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Action List

Our Best Ideas

Action List Our Best Ideas Equity Research June 1, 2011

Equity Research

June 1, 2011

Action List Our Best Ideas Equity Research June 1, 2011

Introduction

The Action List is a monthly publication that identifies our analysts’ top investment recommendations. As well, it provides a list of important industry milestones to watch for in the coming month and an update on our sector stances. The report also includes updates from our Strategy and Quantitative research teams. While it is always difficult for compendium publications to be both timely and informative, we believe that our product strikes a good balance compared to the quarterly products offered by many of our competitors. At times, if we are not bullish on a particular sector, we may not have an Action List pick in that space. The performance of our Action List picks is monitored on an ongoing basis against the relevant S&P/TSX benchmarks.

J. P. Benson, CFA Head of Research

TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

YOUR ATTENTION IS DIRECTED TO THE IMPORTANT DISCLOSURES IN APPENDIX A.

Please see pages 95 to 99 for important disclosure information, including disclosures on Quantitative Research.

This report is strictly a summary. It should not be used as the sole basis for investment decision-making.

For information relating to Justification of Target Price and Key Risks to Target Price please visit our website at https://www.tdsresearch.com/equities/disclosures.

Table of Contents

4

Action List Additions and Deletions Since Our Last Edition Performance Review Investment Strategy 8

5

6

TD Newcrest Action List (as of May 31, 2011)

12

18

Banks 21

Biotechnology & Health Care 24 Chemicals & Fertilizers 27

30

Communications

Quantitative Analysis Alternative Energy

Consumer Discretionary 33 Consumer Staples 36

39

Diversified Financials

Energy Producers – Intermediate Oil & Gas 42

Energy Producers – International

44

Energy Producers – Senior & Unconventional

47

Energy Services 50

Gold & Precious Minerals 53

Industrial Products

56

Insurance

59

Media

62

Metals & Minerals 64

67

Paper & Forest Products 69 Pipelines, Power & Utilities 72

Real Estate 75 Special Situations 78 Technology 81

84

Transportation – Railroads 87 Action List Rules 94 Appendix A. Important Disclosures 95

Transportation – Aerospace

Multi-Industry

TD Newcrest Action List (as of May 31, 2011)

 

Share

Target

Page

Sector

Action List Pick

Ticker

Price

Price

18

Alternative Energy

None

21

Banks

None

24

Biotechnology & Health Care

None

27

Chemicals & Fertilizers

None

30

Communications

Thomson Reuters Corp.

TRI-T

$37.74

$50.00

 

Manitoba Telecom Services Inc.

MBT-T

$34.46

$39.00

33

Consumer Discretionary

None

36

Consumer Staples

Alimentation Couche-Tard Inc.

ATD.B-T

$26.92

$33.00

 

Loblaw Companies Ltd.

L-T

$41.60

$51.00

39

Diversified Financials

Canaccord Financial Inc.

CF-T

$14.00

$19.00

42

Energy Producers – Intermediate

None

44

Energy Producers International

Bankers Petroleum Ltd.

BNK-T, L

$7.97

$12.50

47

Energy Producers – Senior & Unconventional

Canadian Natural Resources Ltd.

CNQ-T, N

$42.17

$53.00

50

Energy Services

Trican Well Service Ltd.

TCW-T

$23.29

$30.00

53

Gold & Precious Minerals

Goldcorp Inc.

GG-N

US$50.07

US$66.00

 

Eldorado Gold Corp.

ELD-T; EGO-A

$15.37

$22.00

56

Industrial Products

None

59

Insurance

None

62

Media

None

64

Metals & Minerals

Teck Resources Ltd.

TCK.B-T

$50.82

$68.00

 

First Quantum Minerals Ltd.

FM-T

$131.76

$155.00

67

Multi-Industry

None

69

Paper & Forest Products

Sino-Forest Corp.

TRE-T

$19.27

$34.00

72

Pipelines, Power & Utilities

ATCO Ltd.

ACO.X-T

$63.36

$69.00

 

Canadian Utilities Ltd.

