Editor’s Note: In Brief is the executive summary of the May 2011 issue of Canadian Edge. Please use it as a guide to points of interest. — RC

The Conservative Party of Canada has won a four-year extension in power, this time with a veto-proof Parliamentary majority. That’s the verdict of the election held this week.

The consequences are far reaching, not so much because the results will usher in any significant new policies. The Conservatives have been pushing their priorities for the past five years, leading back-to-back minority governments.

Rather, the vote is significant because investors can now count on those policies to reign supreme in Canada from now until at least 2015, and quite possibly well beyond. That’s a move toward a balanced budget by mid-decade, while continuing to bring down the corporate tax rate–already the lowest in the developed world.

It means pro-investment regulatory, legal and environmental policies in everything from renewable energy and oil sands development to the explosive growth of communications and connectivity. It means foreign investors’ capital will be welcome provided it’s willing to play by what are clearly defined rules. And it means a stable to appreciating Canadian dollar, particularly as the value of the country’s natural resource exports continues to surge.

That’s all positive for investors. But Conservative Party hegemony isn’t going to be the only factor impacting investor returns in Canadian stocks over the next four years.

Rising global demand for natural resources, particularly from developing Asia, is the single biggest reason Canada, like Australia, largely avoided the global recession of recent years.

And, by extension, it’s the single biggest reason Prime Minister Stephen Harper has at long last been voted a majority in Parliament, though no doubt flaccid Liberal Party leadership was also a factor.

History shows that sooner or later every natural resource bull market comes to an end as new sources are discovered and exploited, customers conserve and use less and alternatives are developed.

This bull market is being driven largely by the runaway growth of developing Asia and that region’s dire need for resources to build infrastructure and run its factories.

Because of that, my view is this bull has many years left to run. But when it does come to an end, it won’t matter who’s in power in Canada. There will be difficulties, just as there were in the 1980s and ’90s after the 1960s and ’70s resource bull market finally came to an end.

More important than that is the ability of managements to grow our companies’ wealth. Unfortunately, even the best can stumble, and as the May Portfolio Update details, we’ve already seen some disappointments during first-quarter earnings season, despite what appears to be a generally bullish macro picture for North American economies.

I’ve written repeatedly that disappointing the lofty investor expectations that have emerged after two explosive years in the stock market is the greatest risk to stocks in 2011. Companies that generally do what the market expects are still being treated relatively well in the aftermath of earnings releases and conference calls. But those that surprise to the negative have been pummeled.

That’s a very good reason not to chase any buy-rated stock–either in or outside the Portfolio–above the targets I’ve set with yield, growth and safety in mind. It’s also a good reason not to over do it in any one stock, no matter how attractive it looks.

Most important, no one should have a position so large in any one stock that they can’t unemotionally turn around and sell for whatever the market will bear. We’re certainly much better off now in a macro sense than we’ve been since 2007. But there’s still a great deal of uncertainty on a wide range of issues. And the higher stock prices go, the greater the damage when lightning strikes.

I might not sell the stocks I’ve downgraded to hold this month. But if conditions merit such a move, don’t be surprised if I do take my lumps and move on. There are a lot of stocks to choose from, and there’s no point in getting hung on one.

Portfolio Action

I hate admitting it as much as any advisor does. But not every stock works out, even Canadian Edge Portfolio recommendations I’ve pored over for years. My goal is to not become emotionally committed to any one stock and therefore remain capable of moving on should events turn against that company.

Unfortunately, over the past month three Portfolio Holdings have experienced developments disturbing enough to merit a change in advice. First, I’m selling Conservative Holding CML Healthcare Inc (TSX: CLC, OTC: CMHIF). As I most recently wrote in the April 2011 Portfolio Update, I’ve been increasingly concerned in recent quarters about the company’s ability to manage its operations in the US. The sudden departure this week of Chief Executive Officer Paul Bristow and Chief Operating Officer Kent Nicholson is a tacit admission by the board of directors that nothing is getting better and a warning that earnings–due May 19–will reflect that. As of Thursday afternoon the stock is trading roughly where I recommended it initially in December 2008. Sell CML Healthcare.

