oil prices

ALGONQUIN POWER INCOME FUND $2.88 (Toronto symbol APF.UN; Shares outstanding: 77.4 million; Market cap: $222.8 million; SI Rating: Extra Risk) dropped sharply in price recently after the fund cut its monthly distribution by 73.9%, to $0.02 from $0.0766. The units now yield 8.3%. Prior to the cut, the fund paid out around 100% of its cash flow in distributions. That payout ratio now drops to an estimated 30% for 2009. We advised against buying Algonquin last month on the possibility of a distribution cut. But while the fund’s expansion into alternative fuels such as landfill gas and wind power continues to add risk, it now looks more attractive....

IMPERIAL OIL $40.32 (Toronto symbol IMO; Shares outstanding: 869.7 million; Market cap: $35.1 billion; SI Rating: Average) is Canada’s largest integrated oil company. Imperial also operates 2,000 retail gas stations under the “Esso” banner. In the three months ended September 30, 2008, earnings per share rose 78.4%, to a record $1.57 from $0.88. The improvement came from higher oil and gas prices, plus higher profit margins at the company’s refining and chemical operations. Revenues rose 48%, to $9.5 billion from $6.4 billion. Imperial’s cash flow rose 78.5%, to $1.7 billion from $958 million in the latest quarter. Cash flow per share rose 87.5%, to $1.95 from $1.04, due to continued aggressive stock buybacks....

CANADIAN PACIFIC RAILWAY LTD. $51.90 (Toronto symbol CP; Shares outstanding: 153.8 million; Market cap: $8.0 billion; SI Rating: Average) reports that in the three months ended September 30, 2008, earnings per share excluding one-time items fell 2.4%, to $1.20 from $1.23. Like most railways, CP uses special surcharges to offset its higher fuel costs. Thanks mainly to these surcharges, revenue grew 6.5%, to $1.3 billion from $1.2 billion. CP’s fuel costs rose 49% in the third quarter. Consequently, its operating ratio (regular operating costs divided by revenue — the lower, the better) weakened to 76.0% from 72.9% a year earlier. However, falling oil prices and the benefits of a new productivity improvement plan should help CP cut its costs in fourth quarter. CP Rail is still a safety-conscious buy.

These two growth stock picks face slowing growth caused by weakness in the economy, but fuel is a key cost for both of them, so these growth stock picks stand to gain from the recent plunge in oil prices. ARKANSAS BEST CORP. $28 (Nasdaq symbol ABFS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 25.3 million; Market cap: $708.4 million; WSSF Rating: Average), provides less-than-truckload shipping services, which combine freight from multiple customers into a single truck. Arkansas Best carries freight that includes food, textiles, apparel and furniture. Higher fuel costs have hurt Arkansas Best’s earnings growth this year. As well, its labour costs increased because of a new deal with its main union....

FORDING CANADIAN COAL TRUST $85 (Toronto symbol FDG.UN) continues to trade below Teck Cominco Ltd.'s takeover offer of $82.00 U.S. in cash plus 0.245 of a Teck class B subordinate voting share. The offer is now worth $97.27 per Fording unit. The deal should close on October 30, 2008. As we recommended in August, 2008, you should sell your Fording units if you hold them outside of an RRSP. If you hold them in an RRSP, you should tender your units to Teck. NORTEL NETWORKS CORP. $1.79 (Toronto symbol NT) has cut its revenue and earnings outlook for 2008, due to slowing demand for telecommunications equipment, unfavourable foreign exchange rates and delays delivering certain products. Sell from your aggressive portfolio. PENGROWTH ENERGY TRUST $11 (Toronto symbol PGF.UN) has moved down lately along with oil prices. Lower prices could prompt Pengrowth to cut its monthly distribution of $0.225 a unit (24.5% yield). Even if the trust cut the rate in half, the units would still yield over 12%. Buy for your aggressive portfolio....