CU-T

$57.11

$60.00

75

Real Estate

Homburg Canada REIT

HCR.UN-T

$12.85

$14.00

78

Special Situations

Progressive Waste Solutions

BIN-N

US$25.13

US$33.00

81

Technology

None

84

Transportation – Aerospace

None

87

Transportation – Railroads

None

Transportation – Railroads None — — — Additions to the Action List since our last edition.

Additions to the Action List since our last edition.

Action List Additions and Deletions Since Our Last Edition

Additions

Canadian Natural Resources Ltd. (CNQ-T, N; effective May 18, 2011) We added Canadian Natural Resources to the Action List on May 18. The January fire at its Horizon Upgrader and subsequent sell-off in its shares has created a unique entry point, in our view. With expectations of a return to full productive potential in 2012, we contend that the outlook is very positive. The company also stands to benefit most from the recent narrowing in heavy differentials, a trend that is likely to persist for the foreseeable future.

Deletions

Torstar Corp. (TS.B-T; effective May 5, 2011) Torstar shares have performed well, returning 97% since we added them to the Action List in March 2010. After disappointing Q1/11 results announced on May 4 and with few catalysts on the horizon, we downgraded the stock to BUY. The valuation remains attractive and we still believe that the stock is well suited for value investors.

Groupe Aeroplan Inc. (AER-T; effective May 27, 2011) With our 12-month return to target down to 33%, from 68% at the time of its upgrade, we removed Groupe Aeroplan from the Action List on May 27. Despite the many positives we see in the company’s business and strategic direction, we believe that 2011 is going to remain a transition period in terms of cash flow generation and earnings from the U.S. and U.K. This, combined with lingering headline risk related to Air Canada’s union negotiations and the competition bureau’s investigation into credit card regulations justify moving to a BUY, based on the reduced upside to our target.

Performance Review

After reaching a mid-month low on May 13, the S&P/TSX Composite Index (total return) posted nine consecutive days of positive returns, ending with a small decline on May 31. However, this was not enough to erase the losses sustained earlier in the month, and the Composite once again finished down on the month, posting a May return of -0.9%. This now marks two consecutive months of decline, which last occurred in May and June last year. U.S. markets did not fare any better and were also down. The S&P 500, NASDAQ Composite and Dow Jones Industrial Average posted losses of 1.1%, 1.3% and 1.9%, respectively.

At the sector level in Canada, high yielding and defensive sectors did best. Telecoms easily led the way, with a return of 7.4%. Consumer Staples and Utilities followed with returns of 3.6% and 3.1%, respectively. On the down side, Information Technology was once again the worst performing sector (third month in a row), shedding 4.8% in May. Research in Motion Ltd. (RIM-T) declined 10.3% in May and is now down 28.8% year to date. In the U.S., it was a similar story, with the best performers being the defensive sectors of Consumer Staples, Health Care, Telecommunications and Utilities, up 2.4%, 2.2%, 1.6% and 1.6%, respectively. The Energy sector had the biggest declines, and finished the month down 4.6%.

Our Action List returned -0.7% on the month, outperforming the S&P/TSX Composite by 20 bps. Our best relative performing group was Energy Producers Senior & Unconventional, with the addition of Canadian Natural Resources Ltd. (CNQ-T) in mid-May. Year to date, Consumer Discretionary remains our best performing group.

Indices

Total Return (%)

1-Month

Year-to-Date

Action List

-0.7

2.8

S&P/TSX Composite

-0.9

3.6

Equal-Weight Benchmark

-0.4

7.6

S&P 500

-1.1

7.8

NASDAQ Composite*

-1.3

6.9

Dow Jones Industrial Average*

-1.9

8.6

* Price return only.

TD Newcrest – Action List Performance*

TD Newcrest Action List

Energy Producers - Senior & Unconventional

Technology

Transportation - Aerospace

Special Situations

Energy Producers - Intermediates

Consumer Staples

Pipelines, Power, & Utilities

Metals & Minerals

Real Estate

Communications

Banks

Industrial Products

Insurance

Energy Services

Energy Producers – International

Transportation - Railroads

Multi-Industry

Health Care

Paper & Forest Products

Consumer Discretionary

Alternative Energy

Diversified Financials

Gold & Precious Metals

*% total return.

