Safety in Numbers

By Roger Conrad • July 8, 2011 • Portfolio Update

They don’t all work out. No matter how well you research companies, you’re going to have dogs. The key is not to give any one stock the chance to sink your overall portfolio, if things don’t work out as you expect.

Not working out as expected definitely sums up the situation with Aggressive Holding Yellow Media Inc (TSX: YLO, OTC: YLWPF) at this point. And unless management can defy its skeptics by completing a planned asset sale and holding its dividend, our losses in the stock will become permanent.

My decision to hold onto Yellow this year was based entirely on its numbers, which have routinely backed up management’s assertion that its Internet business is growing faster than its traditional directory operation is shrinking. Similarly, cash earnings have been in line with projections and covered dividends comfortably.

Strong numbers didn’t prevent the stock from basically falling in half the past couple months. But my position on Yellow remains the same as what I highlighted in a Jun. 27 Flash Alert: All that’s dragged the stock down thus far is rumor and innuendo. And until the charges against the company are reflected in the official financials–i.e. dividend coverage fails and overall revenues decline as print losses outweigh Internet gains–recovery is still quite possible.

In a similar vein, my advice to not buy more Yellow–and for everyone but patient speculators to sell it–is also based on the numbers. Everyone has losers. And if you resolve not to sell on ugly rumors, you’re going to get stuck with a loser on those rare occasions where they actually do become fact.

Should Yellow’s rumors become fact in coming weeks, it will still be only one of many stocks in the Canadian Edge Portfolio. Losses always hurt. But the impact will be far from devastating on our overall returns. We’ll live to fight another day.

Meanwhile, the rest of the Portfolio has generally held up well over the market selloff of the past couple months.

That’s in no small part due to the strong first-quarter earnings they posted and management guidance for as good or better the rest of the year.

Here’s where to find my analysis of first-quarter numbers for each recommendation. Click on the document name to go directly to the writeup in question. Those printing out can go to the website (www.CanadianEdge.com) to access documents directly.

Conservative Holdings

Aggressive Holdings

Even solid results didn’t prevent some retrenching, particularly in the Aggressive Holdings. All of these are now currently trading below my buy targets, including Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF), which now has a buy target of USD22.

Other recommended stocks, however, have barely budged off their highs. That includes nine of the Conservative Holdings that continue to trade above my buy targets. That’s something less than a rout for the overall Portfolio. In fact, we’re still very much in the game for a third year of strong returns.

Gains could be a lot more difficult to come by, of course, if the global economy weakens or credit pressures intensify, hitting stock markets worldwide once again. Here, too, however, Canadian Edge picks are well protected as businesses, particularly when it comes to the lack of refinancing needs over the next couple years. Even in a worst-case for credit conditions, they could simply pull back and wait.

Below I show each company’s exposure to refinancing pressures. In general, any company with outstanding maturities totaling 10 percent or less of market capitalization will be able to handle a refinance even under the worst of circumstances without any real pain. Those with maturing debt through 2012 between 10 and 20 percent are slightly more at risk, but should still have little difficulty as well.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–CAD100 mil, 4.6%
  • Artis REIT (TSX: AX-U, OTC: ARESF)–0, 0%
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–CAD100 mil, 9.6%
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–0, 0%
  • Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPUF)–CAD280 mil, 11.6%
  • Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–0, 0%
  • Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–CAD36 mil, 7.1%
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–CAD465 mil, 30.9%
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–CAD14 mil, 5.6%
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–0, 0%
  • Extendicare REIT (TSX: EXE-U, OTC: EXETF)–0, 0%
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–0, 0%
  • Innergex Renewable Energy (TSX: INE, OTC: INGXF)–0, 0%
  • Just Energy Group Inc (TSX: JE, OTC: JSTEF)–CAD33 mil, 1.6%
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–CAD2 mil, 0.1%
  • Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–0, 0%
  • Pembina Pipeline Corp (TSX: PPL, OTC: PBNUF)–0, 0%
  • RioCan REIT (TSX: REI-U, OTC: RIOCF)–CAD220 mil, 3.2%
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–0, 0%

