option

HOME CAPITAL GROUP INC. $39.51, Toronto symbol HCG, earned $2.59 a share in 2007, up 32.8% from $1.95 in 2006. Revenue grew 30.6%, to $368.9 million from $282.5 million. The company’s loan portfolio rose 21.5%, mainly due to strong demand for residential and commercial mortgages. Home Capital has no exposure to the U.S. mortgage market. Receivables on its Equityline Visa credit cards rose 40.2% in 2007. The strong results let Home Capital increase its dividend for the eighth time in the past five years. The new annual rate of $0.48 a share, up 9.1% from $0.44, yields 1.2%. Home Capital Group is a buy....

MICROSOFT CORP. $30.45, Nasdaq symbol MSFT, has launched an unsolicited offer to buy Internet search provider Yahoo! Inc. for $44.6 billion in cash and stock. Microsoft will limit the cash portion to 50% of the total payout. To put the price in perspective, Microsoft earned $4.7 billion or $0.50 a share in its second fiscal quarter ended December 31, 2007. The company holds cash of $21.1 billion or $2.26 a share. The offer represents a 62% premium for Yahoo’s stockholders, so a competing bid seems unlikely. Yahoo may try to find other bidders. However, recent writedowns of subprime mortgages have limited the willingness of banks to provide financing for big takeovers like this. Microsoft feels it can save $1 billion in costs a year by combining Yahoo with its MSN online search business. The Internet advertising market is growing fast, and the combination will help Microsoft compete more effectively with market leader Google. The deal would also give Microsoft access to Yahoo’s fast-growing search businesses in Asia....

BCE INC. $36.29, Toronto symbol BCE, is trading nearly 15% below the $42.75-a-share takeover offer it accepted in July 2007. This is partly because several institutional holders of BCE bonds have launched a class-action lawsuit to oppose it. BCE’s plan to take on more debt has hurt the value of their holdings. If the suit succeeds and forces BCE to compensate the bondholders for their losses, the Ontario Teachers’ Pension and its partners may decide to abandon the takeover. Liquidity problems in the debt markets could also scuttle the takeover, since that could hurt the ability of the takeover consortium to issue new bonds. This group has also lined up loans from several banks, but recent writedowns of U.S. subprime mortgages have raised fears that these banks may withdraw or cut their involvement. However, lower interest rates will cut the buyers’ costs. The drop in BCE suggests that the takeover is unlikely to go through. But at the current reduced price, BCE is once again an attractive buy for income and growth....

Today many people seem sure that the subprime situation and associated problems will bring on a long-term market decline that could carry stock prices much lower. When conclusions like these become widespread, the conclusion or the timing or both are often wrong. Think back to how many people agreed with former Federal Reserve Board Chairman Alan Greenspan’s famous (or notorious) ‘irrational exuberance’ speech, in December, 1996. Yet nearly four years passed before the market hit its ultimate peak. In between the Greenspan speech and 2000 market peak, we went through a market setback in response to an economic crisis that started in Thailand in 1997....

H&R BLOCK INC. $18 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 325.0 million; Market cap; $5.9 billion; WSSF Rating: Above average) has cancelled its deal to sell its Option One mortgage business, due to increasing default rates in the subprime mortgage market and falling home prices. The company now plans to shut down its mortgage operations and focus on its more profitable businesses — tax preparation, accounting and brokerage services. One-time costs to wind down the mortgage division increased H&R Block’s losses from continuing operations in its second fiscal quarter ended October 31, 2007, to $0.42 a share (total $136.1 million) from $0.38 a share ($121.0 million) a year earlier. The company typically loses money during this quarter, as it earns most of its income during the January to April tax filing season. Revenue from continuing operations rose 9.8%, to $434.8 million from $396.1 million....

MDS INC. $19 (Toronto symbol MDS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 122.5 million; Market cap: $2.3 billion; SI Rating: Average) is now 16.8% owned by activist investor ValueAct Capital Management LLC. That’s up from 6.6% in May, 2007. ValueAct will likely spur MDS to move more aggressively with its current restructuring plan. Meanwhile, MDS has agreed to sell two of its product lines for an undisclosed sum. These businesses, which make radiation equipment that sterilize blood and treat cancer, account for 3% of MDS’s annual revenue. The sale will let MDS focus on its more promising medical isotope business. MDS is still a hold....

H&R BLOCK INC. $20.02, New York symbol HRB, has canceled a deal to sell its Option One mortgage business due to the problems in the mortgage securities market and slumping home prices. Instead, the company will wind down its mortgage operations. It also plans to sell its mortgage servicing business, which collects loans on behalf of other lenders. These moves will cost H&R Block about $200 million (pre-tax). To put that in context, the company lost $302.6 million or $0.93 a share in the three months ended July 31, 2007, including a $192.8 million loss from Option One. Despite the extra charges, steadily getting out of the mortgage business cuts H&R Block’s long-term risk, and lets its focus on its core tax preparation, accounting and wealth management operations....

BANK OF NOVA SCOTIA $52.15 (Toronto symbol BNS: SI Rating: Above average) ranks second among Canada’s five big banks, with assets of $408.1 billion. It has over 1,000 branches in Canada. In the three months ended July 31, 2007, Bank of Nova Scotia earned $1.02 billion or $1.03 a share, up 9.5% from $928 million or $0.94 a share a year earlier. Net interest income rose 5.6%, to $1.8 billion from $1.7 billion. Other income (which includes wealth management) rose 18.4%, to $1.4 billion from $1.2 billion. The bank’s shares currently yield 3.5%. The bank expects to write down some of its asset-backed securities in its fiscal fourth quarter ended October 31, and take an after-tax charge of around $135 million. However, a $160 million after-tax gain from the Visa restructuring will offset the writedown....

Bank of Nova Scotia moved down in November along with most financial services stocks, mainly because of concerns over a general lack of liquidity for asset-based securities. However, its shares have already recovered, and the upcoming writedown of its own asset-based securities shouldn’t hurt its strong profit and dividend outlook. BANK OF NOVA SCOTIA $52.15 (Toronto symbol BNS: SI Rating: Above average) ranks second among Canada’s five big banks, with assets of $408.1 billion. It has over 1,000 branches in Canada. In the three months ended July 31, 2007, Bank of Nova Scotia earned $1.02 billion or $1.03 a share, up 9.5% from $928 million or $0.94 a share a year earlier. Net interest income rose 5.6%, to $1.8 billion from $1.7 billion. Other income (which includes wealth management) rose 18.4%, to $1.4 billion from $1.2 billion. The bank’s shares currently yield 3.5%....

THE STANLEY WORKS $51 (New York symbol SWK; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 82.2 million; Market cap: $4.2 billion; WSSF Rating: Average) makes a wide variety of hand and power tools for consumers and industrial users. In addition to the Stanley brand, the company’s best-known trademarks include Bostitch, Husky, Monarch, and Mac Tools. It sells its products through home improvement chains such as Home Depot and Lowe’s, and independent distributors. In the past few years, Stanley has spent $2 billion on acquisitions to shift its focus from consumer products to industrial products and building security systems, which have steadier revenue streams....