Media

May 2011

-0.7 -0.9 3.5 -3.4 0.0 -4.8 2.0 -2.2 1.1 -1.9 0.0 -2.7 6.4 3.7 8.0
-0.7
-0.9
3.5
-3.4
0.0
-4.8
2.0
-2.2
1.1
-1.9
0.0
-2.7
6.4
3.7
8.0
5.6
-1.7
-3.2
2.6
1.2
6.5
5.1
0.0
-0.4
0.0
0.1
0.0
0.3
-0.1
0.6
-4.0
-2.7
0.0
2.0
0.0
2.1
0.0
2.5
-18.0
-15.2
0.0
3.5
0.0
3.5
-2.1
3.3
-10.5
-4.6
-11.3
-2.5
-30
-20
-10
0
10
20
30
Action List
Comp Group

Year-to-Date

TD Newcrest Action List

Consumer Discretionary

Technology

Gold & Precious Metals

Media

Communications

Metals & Minerals

Energy Producers - Senior &

Unconventional

Special Situations

Insurance

Energy Producers - Intermediates

Industrial Products

Consumer Staples

Real Estate

Energy Producers – International

Pipelines, Power, & Utilities

Paper & Forest Products

Alternative Energy

Multi-Industry

Banks

Transportation - Railroads

Energy Services

Diversified Financials

Transportation - Aerospace

Health Care

-100

-50

0

50

100

Transportation - Aerospace Health Care -100 -50 0 50 100 Action List Comp Group A Division

Action List

Transportation - Aerospace Health Care -100 -50 0 50 100 Action List Comp Group A Division

Comp Group

Investment Strategy

John Aitkens

We define an economic soft-landing as a period of time when growth slows, but does not turn negative. It has been our view that the U.S. and global economies have been in a soft landing since momentum peaked in the second quarter of last year. We still believe that the U.S. and global re-acceleration will most likely begin early next year.

Market expectations have swung on either side of this soft landing view. The correction in May and June last year came amid rising fears of double-dip (a hard landing or recession). By early this year, market expectations had swung from pessimism to optimism that growth was robust and ready to accelerate. We argued that it was too soon to expect a re-acceleration of growth based on the pattern evident in past cycles, as well as the important fact that China was tightening in an attempt to slow growth. Equity markets recently corrected, led by the resources, as weak data has guided expectations back to a view more consistent with continued soft landing.

We have shown that equity markets perform quite well in soft landings, as investors come to realize that the temporary slowdown will be followed by re- acceleration. However, resource stocks have typically lagged, as commodity prices have tended to be weak in past soft landings, although not as weak as in hard landings (recessions). The resource sector has performed quite well in this soft landing (until the recent correction), which we attribute to the impact of QE2 and the secular bull market in commodities that has kept us at market weight, despite the global slowdown.

The resource sector typically provides great returns when global growth is accelerating; so, we do plan to return to an overweight stance this year. We expect continued weak economic data, such as the June 1, 2011 U.S. PMI release, to translate into further weakness in resource stocks, providing the buying opportunity we are looking for. Some analysts have pointed out that when the U.S. PMI moves down toward 50 from 60, bear market have sometimes followed. The PMI makes such a move in both soft and hard landings. It is best not to average these two outcomes together as stocks do well in soft landings (when the yield curve is positively sloped) and quite poorly in hard landings (when the yield curve is inverted). We have attached a chart of stocks and the PMI during the 1995-1996 soft landing and the 2001 hard landing to show the different market outcomes.

We continue to recommend a maximum weighting in stocks and a minimum weighting in bonds. We recommend underweighting defensive sectors, including gold. We continue to hold a market weight in the resource sector, which will likely come under pressure with some disappointment in global growth. The remaining higher beta sectors should be overweight (financials, technology, industrials, consumer discretionary). We anticipate returning the resource sectors to an overweight within the next few months.

TSX Group Weightings

Overweight

Market Weight

Underweight

Industrials Consumer Discretionary Financials Technology

Energy Materials ex Gold Health

Gold

Consumer Staples

Telecom

 

Utilities

Exhibit 1.