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–0, 0%
  • Ag Growth International (TSX: AFN, OTC: AGGZF)–0, 0%
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–0, 0%
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–0, 0%
  • Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–0, 0%
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–CAD60 mil, 14.3%
  • Enerplus Corp (TSX: ERF, NYSE: ERF)–0, 0%
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–CAD115 mil, 19.1%
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–0, 0%
  • Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–CAD224 mil, 1.9%
  • Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–CAD75 mil, 14.1%
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–0, 0%
  • PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–0, 0%
  • Provident Energy Ltd (TSX: PVE, NYSE: PVX)–0. 0%
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–0, 0%
  • Yellow Media Inc (TSX: YLO, OTC: YLWPF)–0, 0%

Even battered Yellow Media has no refinancing needs until 2013. It may still face tighter debt covenants if it can’t reduce future obligations aggressively in coming months. But the upshot here is CE Portfolio picks have largely insulated themselves from global credit woes, at least for the next 18 months.

Q2 Numbers: A Preview

The books are now closed for second-quarter 2011. And judging from the news flow we’ve seen since April 1, numbers should be solid for virtually all Canadian Edge Portfolio Holdings.

For one thing, borrowing rates in Canada remained low, as they have been in the US. Almost any company that wanted to raise debt capital for expansion–or to refinance expiring credit agreements and maturing bonds–has been able to do so at low interest rates.

That should have been a very big plus for my real estate investment trusts (REIT), all of which typically finance property purchases and constructions with roughly half debt. For example, Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) announced in late June that it was able to lock in a floor rate of 3 percent with a maximum of 3.6 percent on CAD312 million in 10-year mortgages.

That replaced debt maturing between September 2011 and June 2013, essentially eliminating refinancing needs at the property level as they have been at the corporate level. And the rate was well below the average 4.4 percent on the REIT’s debt overall.

Oil and gas prices hit their highs in April and have moved lower since. Nonetheless, they remained above our oil and gas producers’ realized selling prices in the first quarter.

Gas producers are likely to see a second consecutive quarter of unfavorable comparisons in realized selling prices from second-quarter 2010 levels. That, however, will be balanced by higher price comparisons for oil and natural gas liquids, which are increasingly popular substitutes for oil in a range of industrial processes.

Wildfires and flooding in Alberta did shut in some capacity and some producers like Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) have already warned output will be curtailed for the quarter. Most of our producers, however, should enjoy another quarter of rising output, which will offset lower selling prices for natural gas.

Our energy infrastructure companies look set to benefit from continued successful completion of acquisitions and the construction of new assets. As in the US, the opening of shale gas to development has created a need for infrastructure and our picks are getting their pick. And their efforts are helped immeasurably by a low cost of debt and well as equity capital.

Adding assets also means earnings growth for our power producers. Atlantic Power Corp’s (TSX: ATP, NYSE: AT) buyout of Capital Power Income LP (TSX: CPA-U, OTC: CPAXF) will transform the company into a much larger and financially powerful entity. But it would hardly be possible without low-cost access to debt and equity capital.

There are some pockets of potential weakness in the numbers. Going in, I’m somewhat concerned about Hold-rated Colabor Group Inc (TSX: GCL, OTC: COLFF), which last quarter posted disappointing results in large part because it couldn’t recover certain cost increases from customers in a highly competitive environment. I’ll be looking for the improvement management promised in its first-quarter earnings call.

I’m particularly interested in Yellow Media’s numbers. If we don’t get answers before hand about the company’s real situation, we’re certain to get them then. Note the stock is hold-rated, not buy-rated.

For the most part, however, I’m not expecting a lot of surprises from what are mostly blue-chip companies operating in what remains one of the world’s healthiest economies. As long as that’s the case, they’ll continue to build wealth as they grow in value as businesses. And as I’ve noted previously, that’s the return road to dividend growth also.

Below I list the estimated and confirmed dates when each Canadian Edge Portfolio Holdings will report their second-quarter profits. I’ve also included brief comments on what the key issues for each company are and what I expect to see in the numbers.

I’ll update the list as dates are firmed up. Note the first numbers aren’t due until the end of July. I’ll likely review them in the August issue of CE, slated to be emailed and posted at www.CanadianEdge.com on Aug. 5. I’ll report the rest in Flash Alerts as I’ve had time to digest them, with a likely final installment and recap in the September CE.

Conservative Holdings

AltaGas Ltd (TSX: ALA, OTC: ATGFF)–Jul. 29 (estimate). The energy infrastructure company has frequently been among the first to report numbers during earnings season. This time’s projected date is a little earlier than past cycles and is an estimate, meaning it could be delayed.

