diversification

We’ve said for some time that insurers are riskier than they look. Insurance has a stable image, but it has always been highly competitive and volatile. For safety-conscious investors, right now we recommend just three Canadian insurance companies as buys: Manulife Financial, Great-West Lifeco and Sun Life Financial. SUN LIFE FINANCIAL $50.54 (Toronto symbol SLF; SI Rating: Above-average) offers savings, retirement, pension and life and health insurance products and services to individuals and corporations. The company operates mainly in Canada, the U.S. and the UK, and also in Asia and India. It has assets under administration of $436.5 billion. In the three months ended December 31. 2006, Sun Life’s earnings rose 14%, to $545 million or $0.95 a share, from $478 million or $0.82 a share a year earlier. Revenue rose 15%, to $6.1 billion from $5.3 billion a year earlier. The company recently raised its quarterly dividend by 6.7%, to $0.32 from $0.30. The shares now yield 2.4%....

It was great to see the Saturday, February 3, 2007 Globe & Mail Report on Business ranked Stock Pickers Digest as Canada’s top investor newsletter in 2006. (The Successful Investor, our flagship newsletter for less aggressive investors, was #3 in the Globe’s analysis.) We achieved this ranking despite a couple of formidable obstacles that we faced this past year. First, we advise Canadians to invest up to 30% or so of their money in U.S. stocks. However, the U.S. dollar moved down in relation to the Canadian dollar in the first half of 2006. This hurt our U.S. recommendations and detracted from our overall results. Second, the resources sector provided much of the market’s 2006 gains. Here too, diversification weighed on our results....

SUPERIOR PLUS INCOME FUND $11.07 (Toronto symbol SPF.UN) faces gradual shrinkage in its core propane distribution market. Its diversification into new areas such as pulp and paper chemicals and construction materials does not inspire our confidence. We don’t recommend Superior Plus. WESTSHORE TERMINAL INCOME FUND $11.49 (Toronto symbol WTE.UN) receives 90% of the revenue at its coal storage and loading terminal at Roberts Bank, B.C. from mines owned by the Elk Valley Coal Partnership. That concentration in a single facility, moving just one commodity and serving one customer almost exclusively, are major risk factors. Westshore is a sell. YELLOW PAGES INCOME FUND $12.81 (Toronto symbol YLO.UN) is Canada’s largest telephone directories publisher. The company already has around a 93% share in its markets in Ontario and Quebec, so there’s not a lot of room for growth. Yellow Pages’ assets consist mainly of intangibles and goodwill. These assets only have full value if the fund can maintain its market share and public recognition and loyalty as the leading brand. We don’t recommend units of Yellow Pages Income Fund....

We’ve said for some time that insurers are riskier than they look. Insurance has a stable image, but it has always been highly competitive and volatile. For safety-conscious investors, right now we recommend just three Canadian insurance companies as buys: Manulife Financial, Great-West Lifeco and Sun Life Financial. SUN LIFE FINANCIAL $45 (Toronto symbol SLF; SI Rating: Above-average) offers savings, retirement, pension and life and health insurance products and services to individuals and corporations. The company operates mainly in Canada, the U.S. and the UK, and also in Asia and India. It has assets under administration of $387.2 billion. In the three months ended June 30, 2006, Sun Life’s earnings rose 7.3%, to $512 million, or $0.88 a share, from $477 million or $0.81 a share a year earlier. Revenue rose 4.1%, to $6.2 billion from $6 billion a year earlier. The company recently raised its quarterly dividend by 9.1%, to $0.30 from $0.275. The shares now yield 2.7%....

TRANSALTA POWER, L.P. $8.08 (Toronto symbol TPW.UN; SI Rating: Extra risk) owns a 49.99% interest in TransAlta Cogeneration, L.P., which in turn holds interests in five gas-fired cogeneration plants in Ontario, Saskatchewan and Alberta, and in the Sheerness coal-fired plant in Alberta. TransAlta Power has secured long-term contracts for all of its power. Cogeneration is the simultaneous production of power and useful heat from a single fuel source. TransAlta Corp., one of our long-time safety-conscious stocks, owns the remaining 50.01% interest in TransAlta Cogeneration and is responsible for the operation and maintenance of the plants. TransAlta Power’s shares dropped recently after it released its results for the three months ended June 30, 2006. The company made $267,000 or nil per share, down from $3 million or $0.04 a share a year earlier....

CAE INC. $8.65 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Above average) is a leading maker of full-size, computerized flight simulators. Airlines use these devices to train pilots to fly certain aircraft, and to prepare flight crews to handle emergencies. CAE also makes simulators for military aircraft, including fighter jets and helicopters. In 2001, the company began operating pilot-training facilities, which nicely complements its simulator business. CAE is now the world’s second-largest provider of pilot training services, with 22 facilities on four continents. Demand for these services should grow, since it’s cheaper for airlines to send pilots to CAE’s schools than to train them in-house. CAE gets about half of its revenue from civilian airlines, and half from military organizations. That helps cut its exposure to the highly cyclical air travel industry. Revenue from continuing operations fell from $1.01 billion in 2002 (fiscal years end March 31) to $938.4 million in 2004, mostly due to the drop in air travel after 9/11. Revenue grew to $986.2 million in 2005, and to $1.11 billion in 2006....

When we last featured CAE on our front page in November, 2004, we said the stock could soar as airlines revived following 9/11. CAE went on to rise as much as 80%, even though it faced a couple of major negatives. First, the rise in oil prices strained the budgets of the world’s airlines, who buy the company’s flight simulators. Second, the rise in the Canadian dollar undermined the value of the company’s sales in foreign markets (and foreign customers provide 91% of CAE’s revenues). The stock could remain sluggish, along with the rest of the market, in the next few months. But over the next couple of years and beyond, after the impact of oil prices and the Canadian dollar has run its course, we expect further big gains from CAE....

GATEWAY CASINOS INCOME FUND $15.07 (Toronto symbol GCI.UN; SI Rating: Speculative) operates the Burnaby Casino and Cascades Casino in Vancouver, B.C., the Palace Casino in Edmonton, Alberta and the Lake City Casinos in Kamloops, Kelowna, Penticton and Vernon, B.C....

NORANDA INCOME FUND $11.85 (Toronto symbol NIF.UN; SI Rating: Speculative) operates the CEZ processing facility in Salaberry-de-Valleyfield, Quebec. The fund currently yields 8.6%. The fund’s exposure to zinc prices and its lack of geographic diversification add to its risk....

Income trusts as a group are more speculative than most investors realize. They carry a lot of hidden risk, due to the way they are organized as investments, and to the way they are valued by investors. Share prices of many companies rise in price when they announce plans to convert into income trusts. But that leaves a lot of room for share prices to fall when business conditions weaken. Income trusts are generally set up to hand out most of their cash flow to their investors. However, that often leaves them with no reserves to carry them through a period of slow sales and falling asset values....