U.S. Purchasing Managers' Index ISM

70 70 60 60 53.5 50 50 40 40 30 30 1955 1960 1965 1970
70
70
60
60
53.5
50
50
40
40
30
30
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
M441
Shaded Areas Represent U.S. Economic Recessions
MAY 2011
Exhibit 2.
Steepness of U.S. Yield Curve
(Ratio of TBills to Long Term Treasury Bonds)
Median: 0.80
Average: 0.77
1.6
1.6
1.4
1.4
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.02
0.0
0.0
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
W17
Shaded Areas Represent U.S. Economic Recessions
28 MAY 11

Exhibit 3.

ISM PMI ( ) and S&P 500 ( right) 58 800 56 750 54 700
ISM PMI (
) and S&P 500 (
right)
58
800
56
750
54
700
52
650
50
600
48
550
46
500
44
450
J
FMAMJ
J
ASOND
J
FMAMJ
J
ASOND
1995
1996
M4356
DEC 1996
Exhibit 4.
ISM PMI (
) and S&P 500 (
right)
60
1600
1500
55
1400
1300
50
1200
1100
45
1000
900
40
800
1999
2000
2001
2002
M4357
Shaded Areas Represent U.S. Economic Recessions
DEC 2002

Quantitative Analysis

Chris Dutton, CFA

June 2011 As previously discussed earlier last month in our Momentum Weekly, dated May 26, 2011, the current macro trends appear almost identical to those a year ago through May. We believe that until these trends change, further weakness is likely through June. Like last year, rising macro risks with European sovereign debt, and the Chinese and U.S. economies all weighed on the market through what is typically a weak seasonal period.

We believe that investors should be following several key macro trends that could help time or at least confirm a cyclical bottom. Many of these trends gave us a lead signal to reduce cyclical exposure over the past several weeks and, in turn, may give us an early signal to increase cyclical exposure. However, like last year, it may still be too early, as seasonal trends in commodities tend to deteriorate through June.

Last year, the S&P/TSX Composite (July 5) and the S&P 500 (July 2) bottomed in early July. We would not be surprised by a similar bottom this year. Technically, a bottom may not be reached until there is a market capitulation in which all sectors, both cyclical and defensive, decline on heavy volume. We saw a similar pattern last year.

Materials Interest rates will likely remain an important factor for gold. In the past month, U.S. rates and euro rates continued their decline. At the same time, distressed European sovereign debt yields have risen. This prompted us to raise our gold position closer to a market weight. If less distressed European yields rise, such as in Spain, we will likely raise our gold exposure.

We are not bullish on the base metals. Our concern here remains China and the continuing slowing trend evident in economic data like the China PMI. Copper inventories are also rebuilding. Until Chinese cyclical sectors recover, we would avoid base metals. We do, however, remain biased toward the fertilizer group, and in particular Potash Corp. of Saskatchewan (POT-T, $60, portfolio weight 4%). Corn futures remain backwardated – to us, a positive signal of a tight market.

Energy In our view, the key positive factor for oil remains the current backwardated market in Brent oil futures, an indication that the international oil market is discounting tighter oil supplies. The majority of oil rallies have occurred in a backwardated market, as in 2007-2008. However, this can change very quickly and, in our view, needs to change for the benefit of the economy and the market. Without a substantial decline in oil, as in H2/96, we believe it will be very difficult for the market to recover.

Specifically, we favour energy names with higher dividend yields and some natural gas exposure. A reduction in U.S. natural gas inventories over the past month, strong seasonal trends, and the potential for a short cover rally could support higher prices.

Industrials Industrials that performed well in Q1/08, when oil was rising late in the cycle, also seem to be outperforming again. Finning International Inc. (FTT-T, $28.00, portfolio weight 2%) remains a top pick, given its strong underlying earnings trend and positive commodity exposure. FTT fits well into our theme of owning stocks that service the resource sector.

Consumers Defensive consumer stocks have rallied as a result of rising market risks. However, in Canada, the premium paid for this defensive exposure is coming at too high a cost, in our view.