Whatever the case, the company should benefit from strong throughput in its pipeline network, as well as recent asset additions. Management announced another of these in late June, as Alberta regulators granted final approval for a natural gas liquids extraction facility to be built at Gordondale. The two-phased construction plan will cost CAD235 million and will be fully operational in late 2012.

My view has been another round of solid earnings could induce management to boost the dividend for the first time since the company converted to a corporation in July 2010. It may be premature to expect a boost following second-quarter earnings, no matter how robust they are. At an analyst presentation last month, for example, CEO David Cornhill said he expected “a slow, modest dividend until 2014” with “clearly acceleration at that point.

That sounds very good for a bump up in the buy target. But in the meantime, AltaGas is a buy up to USD24.

Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 11 (estimate). The western province-based owner of offices and other properties has been taking full advantage of low capital costs to expand its portfolio.

Last month the company was able to turn a planned CAD90 million equity offering into a CAD100.1 million one, as demand for units far outstripped expectations. That’s despite the fact that the deal price of CAD14.10 is above the current price. Equity offerings do initially dilute earnings, at least until the raised cash can be put to work. They have limited Artis’ need to borrow and expand the portfolio. But it’s possible that second-quarter cash flows could suffer on timing issues. Should that happen, investors can rest assured the effect will be temporary, including on the payout ratio.

I’ll be watching earnings to judge portfolio quality issues such as rent growth and occupancy. But my expectation is still that cash flow growth will ultimately spur dividend growth. Artis REIT a buy up to USD15.

Atlantic Power Corp (TSX: ATP, NYSE: AT)–Aug. 9 (estimate). Management has already warned investors to expect elevated payout ratios in 2011, the result of equity issues and the time needed for invested cash to generate returns. Operating rates for plants are always important, as is the company roughly matching management expectations. But given Atlantic’s focus on minimizing risks, I don’t look for anything that would really threaten the company’s growth and dividends.

Management’s announced acquisition of Capital Power Income LP will transform the company into a major independent power producer with diversified power sources and a much stronger balance sheet. I’ll be listening closely to the second-quarter conference call for how the deal is going, as well as the situation with the still-to-be-named replacement for CFO Pat Welch.

With the announcement of a 5 percent dividend increase when the deal closes, I’ve raised my buy target on Atlantic Power to USD16. Note I highlight the company in greater depth in High Yield of the Month.

Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 5 (estimate). Happily for this large-scale construction company, Canada isn’t wrestling with a budget deficit. That means the company can count on its contracts with provincial and federal authorities to hold up.

The big question mark is the private sector, which has shrunk to barely a third of the company’s total revenue. These are generally much higher-margin contracts than government deals but they’ve been slow to reappear, including in the oil sands region.

Bird’s first-quarter earnings disappointed mainly because of lower margins, as order backlog remained robust. I expect to see better numbers this quarter, but I would be troubled if there was significantly more weakness, or if backlog declined.

At this point the company still looks like a good way to play continued growth of the oil sands. And management hasn’t been shy about increasing dividends–the current rate is a monthly CAD0.055. Buy Bird Construction up to USD12 if you haven’t yet.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–Aug. 9 (estimate). There hasn’t been much news out of this owner and operator of hydro and wind power plants since the release of first-quarter earnings results in May. Management still apparently hasn’t decided on the timing of its conversion to a corporation but apparently continues to execute its construction plan, which will eventually lift cash flows and dividends again.

As shareholders are no doubt aware by now, quarterly earnings are heavily impacted by water flows, and one quarter’s bounty is frequently a shortfall the next. That’s not a cause for alarm, and the company is very well reserved against the ups and downs. I look for more progress with projects and solid operating results, normalized for weather swings.

Brookfield Renewable Power is a buy on dips to USD22 or lower. Note the company now pays a quarterly rather than monthly dividend, with payment slated for the end of January, April, July and October.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 10 (estimate). Low-cost refinancing, robust occupancy rates, steady rent growth and acquisitions should ensure another solid quarter at this high-quality real estate investment trust.

Apartment REITs typically pick up the heating bills of their tenants, so we should also see the payout ratio come down substantially from the prior (winter) quarter. Other than that, the only thing to note is the unit price is currently at its highest level since the 2008 crash and barely 10 percent below the all-time high set in early 2007.

I want to see some dividend growth before I raise my buy target. That could be forthcoming given continued successful acquisitions and debt refinancing. But management is exceptionally conservative. Buy Canadian Apartment Properties REIT on dips to USD18.

