When a stock you own lags the rest of your holdings by a significant margin, it’s time to ask a basic question: Are investors oblivious to value–as they often are–or is something really wrong with the underlying business?

If the problem is with the business, it’s almost always time to move on. The stock may be cheap, and the company may repair its fortunes. In fact, if you’ve been exacting in choosing high-quality enterprises, that more than likely will prove to be the case–and you’ll ride a nice recovery in addition to capturing a high yield. On the other hand, these are the kinds of stocks that can really knock a hole in your portfolio, even if everything else does well. Rarely is that a risk worth taking.

If the underlying business is still solid, underperformance is a popularity problem. There may be some headline issue holding back buyers. But as long as the numbers are in good shape, they’ll eventually come in, and last year’s underperformer will rapidly become this year’s outperformer.

That’s the bet I’m making with both of February’s High Yield of the Month selections: Daylight Energy Ltd (TSX: DAY, OTC: DAYYF) and IBI Group (TSX: IBG, OTC: IBIBF). Daylight returned roughly 15.6 percent for 2010 in US dollar terms. About half of that was due to the rising Canadian dollar, however, as the stock is actually underwater the past 12 months in home currency terms. IBI units, meanwhile, dropped 15.4 percent even in US dollar terms last year, for a negative total return of 5.7 percent.

That was well below the 40 percent average total return for Canadian Edge Holdings in 2010. Moreover, underperformance stretches back to 2009 as well. IBI is currently 73 percent above its Dec. 19, 2008, low but only sells for 57 percent of its market value at its Nov. 9, 2007, all-time high. Daylight, meanwhile, is more than twice its Mar. 6, 2009, low but barely half its May 12, 2006, all-time high.

In Daylight’s case the underperformance is directly attributable to its production weighting toward natural gas in recent years. When I initially recommended the company in early 2009, CE Associate Editor David Dittman and I were particularly impressed by management’s strategy as a small producer trying to get bigger without over-leveraging itself.

The basic approach–as highlighted in the May 2008 High Yield of the Month–was to buy properties adjacent or nearby to where larger firms were aggressively developing. As a result management has been able to learn the geology and therefore the best technology to develop many of the most prolific finds in Canada, without taking on the risk or cost of drilling the proverbial dry hole.

Back in mid-2008 development was mostly of natural gas, which contributed nearly 60 percent of overall output that year, versus 24 percent light oil, 12 percent heavy oil and 5 percent natural gas liquids (NGL). By late 2010, however, management was increasingly focusing on the much stronger market for liquids.

Third-quarter 2010 numbers showed a 162 percent increase in production of oil and NGLs, by far the lion’s share of an overall output boost of 79 percent from year-earlier numbers. Remarkably, Daylight posted that sizzling production growth even as it boosted proven reserves by 40 percent in the first nine months of last year.

We probably won’t have full-year and fourth-quarter 2010 numbers for Daylight until early March, when it normally schedules its earnings release and conference call. The company, however, has provided extensive guidance on its expected 2011 production and capital spending.

In contrast to last year, overall production is expected to grow only slightly, to a range of 42,000 to 42,500 barrels of oil equivalent per day (boe/d) from a 2010 “exit rate” of 41,500 boe/d, net of 3,800 boe of “non-core” production sold during 2010. Rather, the primary effort is on expanding liquids’ share of the overall output mix, while strictly managing capital costs and debt.

Despite absorbing taxes as a converted corporation since May 2010, Daylight has fully funded its dividend and capital spending with operating cash flow. That’s a policy it expects to follow in 2011, paying an initial monthly dividend of CAD0.05 per share and funding a CAD250 million capital budget.

The focus is on the company’s core Deep Basin assets, which are strongly weighted to light oil and NGLs. Daylight has been able to utilize horizontal and directional drilling in this area, holding down costs. Some 60 percent of capital spending in 2011 will be on light oil and 20 percent on NGLs, both of which continue to command a premium in the marketplace. The company has targeted growth in liquids production of 11 percent for 2011, bringing their weighting up to 45 percent of production by the fourth quarter.

That still leaves natural gas at 55 percent of production, with 20 percent of CAPEX going to their further development. As a result, Daylight is still somewhat exposed to low market prices for gas as it’s been in recent years.

Importantly, however, current budget assumptions are quite conservative, assuming CAD4 per thousand cubic foot for gas at the AECO hub. Oil price assumptions are based on CAD90 per barrel oil and rough parity between the loonie and the US dollar. Unlike many producers, Daylight directly controls the marketing of its output as well as transport costs. That enables the company to control expenses as well as hedge prices, which it has done extensively to lock in price certainty.

Operating costs are on track to keep falling to a range of CAD9.50 to CAD9.90 per boe for the full year, versus CAD10.42. It also has CAD1.6 billion in tax pools, which will hold down what it pays to the Canadian government.

The company has roughly two-thirds of its CAD650 million credit tranche available, no significant refinancing needs until after 2012 and debt maturities of just CAD263 million through 2014 (94 percent convertible bonds), an amount equal to just 12 percent of market capitalization.

That’s considerable financial flexibility, particularly considering management’s conservative policy of funding capital spending and dividends entirely with operating cash flow. And it adds up to little risk to investors in Daylight, even if natural gas prices can’t crack CAD5 per thousand cubic feet this year.

Meanwhile, a low valuation and growing low-cost production base make the company a takeover target, even as higher liquids output boosts profits. Buy Daylight Energy Ltd up to USD11 if you haven’t yet.

I added IBI Group to the Conservative Holdings in December 2009 as a bet on the ongoing global infrastructure boom. IBI had found a haven in government contracts during the market crash/credit crunch/recession of 2008-09, as spending slowed dramatically in the private sector. My bet was 2010 would bring a solid recovery in the latter, even as the company continued to win new public-sector business.