Information Technology, Telecommunication Services Technology remains one of our preferred sectors in the U.S., as we still see very strong earnings momentum. However, the uncertainty surrounding Japan is a major headwind, and, as such, we would prefer software and service stocks at this point. We continue to favour CGI Group Inc. (GIB.A-T, $22, portfolio weight 1%), following positive Q1 results. Technology, which continues to offer positive earnings momentum, is one of the more undervalued sectors, in our view. As an example, Apple Inc. (AAPL-Q, $325) trades at only 12x 2012 earnings.

Financials, Utilities As expected, the Canadian banks’ earnings momentum slowed with their fiscal Q2 results. Historically, Q2 has been a weak quarter for the banks, and it was again this year. The major trading risk we see with the Canadian banks is the sharp decline in U.S. banks. Until U.S. banks stabilize, we would not add to our position.

Quantitative Model Portfolio Revisions in May 2011

Large Cap Stocks Added/Increased

Stocks Removed/Decreased

Pengrowth Energy Corp. (2%)

Goldcorp Inc. (3%)

Sino-Forest Corp. (2.5% to 1.2%)

Barrick Gold Corp. (5 to 3%)

Bankers Petroleum Ltd.

For complete details of our Canadian Earnings Momentum Model please visit our website at www.tdsecurities.com.

Exhibit 1.

11

10

9

8

7

6

5

4

3

2

1

PIGS - Average 10Yr Bond Yield Euro - 10Yr Bond Yield U.S. - 10Yr Bond
PIGS - Average 10Yr Bond Yield
Euro - 10Yr Bond Yield
U.S. - 10Yr Bond Yield
GOLD
The rise in distressed European yields and the
decline in U.S. and euro yields is very bullish
for gold, in our view.
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2008
2009
2010
2011

1600

1500

1400

1300

1200

1100

1000

900

800

700

600

Exhibit 2.

12600

11400

10800

10200

9600

9000

8400

7800

7400

7000

6600

6200

5800

5400

5000

4600

4200

3800

3600

3400

3200

3000

2800

2600

2400

2200

2000

1800

1600

TSX Diversified Metals China PMI (Source: China Federation of Logistics and Purchasing) The decline in
TSX Diversified Metals
China PMI (Source: China Federation of Logistics and Purchasing)
The decline in China PMI and
stocks is a big risk for base metal
stocks.
2005
2006 2007
2008 2009
2010
2011

59

58

57

56

55

54

53

52

51

50

49

48

47

46

45

44

43

42

41

40

39

Exhibit 3.

WTI Oil - Non-Commercial (Speculative) Net Futures Position WTI Oil - Closest Contract 300000 144
WTI Oil - Non-Commercial (Speculative) Net Futures Position
WTI Oil - Closest Contract
300000
144
130
Fundamentally, with a slowing global economy, we
122
believe that oil prices are too high on speculative
116
250000
buying. For non-energy stocks to recover, we may
need to see a substantial decline in oil prices, similar to
110
104
2006.
98
92
200000
86
80
76
72
150000
68
64
60
56
100000
52
48
44
50000
40
38
36
34
32
0
30
28
26
-50000
24
22
20
-100000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Exhibit 4.
CNR - Close
CNR - 12Month Forward Consensus EPS
CNR - Trailing Operating EPS with Next Qtr Estimate
100
5.5
90
5.0
80
4.5
CNR (and SNC Lavalin) have the most
stable earnings within the industrial sector.
70
4.0
60
3.5
50
3.0
40
2.5
30
2.0
20
1.5
10
1.0
0
0.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Exhibit 5.

Exhibit 5. gib.a - Close gib.a - 12M Forward Consensus EPS gib.a - 12M Trailing Operating

gib.a - Close

gib.a - 12M Forward Consensus EPS gib.a - 12M Trailing Operating EPS 22 1.6 21
gib.a - 12M Forward Consensus EPS
gib.a - 12M Trailing Operating EPS
22
1.6
21
1.5
20
1.4
19
18
In technology, the market has
rotated into less cyclical software
and service stocks like GIB.A.
1.3
1.2
17
1.1
16
1.0
15
0.9
14
0.8
13
0.7
12
11
0.6
10
0.5
9
0.4
8
7
0.3
6
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.2
5

Exhibit 6.