Second, I’m cutting last month’s co-High Yield of the Month Colabor Group Inc (TSX: GCL, OTC: COLFF) from a buy to a hold. As I wrote then, the company is successfully taking advantage of rivals’ weakness to build scale with acquisitions. What I didn’t see coming was the apparent first-quarter deterioration in its ability to pass along fuel cost changes to customers. Management, in its quarterly conference call, claimed this would be temporary. But that’s too big a surprise to brush off. Colabor Group is a hold.

Finally, I’m cutting Yellow Media Inc (TSX: YLO, OTC: YLWPF) to a hold. First-quarter distribution coverage was solid, and the migration to the Internet continues. Meaningful debt maturities have also been pushed off to 2013. But my view is too many readers are taking positions that are too aggressive in this stock because of its high yield. Yellow Media is a hold.

As for the rest of the Portfolio, we’ll know a lot more as earnings results come in over the next month. Many picks continue to trade north of my buy targets, some well above. These shouldn’t be purchased except on pullback that takes them back below my targets. The following companies’ results and other developments are reviewed in Portfolio Update.

• Acadian Timber Corp (TSX: ADN, OTC: ACAZF)
• AltaGas Ltd (TSX: ALA, OTC: ATGFF)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)
• Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)
• TransForce Inc (TSX: TFI, OTC: TFIFF)
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)

Also note that Macquarie Power & Infrastructure Corp is now Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF).

High Yield of the Month

High Yield of the Month features the two best buys for May. This month I’m featuring two high-yielding Aggressive Holdings, EnerCare Inc (TSX: ECI, OTC: CSUWF) and Perpetual Energy Inc (TSX: PMT, OTC: PMGYF).

EnerCare has a primary business of renting waterheaters to Canadians but is rapidly expanding in submetering, a fee-based business driven by energy conservation. Perpetual is an energy producer that’s historically been 100 percent dependent on natural gas output but has recently diversified into liquids.

EnerCare is suitable for all but the most conservative investors. Perpetual is a rank speculation on management’s ability to adapt to tough markets, and an eventual recovery in natural gas prices.

Both yield close to 9 percent, paid monthly. Both will report earnings on May 10 and have strongly indicated those results will be solid. Buy EnerCare up to USD8, Perpetual Energy up to USD5.

Feature Article

The results of the 41st Canadian general election this week certainly don’t guarantee anyone a profit. But they do virtually assure investors will enjoy a favorable regulatory, legal and taxation environment for at least the next four years, when Prime Minister Stephen Harper will have to call another election, if he doesn’t find it advantageous to beforehand.

I discuss the businesses most likely to benefit, including oil sands development and expansion of other investment in natural resources. I also look at companies that may have a tougher time, including those most negatively exposed to what’s likely to be continuing strength in the Canadian dollar.

Canadian Currents

The ascension of Stephen Harper’s Conservative Party to a majority in Canada’s House of Commons for at least the next four years means a more favorable environment for foreigners investing in the Northern Tiger.

But it’s also a likely plus for Canadian companies’ recent push to use the loonie’s strength to snap up first-rate assets abroad on the cheap. Associate Editor David Dittman explores the players in line to profit the most.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide.

Dividend Watch List—Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF) has at last announced its post-conversion dividend, a quarterly rate of CAD0.40. That’s a 46.7 percent reduction from the previous monthly rate of CAD0.25. It should be sustainable at that level. But the yield of less than 9 percent doesn’t compensate for the huge risks of this industry, which can be hurt both by rising timber prices and stockpiling in China. I’m also not at all certain most investors have caught on about the dividend cut. US investors should be able to unload shares on the Toronto Stock Exchange (TSX).

That leaves just Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) to declare a dividend at the rate it’s promised to as a corporation. It still shows a yield in quote services–including the one we use in How They Rate–that doesn’t reflect the new annual rate of CAD1.20 per share. Current yields shown for all other stocks in How They Rate are now accurate.

The current Watch List is as follows. Note that the List is likely to change as first-quarter 2011 earnings are released later this month. Note also that companies on the Watch List can actually be buys, if potential returns are high enough.

