canned pasta and sauces, Pepperidge Farm cookies and V8 vegetable juices. Like Heinz Campbell plans to spur growth by expanding overseas. International markets now supply 30% of its revenue. It is particularly interested in Russia and China, where soup is popular. As a result of its growing international operations, unfavourable currency rates held back Campbell’s earnings by $0.04 a share in its third fiscal quarter, which ended May 3, 2009. The company’s sales fell 10.3%, to $1.7 billion from $1.9 billion. Currency rates accounted for about half of the decline....

H.J. HEINZ CO. $35 (New York symbol HNZ; Income Portfolio, Consumer sector; Shares outstanding: 315 million; Market cap: $11 billion; Price-to-sales ratio: 1.1; WSSF Rating: Above Average) is a leading maker of condiments. Its flagship product, Heinz Ketchup, makes up about 60% of all ketchup sold in the U.S. Heinz also makes frozen potatoes (under the Ore-Ida brand), pasta sauces (Classico) and diet foods (Weight Watchers). Heinz has expanded its overseas operations over the last few years. These now account for about 60% of its sales. And the company plans to keep adding new markets: it’s particularly interested in China, India, Russia and Poland. However, Heinz’s international growth adds currency risk. In its latest fiscal year, which ended April 29, 2009, sales rose just 0.8%, to a record $10.15 billion from $10.07 billion in the prior year. But excluding the negative impact of the higher U.S. dollar, sales would have risen 7.4%. The company raised its selling prices, which helped offset a 1.5% drop in volumes. Earnings rose 9.3%, to $923.1 million from $844.9 million. Earnings per share rose 10.3%, to $2.90 from $2.63, on fewer outstanding shares....

GENERAL MILLS INC. $55 (New York symbol GIS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 329 million; Market cap: $18.1 billion; Price-to-sales ratio: 1.3; WSSF Rating: Above Average) is the second-largest maker of breakfast cereals in the United States after Kellogg. Its main brands include Cheerios, Wheaties and Total. The company also makes Betty Crocker baking mixes, Green Giant canned and frozen vegetables and Yoplait yogurt. General Mills will probably report earnings of $3.92 a share in its latest fiscal year, which ended May 31, 2009. That’s slightly higher than its previous forecast of $3.87 to $3.89. These figures exclude unusual items, mainly gains and losses on hedging contracts that General Mills uses to lock in prices for wheat, corn and other raw materials. The company raised its selling prices last year in order to offset higher prices for these raw materials. Since then, these costs have stabilized; this was the main reason behind the higher earnings forecast. It also expects a lower income-tax rate in the fourth quarter of fiscal 2009....

CONAGRA FOODS INC. $20 (New York symbol CAG; Income Portfolio, Consumer sector; Shares outstanding: 447.2 million; Market cap: $8.9 billion; Price-to-sales ratio: 0.7; WSSF Rating: Above Average) makes a number of packaged foods, including Chef Boyardee canned pasta, Hunt’s tomato sauce, Peter Pan peanut butter and Orville Redenbacher popcorn. In its third fiscal quarter, which ended February 22, 2009, ConAgra’s earnings per share rose 17.6%, to $0.40 from $0.34 a year earlier. These figures exclude several non-recurring items, but they include a $0.05-a-share gain on hedging contracts, which ConAgra uses to lock in costs for wheat, corn and other ingredients. As well, ConAgra paid $0.03 a share in legal costs related to a 2007 peanut-butter recall that was caused by a salmonella outbreak. Sales rose 6.1%, to $3.1 billion from $3 billion. ConAgra raised its selling prices because of higher raw-material costs. This offset lower sales volumes....

UNITED TECHNOLOGIES CORP. $51 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 942 million; Market cap: $48 billion; Price-to-sales ratio: 0.9; WSSF Rating: Above Average) has six main businesses: Carrier makes heating and air-conditioning equipment (25% of 2008 revenue, 17% of profit); Otis makes and services elevators (22%, 32%); Pratt & Whitney makes aircraft engines (22%, 27%); Hamilton Sundstrand makes electronic controls for aircraft (11%, 13%); UTC Fire & Security sells burglar alarms and fire-protection services (11%, 6%); and Sikorsky makes helicopters (9%, 5%). The U.S. government is United Technologies’ biggest customer, and accounts for about 13% of its yearly revenue. We feel that United Technologies’ diversification is one of its major strengths. All of its businesses are leaders in their industries. Plus, the company sells products to both original-equipment manufacturers and aftermarket customers. That cuts its risk. For example, when demand for new planes is weak, airlines will probably buy more replacement parts instead of new aircraft. When the economy improves, aircraft makers will order more new engines and electronics. This will offset lower sales of spare parts....

Here are four classic, profit-killing errors that all investors make from time to time. All can seriously hinder your stock market returns. 1. “Averaging down” without reconsidering whether you should have bought in the first place. Many investors have made lots of money by “averaging in” to the stock of a well-established, well-managed company — that is, buying more as funds became available over a period of years....

Lately, a number of readers have been asking me whether it’s worth holding onto their U.S.-stock holdings if the U.S. dollar keeps falling. Some wonder if they should follow their brokers’ suggestions and hedge against the risk of a drop in the U.S. dollar, using options, futures or other investment products. If you knew that the U.S. dollar would keep falling, the best portfolio management strategy would be to sell all of your U.S. stocks and buy them back when the dollar stabilizes. However, you don’t know where the U.S./Canada exchange rate is going next — you never do. The financial industry has a variety of products that can insulate your U.S. investments from a drop in the value of the U.S. dollar. These products obviously cost you money. In addition, they reduce the long-term value of your U.S. investments. After all, you invest in U.S. stocks for two key reasons. One is that the U.S. stock market offers certain types of investment opportunities that are rare or non-existent in Canada, such as giant multi-national consumer companies like Procter & Gamble or McDonalds. The other key reason for U.S. investment is that it gives you currency diversification. That’s crucial to a sound portfolio management strategy....