option

An investor recently asked us a question that touches on several stock market investing concepts that we cover in our Canadian Wealth Advisor newsletter. He said, “Due to a corporate reorganization, I now have the option of cashing in $279,000 from insurance-company mutual funds, then transferring the money into my brokerage RRSP account. I prefer to invest the money directly in stocks you recommend, rather than hold mutual funds from my insurance company. However, the insurance company tells me that I have to cash in the funds first, then wait at least six weeks for the money to turn up in my brokerage RRSP account. I’m concerned that the market will turn up while the money is in transit and I’ll wind up missing out. What should I do?”...

BROADRIDGE FINANCIAL SOLUTIONS INC., $20.30, New York symbol BR, reported this week that its earnings rose 16.2% in the fiscal year ended June 30, 2009, to $1.58 a share from $1.36 in the prior year. If you disregard unusual items, including a gain on the early retirement of debt and a tax credit that lowered its effective income-tax rate, Broadridge’s earnings per share rose 6.3%, to $1.51 from $1.42. The improved earnings came despite difficult conditions in the financial sector. Broadridge serves the investment industry in three main areas: investor communications; securities processing; and transaction clearing, trade settlements and other back-office operations. Its clients include 250 banks, 500 mutual-fund families and 5,000 publicly listed companies....

GREY ISLAND SYSTEMS INTERNATIONAL $0.36, symbol GIS on Toronto, has risen almost 30% over the last week. That’s after it received a friendly takeover offer from WebTech Wireless (symbol WEW on Toronto). Under the offer, Grey Island shareholders will receive 0.30 of a WebTech share for each Grey Island share they hold. Based on WebTech’s current trading price, that translates to $0.40 per Grey Island share. WebTech’s technology integrates the Global Positioning System (GPS), wireless communications and the Internet to provide fleet operators with real-time information about the location and status of their vehicles....

The Webb Enhanced Income Fund is a mutual fund whose portfolio mainly consists of large-capitalization stocks. It also holds some income trusts and bonds. Resource shares make up the largest component of its stock holdings, at 41%. The fund lost 26.5% in the year ended June 30, 2009, compared to a loss of 29.6% for the S&P/TSX Index. The fund pays a $0.05 monthly distribution, which gives it an 8.2% yield based on the current unit price. The Webb Enhanced Income Fund aims to increase its returns by writing call options. Call-option holders have the option to buy the underlying shares from the fund at a specified price. The fund earns a premium on the call option, whether or not it’s exercised. The problem with covered-call writing is that you have to hold the stocks on which you’ve sold calls, even when prices drop; if you sell those stocks, your calls are no longer “covered”, and you expose yourself to far more risk. But when the market rises, call holders exercise their calls and you have to sell your stocks at a fixed price. In other words, if it goes down, you have to hang on; if it goes up, you have to sell. In addition, regardless of market trends, you pay a heavy toll in brokerage commissions. These eat away at your capital....

Sanofi-Aventis, $32.71, symbol SNY on New York (ADRs outstanding: 2.7 billion; Market cap: $86.1 billion), is the world’s fourth-largest drug company, and the largest in continental Europe. In August 2004, Sanofi-Synthelabo bought Aventis and became Sanofi-Aventis. Paris-based Sanofi gets 90% of its sales from pharmaceuticals. Vaccines, which it sells through subsidiary Sanofi-Pasteur, make up the other 10%. Sanofi-Pasteur makes 20 vaccines, and is the leading supplier to the U.S. Europe accounts for about 37% of Sanofi-Aventis’s sales, followed by North America (33%) and rest of the world (30%). Its major drugs include Lovenox (strokes), Plavix (blood clotting), Ambien (insomnia), Taxotere (cancer), Eloxatin (colon cancer), Lantus (insulin), Copaxone (multiple sclerosis), Aprovel (high blood pressure) and Allegra (hay fever)....

