option

CANADIAN PACIFIC RAILWAY LTD. $36 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 167.7 million; Market cap: $6 billion; Price-to-sales ratio: 1.2; SI Rating: Above Average) ships freight over a 25,000-kilometre rail network between Montreal and Vancouver. In the United States, its subsidiaries connect its Canadian lines to major hubs in the midwest and northeast. Alliances with other railways extend CP’s reach to Mexico. CP made 29% of its 2008 revenues hauling shipping containers loaded with a variety of goods. Grain accounted for 20% of its revenues, followed by industrial products (16%), coal (13%), fertilizers (10%), automotive products (7%) and forest products (5%). CP’s many revenue sources cut its reliance on any single commodity or industry. Thanks largely to expanding trade with Asia, CP’s revenue rose 20.6%, from $3.9 billion in 2004 to $4.7 billion in 2007. Earnings rose 87.1%, from $359.5 million in 2004 to $672.8 million in 2007. Earnings per share rose 91.2%, from $2.26 to $4.32 on fewer shares outstanding....

CP’s shares soared to a high of $90 in July 2007. They have since fallen 60%, to $36. The stock was probably overpriced at $90 and 21 times earnings. But it now trades at 9.1 times this year’s forecast earnings, and it yields 2.8%. This well-established company is a mainstay of the Canadian economy. It’s a rare low-risk treat to be able to buy it at today’s bargain level. CANADIAN PACIFIC RAILWAY LTD. $36 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 167.7 million; Market cap: $6 billion; Price-to-sales ratio: 1.2; SI Rating: Above Average) ships freight over a 25,000-kilometre rail network between Montreal and Vancouver. In the United States, its subsidiaries connect its Canadian lines to major hubs in the midwest and northeast. Alliances with other railways extend CP’s reach to Mexico....

AGRIUM INC., $46.00, Toronto symbol AGU, may now mail its $67.75 cash-and-stock offer to buy U.S.-based fertilizer producer CF Industries Holdings Inc. (New York symbol CF), directly to CF’s shareholders, now that CF’s management has rejected it (all amounts except share price in U.S. dollars). CF’s stock is now trading at $68.61, which indicates that investors anticipate a higher bid. Agrium’s offer for CF is worth roughly $3.3 billion (56% of the offer is stock and 44% is cash). This is a big acquisition for Agrium, which earned $1.3 billion, or $8.34 a share, in 2008 However, CF has a shareholder-rights plan that lets shareholders buy new shares at half the market price if an investor tries to buy more than 15% of the outstanding shares without the approval of CF’s directors. This makes hostile takeovers like Agrium’s less likely to succeed....

Energy Savings Income Fund, $10.40, symbol SIF.UN on Toronto (Shares outstanding: 106 million; Market cap: $1.1 billion), sells natural gas to homeowners, small to mid-sized businesses and small industrial customers under long-term, fixed-price contracts. The income trust sells gas in Ontario, Quebec, B.C., Alberta and Manitoba, as well as Illinois and Indiana. Energy Savings started up in 1997, and began trading on Toronto in April 2001. The trust first sold units to the public at $10. Energy Savings also markets electricity in Ontario, Alberta, New York and Texas....

MASTERS ENERGY, $1.65, Toronto symbol MSY on Toronto, jumped over 40% this week after it received a friendly $41.4-million takeover offer from ZARGON ENERGY TRUST, $13.54, symbol ZAR.UN on Toronto. To fund the purchase, Zargon plans to pay out a maximum of $5.7 million in cash. It will also issue up to 1.49 million trust units. Zargon is offering Masters shareholders a cash option and a units-plus-cash option. Under the cash option, Zargon will pay $1.83 for each Masters common share tendered until it reaches its maximum cash payout. Any remainder will be paid in Zargon units. Under the second option, each Masters common share may be exchanged for 0.12 of a Zargon unit. This option will also be pro-rated according to Zargon’s unit and cash maximums....