Capstone Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Aug. 9 (estimate). The owner of power plants won an investment-grade credit rating from S&P last month (BBB-). That helped management raise CAD75 million in a preferred stock sale, with a modest yield of 5 percent. The proceeds will finance the company’s final equity commitment for the Amherstburg solar power facility.

That asset won’t boost second-quarter earnings but will likely trigger a higher payout ratio than the 75.8 percent from the first quarter. With the other assets running well, however, the payout should be well within management’s comfort zone.

Negotiating a new deal for the Cardinal Power plant remains a challenge, and I’ll be listening closely to management’s report on progress (if any) on that front. Meanwhile, the current dividend rate looks secure enough to make Capstone Infrastructure a buy up to USD9.

Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 12 (estimate). This owner and operator of theaters and provider of related entertainment services proved last quarter it can survive a quarter of movie duds. It should have a somewhat easier time in the second quarter than the first, thanks to Pirates of the Caribbean 4 and other offerings.

But whatever the case, management’s decision to boost the dividend 2.4 percent in May is a good sign for future growth. Last month the company raised CAD115 million to continue the installation of digital projection systems across its facilities. That should further weight revenue to high-margin operations and insulate it from less-than-successful Hollywood fare. The stock continues to trade well above my buy target of USD23; hold if you own it, otherwise wait to buy Cineplex.

Colabor Group Inc (TSX: GCL, OTC: COLFF)–Aug. 4 (estimate). The key issues for this distributor of food and other grocery items to eastern Canada are pretty clear. It has to either find a way to control its operating costs or else be able to pass them on to customers. The second quarter should be an improvement on the first, if for no other reason than better weather conditions.

Meanwhile, management announced the successful completion of its acquisition of SKOR Food Group, which furthers its goal of expansion in Ontario. SKOR has approximately CAD140 million in annual revenue and CAD5 million in cash flow. That won’t show up on second-quarter numbers, however, other than the dilutive impact of financing.

During the last earnings reporting season, two Street analysts cut their ratings from buy to hold. The analyst with the most recent opinion (Jun. 17) rates it hold. That’s how I see it until we get second quarter results. Note that some expect to see numbers as early as July 7. That looks unlikely given the timing of first quarter results. But we’ll keep you posted. Hold Colabor Group.

Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Aug. 10 (estimate). Canada’s banking system for all intents and purposes looks healthy as ever. That’s even true of Royal Bank of Canada (TSX: RY, NYSE: RY), which announced a messy withdrawal from the US banking market last month. That, in turn, is very good news for Davis + Henderson, which continues to do a brisk business in its traditional paper-related forms and continues to launch new Internet-related offerings as well.

I expect to see at least single digit revenue growth and some catch up in cash flow growth as well. The stock is still a bit above my buy target of USD20, but Davis + Henderson’s business looks solid from this vantage point.

Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Aug. 5 (estimate). The owner and operator of long-term care facilities in the US and Canada should enjoy another quarter benefitting from Medicare rates enacted in the fourth quarter of 2010. The key after that will be how US regulators rule on rates for skilled nursing centers in a decision expected at the end of July or in early August.

In the first-quarter conference call, management hinted at a dividend increase once the final verdict in that case was known. That information therefore is likely to be available when second-quarter earnings are released and management holds its conference call. A somewhat stronger US dollar should help US revenue versus the first quarter, though the comparison with year-ago levels will be unfavorable. That shouldn’t have much impact on dividend coverage, however.

This round of numbers may also have information on the company’s progress with a massive debt refinancing that would boost earnings. I’ll be watching for that, the actual second-quarter numbers and news on the Medicare rate front. Until then Extendicare REIT looks inexpensive and is a buy up to USD12.

IBI Group Inc (TSX: IBG, OTC: IBIBF)–Aug. 4 (estimate). This urban developer will also likely suffer from unfavorable exchange rate comparisons in its second quarter versus year-earlier levels. But the impact of that should be more than offset by continued successful business growth globally, as well as in Canada. The close of several acquisitions last quarter should also provide a boost. Buy IBI Group up to USD15 if you haven’t yet.

Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 10 (confirmed). Like all power producers, this company’s quarterly results always depend on what hydro conditions were. But like all strong ones, one quarter’s weakness is usually more than made up by the next one’s strength.