H&R BLOCK INC. $17 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 334.1 million; Market cap: $5.7 billion; Price-to-sales ratio: 1.4; WSSF Rating: Above Average) is the world’s largest provider of income-tax-preparation services. It operates 12,923 offices in the U.S., as well as 1,193 in Canada and 378 in Australia. Franchisees own 34% of H&R Block’s U.S. tax-preparation offices. The tax-services division accounts for 74% of the company’s revenue. The company gets 22% of its revenue by selling tax-consulting and accounting services to businesses though subsidiary RSM McGladrey Inc. The remaining 4% comes from banking services, including chequing accounts, loans and credit cards that H&R Block issues to its tax-preparation clients. H&R Block’s earnings fell from $1.88 a share (or a total of $635.9 million) in 2005 to $1.15 a share (or $374.3 million) in 2007. (H&R Block’s fiscal year ends April 30.) The drop was mainly caused by losses at its Option One subsidiary, which specialized in subprime mortgages to H&R Block’s tax clients and other borrowers. In 2008, the company sold Option One, along with its brokerage and wealth-management subsidiary, as part of its plan to focus on its more profitable tax and accounting operations. These moves helped H&R Block’s earnings improve to $1.53 a share (or $513.1 million) in fiscal 2009. The company’s revenue rose from $4.4 billion in 2005 to $4.9 billion in 2006, but dropped to $4.0 billion in 2007. It recovered to $4.4 billion in 2008, but fell to $4.1 billion in 2009....

H&R Block’s tax-preparation business has seen less traffic as more tax filers switch to do-it-yourself software. While the company’s own software is selling well, it generates fewer profits than serving clients directly. That’s partly why the stock is down 40% from the $28 it reached in September 2008. However, tax software works best for those with simple tax situations, and upcoming changes to the U.S. tax code should prompt more people to seek professional advice. As well, the company recently sold its mortgage and brokerage businesses. This lowers its volatility. H&R BLOCK INC. $17 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 334.1 million; Market cap: $5.7 billion; Price-to-sales ratio: 1.4; WSSF Rating: Above Average) is the world’s largest provider of income-tax-preparation services. It operates 12,923 offices in the U.S., as well as 1,193 in Canada and 378 in Australia. Franchisees own 34% of H&R Block’s U.S. tax-preparation offices. The tax-services division accounts for 74% of the company’s revenue. The company gets 22% of its revenue by selling tax-consulting and accounting services to businesses though subsidiary RSM McGladrey Inc. The remaining 4% comes from banking services, including chequing accounts, loans and credit cards that H&R Block issues to its tax-preparation clients....

Recently, we’ve heard from some investors who sold most or all of their stocks and mutual funds during the recent downturn. Now, a number of these investors want to get back in, and many are considering Canadian mutual funds. But they wonder whether they should buy now or wait to see if the TSX, which has climbed over 40% from its March 2009 low, will fall again and offer lower prices. In deciding whether to buy now or wait, however, many investors focus on the market outlook. But it’s the one factor that offers you the least advantage in making a decision. That’s because nobody knows for sure what the market will do.

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FORD MOTOR CO. $5.64 (New York symbol F; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 3.2 billion; Market cap: $18.1 billion; Price-to-sales ratio: 0.1; WSSF Rating: Speculative) has rallied from $1.01 last November, partly on expectations that it stands to gain market share in the wake of the bankruptcies of GM and Chrysler. Ford is taking advantage of its higher stock price, and in May issued 300 million common shares at $4.75 each. The proceeds of $1.4 billion will help it meet its obligations to its retired employees’ health-care fund. Ford has the option of paying half with shares valued at around $2 each. But, issuing the shares now at $4.75 means Ford won’t have to issue issue more later. Ford is a hold.

INTUITIVE SURGICAL $150.66 (Nasdaq symbol ISRG; SI Rating: Average) (515-507-5000; www.intuitivesurgical.com; Shares outstanding: 37.9 million; Market cap: $5.7 billion) makes the “da Vinci,” a computerized surgical system. Intuitive’s shares trade at a high price, but you can buy as few as 10 through any broker. Guided by a miniature camera connected to a 3-D monitor, surgeons use the da Vinci to operate by remotely manipulating tiny robotic arms. This is safer and far less invasive than regular surgical techniques, and helps cut a patient’s recovery time and post-operative discomfort. It also reduces scarring and infection risk. To date, Intuitive has sold 1,171 da Vinci systems. In the three months ended March 31, 2009, Intuitive earned $28.1 million, or $0.72 a share. That was down 37.2% from $44.8 million, or $1.16 a share, a year earlier, because of higher stock-option costs....