Sherritt International, $2.03, symbol S on Toronto (Shares outstanding: 293.1 million; Market cap: $595 million), is a diversified natural-resource company that produces nickel, cobalt, thermal coal (which is burned for electricity generation), potash, oil and gas. Sherritt also manages 376 megawatts of electricity-generation capacity in Cuba. The company also licenses its proprietary mining technologies to other metals companies. With nine open-pit mines, Sherritt is Canada’s largest thermal coal producer. It is also developing Canada’s first coal gasification project. (Coal gasification is a process for converting coal partially or totally into gases. Like coal, the gases can then be burned to create heat, but they burn much cleaner and generate fewer harmful emissions.) Sherritt also produces about 31,189 barrels of oil equivalent per day from properties in Cuba, Spain and Pakistan. Coal accounts for 53% of Sherritt’s revenues, metals (nickel and cobalt) account for about 25%, oil and gas, 12%, power generation, 8% and other, 2%....

BCE INC., $26.12, Toronto symbol BCE, earned $1.8 billion in 2008, down 3.9% from $1.9 billion in 2007. Earnings per share fell 3.8%, to $2.25 from $2.34 on more shares outstanding. Revenue fell 0.3%, to $17.7 billion from $17.75 billion. These figures exclude restructuring charges, mainly job cuts, and other one-time items. The restructuring should cut BCE’s annual expenses by $400 million. BCE continues to lose traditional phone customers to cable companies and Internet-based phone services, but these losses are slowing. Meanwhile, BCE’s cellphone business is growing strongly; revenue rose 7.6% in 2008, and its subscriber base grew by 4.5%. The wireless division accounts for 25% of BCE’s revenue and 43% of its profit. Higher demand for BCE’s high-speed Internet and satellite-TV services helped offset lower revenue from its traditional phone services. Despite the lower earnings, BCE raised its quarterly dividend by 5.5%, to $0.385 a share from $0.365. The new annual rate of $1.54 yields 5.9%....

NORTHBRIDGE FINANCIAL CORP. $38.40, symbol NB on Toronto, rose over 26% this week after Fairfax Financial Holdings, symbol FFH on Toronto, announced that it will make an offer to acquire the shares of Northbridge it does not already own. Fairfax hopes to complete the transaction in the first quarter of 2009. Fairfax, which currently has a 63.1% interest in Northbridge, is offering $39 a share in cash for a total of $686 million to obtain the 36.9% interest outstanding. We recommended Northbridge as a buy at $31 in the most recent issue of Stock Pickers Digest. That’s when we pointed out that the chance of a Fairfax takeover of the company added to its appeal....

HEWLETT-PACKARD CO. $34.64, New York symbol HPQ, has reported preliminary earnings that exceed consensus forecasts. In its fourth fiscal quarter ended October 31, 2008, the company earned $1.03 a share before unusual items, up 19.8% from $0.86 a year earlier. The consensus estimate was for $1.00 a share. Sales grew 18.7%, to $33.6 billion from $28.3 billion. If you disregard Hewlett’s recent purchase of Electronic Data Systems Corp., sales improved 5%. Despite the downturn in consumer spending, Hewlett expects that cost cuts will let it earn $0.94 a share in the first quarter of fiscal 2009, up 9.3% from $0.86 a year earlier. As well, the company’s large international operations (two-thirds of its revenue) and diverse range of products and services should continue to help it expand sales. Hewlett-Packard is a buy....

Many aggressive investors find the lure of stock option investing hard to resist. However, despite their appeal, the vast majority of investors lose money with options. An option is a contract between a buyer and a seller, based on an underlying security, usually a stock. The buyer pays the seller a fee, or premium, for certain rights to the stock. In exchange for the premium, the seller assumes certain obligations. Options trade through stock exchanges, with prices quoted each day in the financial section of newspapers. Each options contract is for 100 shares of stock. So one contract quoted at $5 will cost you $500 (before commissions). Each contract has a limited life span, or time to expiry — usually less than nine months. The expiry date is the date on which the contract expires. The strike, or exercise price, is the price at which the rights granted to the buyer can be exercised. There are two types of options:...