9/6/11: Canadian Businesses: Still Solid, Still Growing

By Roger Conrad • September 2, 2011

Student Transportation Inc (TSX: STB, NSDQ: STB) will begin trading on the Nasdaq Sept. 6, with founder and CEO Denis Gallagher ringing the opening bell. Shares previously listed over-the-counter in the US should then trade under the new symbol STB.

The Nasdaq listing will increase the company’s visibility in the US, where it earns the majority of its revenue. That should aid its ability to raise capital, even as it builds revenues with acquisitions and new contract wins in the school-bus-operator business.

Cash-strapped municipalities that still run the majority of US bus systems are increasingly outsourcing to cut costs. Last week Student Transportation announced it’s been awarded 10 new contracts to provide pupil transportation during this fiscal year. It also affirmed a fourth acquisition for this year will close by the end of the month, locking in 12 percent growth for fiscal 2012.

Meanwhile, Just Energy Group Inc (TSX: JE, OTC: JUSTF) announced the purchase of Fulcrum Power Services’ retail electricity business, adding some 240,000 business and consumer customers in Texas. The deal is expected to close by Oct. 1 and will immediately boost earnings as well as increase the company’s scale in the Lone Star State.

Newalta Corp (TSX: NAL, OTC: NWLTF) won a CAD60 million contract to process oil sands mature fine tailings, a dense mixture of clay, silt and water. That’s just the company’s latest move into this fast growing business, which generates huge amounts of waste. And it opens the door to rapid growth going forward as the company constructs a commercial-sized facility.

All three of these companies remain solid buys, Student Transportation under USD7, Just Energy under USD16 and Newalta under USD15. And these are just some of the latest moves being made by Canadian Edge Portfolio companies to boost future cash flow.

In a turbulent market like this one, such wealth-building moves can take a while to show up in higher share prices. Sooner or later, however, stocks will follow growing businesses to higher ground. All investors really have to do to build their own wealth is to buy and hang on for the ride.

In a weak market where economic growth is slow and jagged, any business can stumble. That’s why it never pays to really load up on any one company, no matter how cheap it may look.

Rather, the key is to hold a basket of high-yielding stocks backed by strong businesses. As long as these are solid, you stick with them, no matter how crazy the market action gets. And should one falter as a business, you get out and replace it with something else.

In a market like this one, it can be difficult to follow this kind of bottom up portfolio strategy. In fact, market action on any given day is influence by any number of factors, none of which may have anything to do with individual company developments.

Canadian Edge Portfolio companies did come through second-quarter earnings season in very strong shape as businesses. Even companies that faced tough challenges–notably Extendicare REIT (TSX: EXE-U, OTC: EXETF) in the wake of lower Medicare rates–were able to affirm the strength of their current dividends.

That didn’t save them from losing ground as stocks in August. The hardest hit were Aggressive Portfolio Holdings, many of which follow the ups and downs of energy prices. Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE), for example, was hammered by lower oil prices, even as Perpetual Energy Inc (TSX: PMT, OTC: PMGYF) took a hit from lower gas prices.

Neither company is financial trouble. And both companies’ dividends appear solid. But that’s been clearly trumped by investor worries about the possibility of a new global recession later this year and its possible impact on energy prices. That same concern has also taken its toll on many Conservative Holdings, despite the fact that most of their underlying businesses proved themselves quite recession resistant even in 2008-09.

Unfortunately, I can’t guarantee to anyone that our stocks won’t stay volatile in the coming weeks, and lose more ground if the fear level rises further. And the only way to fully protect against stock market volatility is not to own stocks, which is simply not an option for anyone living off their investments.

What I can say is this: As long as our holdings remain solid as businesses, they will recover from whatever hardship they suffer in the ongoing market turmoil, just as they did from the meltdown of 2008-09, which was the worst market crash/credit crunch/recession in 80 years.

That’s why my primary goal at CE is always to ensure our picks stay strong as businesses. Successfully continuing to grow as Student Transportation, Just Energy and Newalta did this week is one guarantor that companies are still on solid ground. Robust numbers posted in the second quarter and subsequent strong management guidance provide still more assurance.

Here once again is where to find my analysis of each company. Look for more on all of our holdings in the September Canadian Edge, which will be published Friday, Sept. 9.

Conservative Holdings

Aggressive Holdings

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