The company won’t see the benefit of two new wind farms until the fourth quarter, as they remain under construction. The Cloudworks acquisition and improved water conditions in British Columbia should provide some upside, even as the company spends heavily on new projects. That, at the very least, should ensure a sharp improvement from the first-quarter 2011 payout ratio, which still came in at only 82.4 percent based on adjusted cash flows. The first quarter is generally seasonally weak. Innergex Renewable Energy is a buy on dips under USD10.

Just Energy Group Inc (TSX: JE, OTC: JSTEF)–Aug. 12 (estimate). The marketer of electricity and gas to consumers and businesses in unregulated US and Canadian markets historically hedges out exposure to commodity prices. As a result, so long as it’s successful signing on new customers profits generally rise. That should be the case in the second quarter of 2011, as the company continues to enjoy the benefit of past acquisitions.

The rebound in the US dollar during the quarter may be a slight plus, though comparisons from the year-earlier period will be negative. Management does enjoy natural hedges, however, namely the fact that US operations’ costs are in US dollars. The stock has been volatile over the past quarter for no apparent reason, other than that some might view it exposed to energy price swings. Just Energy is a solid buy up to USD16.

Keyera Corp (TSX: KEY, OTC: KEYUF)–Aug. 3 (confirmed). The owner of natural gas and gas liquids midstream assets should enjoy another strong quarter, as its facilities enjoy strong activity levels and the company benefits from recent expansion. That’s been the pattern of prior quarters. And the strength in natural gas liquids demand–management’s most recent focus–should ensure the string continues.

The stock remains well above my buy target of USD38. And if history is any guide, we won’t see another dividend increase until next year. If you own Keyera Corp by all means hold on, but if you don’t, don’t chase it with the yield at just 4.5 percent, even if it has very little risk and is paid in Canadian dollars.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Aug. 9 (confirmed). This owner of diversified properties primarily in remote areas of Canada came in with another set of very strong first-quarter numbers, as vacancy rates plunged and rents rose from year-earlier levels. The payout ratio came down to 71.6 percent. There’s nothing to indicate we won’t see a repeat in the second quarter, and if history is any guide a dividend increase about the same time.

he company successfully executed equity financing during the quarter of the “stapled” units it currently trades under for aggregate proceeds of CAD55.5 million, 10 percent more than the original offering would have raised. That’s a very good sign for the REIT’s ability to keep growing going forward and in a very low risk way.

The only fly in the ointment is price, which is well above my target of USD28, but Northern Property REIT is a strong hold for those who own it and a definite buy on dips to that level.

Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–Aug. 5 (estimate). Pembina should see another strong quarter at all of its business lines, from Oil Sands Transportation to Midstream & Marketing and Conventional Pipelines. The second quarter will probably not see much benefit from the newly completed Mitsue and Nipisi oil sands pipelines. But throughput should be robust, particularly in natural gas liquids.

During an analyst presentation last month management stated it has identified CAD2 billion in energy projects it can execute over the next two to four years. The key is taking advantage of a projected 30,000 barrels a day increase in oil shipped over its conventional pipelines and 50,000 barrels per day more natural gas liquids.

At the same time, management also stated it was “probably looking at dividend increases in the range of 3 to 5 percent post-2012,” when it will have completed other projects. Pembina Pipeline is a buy up to my target of USD25.

Provident Energy Ltd (TSX: PVE, NYSE: PVX)–Aug. 11 (estimate). The midstream energy company with a focus on natural gas liquids is, in my view, now a better fit with the Conservative Holdings.

Management has consistently reduced commodity price exposure and focused on fee-based assets, taking the risk out of the enterprise and putting the company in line for dividend growth eventually, though probably not until the payout ratio comes a bit lower. All of the natural gas liquids value chain the company occupies should get a solid boost in the second quarter. Distributable cash flow (DCF) remains the primary metric for gauging dividend safety. I’ll be looking at the payout ratio based on DCF as well as how management measures up to debt reduction targets and its goal of 5 to 7 percent cash flow growth over the next five years as it identifies and brings new projects on line.  Meanwhile, Provident Energy is a buy up to USD9.

RioCan REIT (TSX: REI-U, OTC: RIOCF)–Jul. 29 (estimate). Canada’s largest and most successful REIT continues to be successful raising low-cost capital and deploying it in its signature retail centers on both sides of the border. The REIT announced several more deals in both Canada and the US last month, totaling USD177.3 million, and completed another in the US for USD21.2 million. It now has CAD350 million of deals in the pipeline that will close later this year.