SHAWCOR LTD. $17 (Toronto symbol SCL.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 71.0 million; Market cap: $1.2 billion; SI Rating: Average) makes sealants and coatings that protect onshore and offshore oil and natural gas pipelines from corrosion. Thanks to high oil prices and a surge in new pipeline construction, ShawCor’s stock jumped to $40 in October, 2007. However, the stock has moved down since then, partly due to the rise in the Canadian dollar. Overseas markets account for about 75% of ShawCor’s revenue, and a strong dollar hurts the contribution of these foreign operations to the company’s overall earnings. As well, rising raw material and labour costs have also weighed on its profit growth. In the second quarter of 2008, earnings fell 24.4%, to $0.31 a share (total $22.2 million) from $0.41 a share ($30.3 million) a year earlier. Revenue rose 6.8%, to $295.1 million from $276.4 million. The higher Canadian dollar cut revenue in the latest quarter by $12.9 million....

Stocks in our Aggressive Portfolio, such as these four, tend to be more highly leveraged and more volatile than those in our Conservative Growth or Income-Seeking Portfolios. These four also operate in the Manufacturing sector, which is generally more risky than, say, Utilities. As well, they serve narrow markets or cyclical industries. Due to the recent stock market turmoil, many investors will consider selling stock from their aggressive portfolio. We feel you should resist the urge to sell high-quality companies, even if they are in your aggressive portfolio, just because you feel they could go lower. We still have a high opinion of these four companies from our Aggressive Portfolio, and they should all rebound strongly as the economy improves. However, only three are buys right now. GENNUM CORP. $6.65 (Toronto symbol GND; Aggressive Portfolio, Manufacturing & Industry sector; Shares outstanding: 35.6 million; Market cap: $236.7 million; SI Rating: Above average) makes equipment that lets broadcasters store, manipulate and transport video signals without losing picture quality. This business accounts for 80% of Gennum’s total sales. The remaining 20% comes from making chips that improve the speed and reliability of transmissions in computer networks....

TERANET INCOME FUND $9.50, Toronto symbol TF.UN, has received a new takeover offer from the Ontario Municipal Employees Retirement System (OMERS). The new offer of $10.25 a unit is 6.8% less than the previous offer of $11.00. Teranet’s units are now trading for roughly 7% below the new offer. The lower offer reflects a slowing economy in Ontario and falling real estate values. That could hurt demand for Teranet’s electronic land registry services. As well, it’s increasingly difficult to secure loans for corporate takeovers. Teranet recommended that investors accept the first OMERS offer, after it failed to attract other bidders. Teranet has not yet commented on the new offer of $10.25 a unit. However, it’s still unlikely that a new bidder will emerge. As well, Teranet’s second-largest shareholder has accepted the new offer....

THE BOEING CO. $52.42, New York symbol BA, has agreed to a new contract with its striking machinists union. The strike began in early September, and probably cost Boeing $100 million a day in lost revenue. The company hopes this new agreement will help it secure a new contract with its engineers and technical workers, whose current contract expires on December 1, 2008. Meanwhile, Boeing’s third-quarter earnings fell 34.3%, to $0.94 a share from $1.43 a year earlier. The decline was mostly due to the strike. Revenue fell just 7.4%, to $15.3 billion from $16.5 billion, as strong growth at its military products division helped offset lower sales of commercial planes. Boeing’s order backlog now stands at a record $349.4 billion, which is equal to over five times its annual revenue. The slowing economy could prompt some airlines to delay or cancel their orders. However, about 90% of the backlog for commercial jets comes from overseas airlines, many of which receive financial subsidies from their governments. Demand for new fuel-efficient planes, such as the 787 Dreamliner, also remains strong....

I still feel that government efforts now underway are likely to solve today’s financial crisis. However, these steps come at a price. My best guess is that we’ll see much higher inflation as a result of all this newly supplied liquidity, probably in the early part of the next decade. My view is that you should keep this inflationary potential in mind, but it’s too early to try to profit from it. That’s partly due to the drawbacks of Resources stocks. They do provide a handy hedge against inflation, and even many of the most pessimistic observers now feel that resource prices are bound to rise in the next few years, as millions of Indian and Chinese workers pole-vault into the middle class. But many pessimists felt the same way following the last great resource and commodity boom, in the 1970s and 1980s. After that boom ended, the sector went into a slump that lasted 15 years or more....