2005 2006 2007 2008 2009 2010 2011 0.2 5 Exhibit 6. RY (NYSE) - Close JP

RY (NYSE) - Close JP Morgan (JPM) - Close

70

60

50

40

30

20

10

With U.S. banks rolling over, we are not willing to add to Canadian banks at
With U.S. banks rolling over,
we are not willing to add to
Canadian banks at present.
2006 2007
2008
2009
2010 2011

70

60

50

40

30

20

10

16 A Division of TD Securities Inc.

to Canadian banks at present. 2006 2007 2008 2009 2010 2011 70 60 50 40 30

Quantitative Model Portfolio: LargeCap (May 31, 2011)

Quantitative Model Portfolio: LargeCap

     

Rel. to

 

Company Name

Symbol

Yield

Date Added

Average Price

Current Price

S&P/TSX

Comp

Weight

Current Weight

S&P/TSX

Comp

Percent Return from Date Added

Energy

   

27.0%

23.7%

0.9x

143.95%

Suncor Energy

SU

0.99%

12/03/2010

$37.92

$40.45

4.0%

5.4%

1.4x

6.66%

Enbridge

ENB

3.02%

04/20/2009

$18.36

$32.47

1.6%

4.0%

2.6x

76.85%

Talisman Energy

TLM

1.29%

06/07/2010

$17.51

$20.46

1.3%

3.2%

2.4x

16.87%

Penn West Energy

PWT

4.31%

10/04/2010

$21.40

$25.06

0.7%

3.2%

4.4x

17.10%

Canadian Oil Sands

COS

3.97%

03/08/2011

$32.33

$30.21

0.9%

2.8%

3.1x

-6.56%

Pengrowth Energy

PGF

6.57%

05/16/2011

$12.65

$12.78

0.3%

2.0%

7.5x

1.03%

Imperial Oil

IMO

0.91%

03/30/2011

$49.91

$48.12

0.8%

1.9%

2.6x

-3.59%

Trican Well Service

TCW

0.43%

08/12/2010

$17.18

$23.29

0.2%

1.2%

5.7x

35.58%

Materials

   

22.2%

18.4%

0.8x

72.43%

Potash Corp.

POT

0.50%

09/28/2009

$43.41

$54.62

2.9%

4.1%

1.4x

25.83%

Teck Resources

TCK.B

1.18%

01/12/2010

$39.74

$50.82

1.5%

3.0%

2.0x

27.88%

Barrick Gold

ABX

1.01%

07/25/2007

$40.63

$46.39

2.9%

3.0%

1.0x

14.17%

Goldcorp

G

0.82%

05/16/2011

$47.13

$48.46

2.4%

2.9%

1.2x

2.82%

Yamana Gold

YRI

0.94%

12/02/2010

$12.13

$12.43

0.6%

2.0%

3.5x

2.47%

Eldorado Gold

ELD

0.65%

02/28/2011

$16.42

$15.37

0.5%

1.9%

3.7x

-6.39%

Sino-Forest

TRE

0.00%

09/14/2010

$18.24

$19.27

0.3%

1.3%

4.4x

5.65%

Industrials

   

5.8%

8.3%

1.4x

67.09%

Canadian National Railway

CNR

1.72%

12/01/2008

$51.77

$75.77

2.2%

4.6%

2.1x

46.35%

Finning International

FTT

1.81%

09/03/2010

$22.35

$28.74

0.3%

2.2%

7.4x

28.59%

SNC Lavalin

SNC

1.47%

02/09/2011

$61.89

$57.03

0.5%

1.4%

2.7x

-7.85%

Consumer Discretionary

   

4.2%

3.2%

0.8x

44.26%

Magna International

MG

2.08%

11/05/2009

$32.51

$46.90

0.6%

3.2%

5.1x

44.26%

Financials

   