In large part, anticipating earnings for the second quarter is a matter of gauging the timing of equity financing versus when a new property begins adding to cash flow. That’s why I’ll be more interested in what management has to say about its pipeline and various measures of efficiency for properties under management than the bottom line number. Happily, we should see solid progress for all three.

Now trading at an all-time high, RioCan REIT is a buy on dips to USD25.

TransForce Inc (TSX: TFI, OTC: TFIFF)–Aug. 1 (confirmed). The transporter announced the completion of its acquisition of DHL Express Canada’s business in Canada, which it will now operate through a newly established subsidiary Loomis Express. The strategic alliance catapults TransForce into the first rank of package and courier service, though the benefits will show up in future quarters. Second-quarter results should reveal returns from the purchase of Dynamex earlier this year and the addition of US revenue. And unlike Colabor Group, the company seems to be having little or no problem passing on costs to customers.

The 15 percent boost in the quarterly dividend kicks in with this month’s payment (Jul. 15). That should a token of things to come. Buy TransForce on dips to USD15 or lower.

Aggressive Holdings

Acadian Timber Corp (TSX: ADN, OTC: ACAZF)–Jul. 28 (estimate). Global timber markets apparently remained solid in the second quarter of 2011 as they were in the first quarter. That should make for another good quarter for Acadian, which employs conservative financial and dividend policies in any case and is backed by the financial power of Brookfield Asset Management (TSX: BAM/A, NYSE: BAM). The stock’s a buy up to USD13.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 11 (estimate). This company’s fortunes from year to year depend heavily on the North American harvest, particularly of corn, which determines demand for its grain-handling equipment. The good news is it looks like the company is heading for a solid second quarter on top of the strong first quarter.

I’ll be looking at the figure management calls “adjusted EBITDA” as the primary point of comparison for dividend safety. Earnings and sales will likely be hit again by the weakness in the US dollar, which reduces the value of sales in Canadian dollar terms. But that will be balanced by the continued growth of sales outside North America. These so-called “International Sales” more than doubled in the first quarter over 2010 levels and should see a similar jump in the second quarter.

All in all, there should be few surprises here and a broader foundation for a dividend increase at the end of the year, if not sooner. Ag Growth remains a buy up to USD50.

ARC Resources Ltd (TSX: ARX, OTC: AETUF)–Aug. 4 (estimate). Despite the rebound in natural gas prices earlier in the quarter, ARC will likely feel the pain from another reporting period of falling realized prices compared with 2010.

On the other hand, it will enjoy another quarter of rising natural gas liquids and oil output, both of which enjoyed strong pricing. And despite weather-related obstacles to production in some parts of Alberta, gas output should rise again as well. The company has been successful in prior quarters driving down costs, as it’s focused on the prolific Montney shale property. I expect that to also continue in the second quarter.

And the company remains protected by high distribution coverage and low debt. ARC Resources is a buy up to USD26.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Jul. 28 (estimate). Demand for sulphuric acid and related products remains robust for industrial companies. That plus continuous operation of the Beaumont, Texas, facility should ensure solid numbers for this income trust, which still has no plans to convert to a corporation.

Meanwhile, the company closed its acquisition of Marsulex last month, adding products and services based on the same fee-based model as Chemtrade. That deal won’t help second-quarter earnings. But it does boost the company’s scale and earning power for the future.

Conservatively run Chemtrade still operates in a business that can be very volatile, which is why it’s in the Aggressive Holdings. But the high dividend looks very solid at this point, and is possibly in line for a boost as the Marsulex assets are absorbed. Buy Chemtrade Logistics up to USD15.50.

Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–Aug. 3 (estimate). This oil and gas producer should also be able to post stronger second-quarter cash flow, despite the effect of lower realized selling prices for natural gas output versus year-earlier tallies. Increased reliance on oil and natural gas liquids production are two big reasons why. Another is simply rising output as the company focuses on its most prolific and profitable reserves.

Weakness in natural gas prices will continue to prevent growth in the distribution, at least for the time being. But this company’s long-term value for quality reserves and management is undimmed. Daylight Energy remains a buy up to USD11 for those who don’t yet own it.

EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 9 (estimate). The company should see another explosive quarter from its submetering operation. That could be tempered to some degree by competition in the waterheater rental business, should the company’s aggressive marketing efforts to hold and take customers compress margins.