• Brompton Stable Income Fund (TSX: VIP-U, OTC: BVPIF)–Hold
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–SELL
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–Hold
• FP Newspapers Inc (TSX: FP, OTC: FPNUF)–Hold
• Interrent REIT (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Buy @ 5
• Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Hold

Bay Street Beat–How the Canadian analyst community views trusts, including our favorite trusts.

Tips on DRIPs–US securities laws restrict participation in dividend reinvestment plans (DRIP) of foreign-based companies that don’t register their offering with the Securities and Exchange Commission (SEC). Most plans of Canadian income and royalty trusts that do sponsor DRIPs aren’t registered under the United States Securities Act of 1933, as amended.

In January 2011 Baytex Energy Corp (TSX: BTE, NYSE: BTE) joined Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) and Provident Energy Ltd (TSX: PVE, NYSE: PVX) among the ranks of Canadian Edge Portfolio Holdings offering the convenience of DRIP investing to US investors.

How They Rate

Coverage Changes

Sun Gro Horticulture has been acquired for CAD6.80 per share in cash. Investors should now have this money in their accounts, as the deal was completed Mar. 13, 2011. The company is no longer tracked in How They Rate.

Advice Changes

Here are advice changes. See How They Rate for changes to buy targets. Rating system criteria are shown at the bottom of the document.

Athabasca Oil Sands Corp (TSX: ATH, OTC: ATHGF)–Buy @ 16 from Hold. The ascension of the Conservative Party to a majority and four year tenure without challenge makes oil sands development much more likely, and this company is very well placed.

Bonterra Energy Corp (TSX: BNE, OTC: BNEFF)–Buy @ 60 from Hold. The oil-focused producer lifted its monthly dividend by 8.3 percent, earning the stock a higher buy target. Higher oil prices would lift it further still.

CML Healthcare Inc (TSX: CLC, OTC: CMHIF)–SELL from Buy @ 12. I had this company a hold for several months and up-rated it to buy last month after some fairly decent fourth-quarter numbers. This week, however, the board of directors dismissed both the CEO and COO, a clear sign US operations aren’t improving this year. Earnings aren’t due out until May 19, but I’d rather stand aside until the dust clears.

Colabor Group Inc (TSX: CGL, OTC: COLFF)–Hold from Buy @ 13. This is a well-managed company, but the spike in fuel costs that couldn’t be passed on to customers should give everyone cause for pause, pending further developments. I review earnings in Portfolio Update.

MEG Energy Corp (TSX: MEG, OTC: MEGEF)–Buy @ 55 from Hold. The ascension of the Conservative Party to a majority and a four-year term without challenge makes oil sands development much more likely, and this company is very well placed. It’s also making money, with production up 106.4 percent and costs per barrel of oil equivalent produced cut 60.5 percent in the first quarter.

Research in Motion Ltd (TSX: RIM, NSDQ: RIMM)–SELL from Hold. Fiscal first quarter results show the company just isn’t measuring up to rivals. It’s surviving and making money, but with no dividend there’s little reason to hold it.

Royal Bank of Canada (TSX: RY, NYSE: RY)–Hold from Buy @ 55. The rumor is this bank is considering selling its US operations after pushing hard into this market in recent years. That kind of reversals is always disturbing, but the real reason to back off is that the stock has shot well past my past buy target.

Suncor Energy Inc (TSX: SU, NYSE: SU)–Hold from Buy @ 35. The company had solid first quarter earnings but has run well past my buy target and there are better oil sands alternatives with bigger dividends and more upside (see above and Feature Article).

Superior Plus Corp (TSX: SPB, OTC: SUUIF)–Buy @ 12 from Hold. The recent distribution cut hit the unit price, but the new level appears sustainable, particularly after the 15 percent boost in first-quarter cash flow per share. Cold weather helped and construction product sales were hurt as expected, but guidance is conservative and management has held it at CAD1.55 to CAD1.90 for full-year 2011. This one is for aggressive investors only, however.

TimberWest Forest Corp (TSX: TWF-U, OTC: TWWEF)–SELL. I’m still rating this one a sell. Those who ignored my advice and held now have an offer on the table from two pension funds to take the company private for CAD6.48 per in cash per stapled share. My advice is still to sell, however, particularly for US investors who may get tangled up with execution by holding on through to payoff. The shares are also pretty much fully priced to the takeover offer as well.

Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Hold from Buy @ 8. This company may still make it and first-quarter results weren’t half bad. But too many Canadian Edge readers are paying too much attention to this stock for its high yield. It’s time to recognize this is a high-stakes special situation and treat it accordingly. We can still make a lot if things work out. But we need to be prepared to sell if they don’t.

Ratings Changes

Here are CE Safety Rating changes, reflecting first-quarter 2011 numbers. Expect more next month as the remaining How They Rate companies report.

Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–4 from 3. This new addition to the Aggressive Holdings posted very strong first quarter results, knocking the payout ratio down to 50 percent earning it another point under the CE Safety Rating System. I’ve also raised my buy target to USD13.

Canadian Pacific Railway (TSX: CP, NYSE: CP)–4 from 5. Bad weather forced the company to idle capacity, driving down earnings and pushing up the payout ratio. Coverage should improve in coming quarters dramatically, but the company loses a Rating point nonetheless.

Canfor Pulp Products Inc (TSX: CFX, OTC: CFPUF)–2 from 1. Sometimes cutting the dividend makes it safer. That’s the case for Canfor, which cut its payout nearly in half and so drove its payout ratio down to 52 percent. See Dividend Watch List for more.

Colabor Group Inc (TSX: CGL, OTC: COLFF)–4 from 6. First-quarter earnings not only took the full-year payout ratio up out of the safety zone, but they’re pretty strong evidence this business is more economically sensitive than once believed. Any way you slice it, that’s two points off the company’s safety rating.

Name and Symbol Changes

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF) is the successor to Macquarie Power & Infrastructure Corp. This is a share-for-share, non-taxable name change. There is no change in management guidance or the monthly distribution of CAD0.055 per share. Capstone reports first quarter earnings Jun. 9.

The North West Company’s (TSX: NWC, OTC: NWTUF) Toronto Stock Exchange (TSX) symbol has changed from NWF to NWC. Nothing has changed other than the TSX symbol.

All other How They Rate entries should now reflect any changes to their post-conversion TSX and US over-the-counter (OTC) trading symbols. For a complete listing of what changed in the recent trust conversion wave, see the Jan. 12, 2011, Flash Alert. Note that in most cases OTC symbols didn’t change. Neither did New York Stock Exchange listings for trusts listed on the Big Board that converted.

Note that the dividend yield for Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) in How They Rate still hasn’t been updated to reflect post-taxation rates, despite the company announcing a new rate of CAD0.30 more than a year ago. The actual first quarterly payment is now expected to be declared on May 18, with an ex-dividend date of May 27. The first payment date could be in late June. Quote services should pick up the new rate when it’s declared later this month. Information on trust conversions is included regularly in a separate table featured in the Income Trust Tax Guide.

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria, described in the text below the How They Rate table, are as follows:

• One point if the payout ratio meets “Very Safe” criteria for the sector.
• One point if the payout ratio is not “At Risk” based on the criteria for its sector.
• One point if debt-to-assets ratio meets “Very Safe” criteria for the sector.
• One point if the company’s debt maturing before Jan. 1, 2013, is less than 20 percent of its market capitalization.
• One point if the company’s primary business is recession resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company has not cut its distribution over the preceding five years.

I list trusts and high-yielding corporations by the following sectors:

• Oil and Gas–All producer trusts are included here.
• Electric Power–Power generators.
• Gas/Propane–Distributors from propane to package ice.
• Business Trusts–A range of businesses involved principally with consumers.
• Real Estate Trusts–All qualified Canadian REITs and real-estate related corporations.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities, and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory, and other information services.
• Financial Services–Canadian banks, investment houses, and other trusts and corporations providing support to these businesses.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture, and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–These trusts and corporations ship freight and move passengers by bus, truck, rail or air.

For More

How They Rate offers several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every How They Rate holding.

We also offer a live, intraday quote feed in US dollar prices, distributions and percentage yields of trusts and high-yielding corporations. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

Clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and CE Weekly article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada. The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.” Find it on the top bar on the Home Page under the subhead Resources. Eye on Trusts and How They Rate are accessible on the shaded box in the middle column.

Roger Conrad
Editor, Canadian Edge