As it turned out, I was half right. IBI has continued to add new business from government-sponsored projects in Canada, as well as internationally. And it’s further expanded its current sales, potential markets and range of offerings with a series of acquisitions.

One of two deals closing last month was the purchase of CSM Engineering Ltd, based on Fort McMurray, Alberta, heart of the oil sands region. CSM is a leading civil engineer for land development and infrastructure in the region. That’s a business that saw boom times up until mid-2007, when the Alberta provincial government launched its now-rescinded “Our Fair Share” plan to hike taxes on oil sands providers. That sowed uncertainty and slowed oil sands investment, which then dried up entirely as oil prices cratered in late 2008.

As a survivor of that slowdown, CSM is a valuable and inexpensive addition to IBI’s business mix. And with the region showing real signs of returning to robust growth, it shouldn’t be long before the new unit starts adding meaningfully to overall company cash flow. Ditto Tetra Design Inc Architects, the architecture and master planning firm focused on educational facilities in Southern California that IBI closed on in November.

The other deal consummated in January was the takeover of the professional architectural practice of Cardinal Hardy Architectes, which focuses on design and technical work in the environs of Montreal, Quebec.

Expertise includes transportation projects (Aeroport de Montreal), social infrastructure (education and health care) and private development projects.

What I was wrong on with IBI last year was the pace of recovery of private-sector business, particularly in the US, where the company has been taking advantage of the weak dollar to expand.

As reported in the Nov. 12, 2010, Flash Alert, there were some good signs in the second half of 2010. Revenue and cash flow in the third quarter, for example, were up 10 percent and 12.9 percent sequentially from the second quarter.

Public-sector business, however, remained where the action was, as private-sector contracts were still hard to come by, particularly in North America. Some two-thirds of revenue came from governments, with the second-quarter 2010 acquisition of Nightingale Architects adding business in the UK, Australia, South Africa and the Persian Gulf and the company hunting opportunities in India and China.

This global business is particularly promising for IBI, given the trillions of dollars to be invested there in coming years. And because the company provides services rather than owns assets, there’s little political or regulatory risk, though greater reliance on foreign operations makes it more important to manage an appreciating Canadian dollar.

Current order backlog for IBI over the next 12 months is healthy, with committed fee volume from contracts rising strongly in the second half of 2010. The breakdown is about 65 percent from government and public institutional clients, mostly for building facility areas in health care, education, transportation terminals, transportation networks and systems technology.

The company has started to see new contract activity in the private sector pick up as well. Residential and industrial building design appears particularly promising, and the company has been hiring in those areas. Overall activity, however, is still under pressure, particularly in the US, putting a premium on cost controls.

The good news is IBI has considerable flexibility with its costs. The post-conversion dividend rate of CAD0.092 per month (a yield of a little less than 8 percent) is sustainable at current levels of business activity. Debt obligations, despite the continued torrid pace of acquisitions, are quite manageable; there are no significant maturities other than the balance of a loan that will have to be renegotiated by August 2012 until 2014.

We’ll know a lot more about how IBI’s public- and private-sector work is faring when the company announces its third-quarter results on Mar. 17. I expect to see the positive trends established in the second half of 2010 continue this year, carrying the stock back at least to its late-2009 high in the upper teens in the next six months or so.

The pace of recovery is likely to depend heavily on what happens to the company’s US business. A good report won’t fail to provide a huge lift. But with the stock selling at just 1.3 times book value and a yield of nearly 8 percent, the bar of expectations is also quite low.

That means little downside risk and a lot of upside as the results improve. Buy IBI Group up to USD15 if you haven’t yet.

For more information on Daylight Energy and IBI Group, see How They Rate. Click on the trusts’ names to go directly to their websites. Daylight is listed under Oil & Gas, while IBI is tracked under Business Trusts.

Click on their US symbols to see all previous writeups in Canadian Edge and CE Weekly. Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts.

Daylight is by far the larger of the two companies, with a market capitalization of some CAD2.158 billion. IBI is relatively small at CAD182 million. Both stocks, however, have decent volume under both their TSX and US over-the-counter (OTC) symbols.

I doubt any brokerage worth its salt will have any trouble buying Daylight for you. IBI may be more difficult, particularly in the handful of states that have antiquated “blue sky” laws that may not allow your broker to pitch either or both of these to you. But the laws won’t prevent you from placing the order. US investors are generally not permitted to take part in secondary offerings but that has nothing to do with shares that are already traded either on the TSX or the US OTC market.

Distributions paid by both companies should be considered 100 percent qualified for US tax purposes. IBI converted from an income trust to a corporation on Jan. 1, 2011. Daylight officially completed its conversion on May 7, 2010, following a 99.7 percent favorable vote from shareholders.

Both provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. For direct links, see our Income Trust Tax Guide.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors. If you hold these outside an IRA, the tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can generally be carried forward to future years.

Both companies’ dividends, however, will not be withheld the 15 percent if they’re owned in IRAs. The first payment for IBI to IRA accounts that’s exempt from withholding is the Feb. 28 disbursement, declared on Jan. 21 to shareholders of record Jan. 31.

The first exempt payment for Daylight was the Jun. 15, 2010, disbursement, declared May 12 to shareholders of record May 31. All subsequent payments made to investors in calendar 2010 should also have been exempt from IRA withholding. All payments made prior to that date in 2010 (January throughout May) were made while Daylight was an income trust and therefore were withheld. Total payments subject to IRA withholding in 2010 were CAD0.40 per unit. Total payments exempt from IRA withholding were CAD0.35 per share.

For more information on IRAs and withholding, see Canadian Currents. Portfolio Update lists the first exempt dividend payments for all current Conservative and Aggressive Holdings.