Overall distribution coverage, however, should again be solid, which should enable progress on debt refinancing. The latter is likely to restrict potential dividend increases the next several years, as CAD60 million comes due in 2012, an additional CAD275 million must be rolled over or paid off in 2013, and another CAD270 million is due in 2014. Refinancing this debt–the result of recent acquisitions–is the company’s greatest challenge and it’s why the stock yields nearly 9 percent. It’s also a very real opportunity to slash costs, and management does have time to make it happen.

I’ll be watching very closely for refinancing progress in the financials and during EnerCare’s second-quarter conference call. In the meantime, refinancing risk is why the company is in the Aggressive Holdings, rather than the Conservative Holdings. Buy EnerCare up to USD8.

Enerplus Corp (TSX: ERF, NYSE: ERF)–Aug. 5 (confirmed). The company’s sale of Marcellus Shale acreage last month will enable it to pay off some USD580 million. This leaves the company’s entire CAD1 billion credit facility untapped, providing substantial liquidity with which to finance development of core properties. These include 110,000 net acres in the Marcellus, primarily in Maryland and Pennsylvania. The sale should put to rest any further talk about Enerplus’ dividend being under pressure from its capital spending needs, which include ambitious development of its Bakken Shale lands. Management’s plan is still to boost output by 10 to 15 percent over the next couple years.

Focusing solely on the second quarter, lower realized selling prices for natural gas will take their toll. But that will be offset by continued development and sale of oil and natural gas liquids, which are now about 47 percent of total output. The Bakken play is a particular focus, with 65 percent of the company’s overall capital spending devoted to its growth. Management expects cash flow to rise some 37 percent over the next year due to this oil shift and growth in the Bakken, pushing capital spending plus dividends from 160 percent of cash flow now down to 100 percent in 2013.

I expect to see at least some early evidence of that very favorable trend in the second quarter, led by results in the Bakken properties. Capital spending and development plans likely rule out a dividend increase in the near future, as the company strives to get to the point where it generates free cash flow after all capital spending. But Enerplus is a solid growth and income bet yielding more than 7 percent up to USD33.

Newalta Corp (TSX: NAL, OTC: NWLTF)–Aug. 5 (estimate). The environmental services company depends heavily on the level of industrial and energy patch activity to grow cash flows. That wasn’t a bad place to be in the second quarter of 2011.

The company has shown itself remarkably adept at meeting the changing needs of industry in recent years, moving from a focus on conventional energy fields to heavy industry and finally to light oil, oil sands, shale gas and natural gas liquids. The 23 percent dividend increase that kicks in with the Jul. 15 payment will probably be the last lift this year. But as long as energy production and heavy industry are dirty businesses, contracts should be increasingly abundant. High commodity prices should also have spurred profits at the recycled product sales business during the quarter.

At this point, it looks like investors are pricing Newalta based on an expectation of a sharp slowdown in the energy patch. Anything short of that should push the stock back toward my buy target of USD15.

Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Aug. 12 (estimate). In light of recent major acquisitions it’s likely Parkland’s revenue has become somewhat more winter-weighted. That could push the payout ratio for the second quarter higher than the very low 43 percent rate in the first quarter.

The company’s purchase of Cango Inc, a major independent retail fuel marketer in Ontario, closed in late June. Consequently, while it’s very promising for the rest of 2011, it won’t have an impact on the second quarter other than dilution from the CAD86 million equity offering completed in early June. That offering was successfully up-sized from an original CAD75 million, a definite sign of strength for Parkland. There was also the matter of a fuel spill from a company-owned tanker truck in British Columbia, though CEO Bob Espey pronounced the “financial impact to Parkland will be immaterial.”

All in all, what I expect to see is another quarter of strong cash flow and revenue growth, offset by some very temporary dilution from financing of recent acquisitions. Dividend growth is unlikely as long as the company is growing quickly and absorbing new assets. But things are definitely moving in that direction. Parkland Fuel is a buy up to USD13.

Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE)–Aug. 4 (estimate). The big news this month was the renewal of a revolving bank facility with a four-year term and an aggregate borrowing limit of CAD2.25 billion, CAD900 million of which is already drawn. That should set the stage for targeted but aggressive development of the company’s wealth of properties.

Second-quarter results are likely to be affected by the wildfires and flood conditions in northern Alberta. The unfortunate combination has drawn a major effort from management on behalf of affected workers and communities, which should pay off in the long haul in good will and worker retention. But in the meantime 35,000 barrels of oil equivalent was shut in, and much of it remains offline. Offsetting that on the positive side will be higher oil prices versus a year ago and several other areas of development where production is rising. And there’s no danger to the dividend, which was covered by better than 3-to-1 in the first quarter.

Finally, this bad news is well priced in for Penn West, which now trades at a sizeable discount to the value of its reserves in the ground even using very conservative assumptions. Penn West Petroleum is still a buy up to USD30. Note the recent decline is mostly due to lower oil prices, which continue to set the tone for the stock.

Perpetual Energy Inc (TSX: PMT, OTC: PMGYF)–Aug. 10 (estimate). Despite rising production of oil and natural gas liquids–as well as still aggressive hedging–Perpetual is almost certain to see another quarter of lower realized selling prices versus year-earlier levels. We could well see improvement from first-quarter levels, however.

In a mid-June report management affirmed it’s taken advantage of stronger summer pricing to lock in fixed-price sales contracts for 24 percent of expected 2011 production. The prices were right around the CAD4 per gigajoule midpoint for the company’s cash flow, debt and payout ratio projections for the year. That’s a good sign for its move to greater liquids output as well as financial and dividend stability.

There are no two ways of putting this: Perpetual is leveraged to a recovery in natural gas prices. Management has increased its staying power with recent moves to redeploy dividend cash to liquids production and development. But we own this one for one reason only, as an aggressive bet on a battered industry that pays us monthly cash while we wait. My buy target for Perpetual Energy remains USD5, but only for the very patient investor who wants a very aggressive bet on natural gas. All others stay away.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 11 (estimate). Those who want a less aggressive bet on natural gas should stick with Peyto, which trades at about a one-third discount to the value of its primarily natural gas reserves. Unlike almost any other rival, the company would still be profitable at much lower selling prices for natural gas.

In the second quarter Peyto will suffer from lower realized selling prices for gas versus 2011 levels but should be able to offset much of the damage with production gains and cost controls. That should provide plenty of cash to continue the company’s development plan, fund the dividend and keep debt levels low, with room to spare.

The company and its stock will do much better if natural gas prices can ever break out of the doldrums. Until then, Peyto Exploration & Development is a solid value and a buy for those who don’t already own it up to USD22.

PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–Aug. 5 (estimate). Directional drilling activity picked up steam in the second quarter of 2011 globally. That should have benefitted PHX immensely, particularly as it was able to take delivery of equipment to meet demand of new business.

I look for solid second-quarter results. The stock, however, is likely to respond much more closely to indications of how the recent drop in oil and gas prices–as well as what appear to be rising concerns about hydraulic fracturing–are affecting directional drilling activity in North America and elsewhere. Judging by recent action in the stock, most are taking a pessimistic view.

That spells an opportunity for those without positions to pick up some PHX Energy Services at a low price, well below my buy target of USD14.

Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–Aug. 9 (estimate). The generally strong pricing environment in Europe and Australia for natural gas and globally for oil should provide a solid boost for Vermilion’s second-quarter results. The company’s Canada properties have apparently emerged virtually unscathed from the fires and floods in central Alberta. Meanwhile, development of new production remains on track in Europe and Australia, as well as in Canada’s Cardium light oil shale trend.

A decision by French politicians to ban hydraulic fracturing even for research purposes shouldn’t impact profit either. And the Corrib pipeline project to develop offshore Irish gas fields is on track. Once Corrib is on line–projected for 2013–Vermilion should return to dividend growth. Until then, the stock’s a solid value anytime it trades under USD50.

Yellow Media Inc (TSX: YLO, OTC: YLWPF)–Aug. 5 (estimate). The retreat in this stock turned into a total rout in June, as speculation grew that the sale of certain assets expected to net CAD745 million was in trouble. That was accompanied by renewed assertions from some analysts that the print directory business is evaporating faster than the Internet business is growing.

My view remains the same as I expressed in the Jun. 27 Flash Alert. That is that I’m going to hold Yellow in the Portfolio until management speaks with its next set of numbers, slated for release in early August. We may see a failure of the Trader sale and a dividend cut before then. But that and much worse is priced in. Again, this is not a recommendation to buy. In fact, anyone at this point who can’t afford a total loss should get out.

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