28.9%

23.0%

0.8x

124.71%

Royal Bank of Canada

RY

3.82%

02/24/2011

$56.26

$56.62

5.1%

6.2%

1.2x

0.64%

CIBC

CM

4.33%

10/27/2008

$58.00

$80.31

2.0%

5.4%

2.7x

38.47%

Bank of Nova Scotia

BNS

3.50%

12/09/2003

$34.75

$59.36

4.0%

5.1%

1.3x

70.84%

RioCan REIT

REI.UN

5.43%

10/13/2010

$22.46

$25.44

0.4%

2.1%

5.1x

13.27%

Power Corp

POW

4.17%

01/31/2011

$27.30

$27.84

0.6%

2.1%

3.5x

1.98%

Sun Life Financial

SLF

4.73%

04/05/2011

$30.60

$30.45

1.1%

2.1%

1.9x

-0.49%

Information Technology

   

2.1%

6.4%

3.1x

-8.57%

Technology Select SPDR

XLK

1.23%

02/08/2010

$23.05

$25.64

NA

4.0%

NA

11.21%

Reseach in Motion

RIM

0.00%

11/15/2010

$60.25

$41.35

1.3%

1.3%

1.1x

-31.37%

CGI Group

GIB.A

0.00%

02/08/2011

$20.02

$22.34

0.3%

1.2%

3.6x

11.59%

Telecommunication Services

   

4.3%

4.6%

1.1x

51.69%

Manitoba Telecom

MBT

4.93%

04/05/2011

$30.18

$34.46

0.1%

2.3%

16.5x

14.19%

TELUS

T

4.15%

06/14/2010

$39.49

$53.03

1.1%

2.3%

2.1x

34.28%

Utilities

   

1.7%

2.1%

1.2x

1.61%

TransAlta

TA

5.40%

04/29/2011

$21.13

$21.47

0.3%

2.1%

6.9x

1.61%

Cash Totals:

10.3%

Portfolio Yield:

2.29%

Equity Totals:

89.7%

Performance

 

1-Week

4-Week

3-Month

6-Month

1-Year

Year-to-Date (2011)

Since Inception

(9/12/2000)

Quantitative Portfolio

%

1.461%

0.279%

-3.803%

2.245%

13.390%

 

-1.252%

154.920%

S&P/TSX Comp Cap (10%)

%

1.534%

0.807%

-2.266%

6.568%

19.279%

 

2.675%

52.070%

S&P/TSX 60 Cap (10%)

%

1.426%

0.770%

-2.695%

6.444%

16.012%

 

2.662%

63.438%

S&P/TSX Completion

%

1.821%

0.910%

-1.082%

6.840%

29.870%

 

2.644%

46.796%

S&P/TSX SmallCap

%

2.152%

0.289%

-2.383%

7.272%

32.480%

 

0.780%

52.160%

S&P 500

%

2.197%

-0.842%

2.976%

13.947%

25.636%

 

6.963%

-9.230%

NASDAQ Comp

%

3.246%

-0.222%

3.576%

13.492%

27.582%

 

6.877%

-26.346%

Dow Jones Industrial Ave.

%

1.729%

-1.856%

4.244%

14.208%

25.397%

 

8.571%

11.898%

 

Turnover:

85.2%

CAGR:

9.128%

All views expressed are the opinions of Quantitative Research based on historical company fundamentals and market statistics. No guarantee of outcome is implied. Due to the quantitative and technical nature of this report, the issuers or securities recommended or discussed in the report are not continuously followed and opinions may change without notice. TDSI is under no obligation to inform you of such a change. As such, investors may not want to base their investment decision solely on this report. TD Securities Inc. may publish fundamental research on the securities of these issuers which expresses differing opinions. Clients should contact their TD Securities Inc. representative to request such material.

Sources: Global Insight, Thomson Financial, CPMS, Bloomberg, S&P/TSX Index Services, S&P Index Services, TSX, NYSE, NASD, company reports.

Alternative Energy

170

150

130

110

90

70

Action List Comp Group* S&P/TSX Oct08 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11
Action List
Comp Group*
S&P/TSX
Oct08
Jan09
Apr09
Jul09
Oct09
Jan10
Apr10
Jul10
Oct10
Jan11
Apr11

Total Return %

 

1M

3M

6M

12M

YTD

Cum. 1

Action List

0.0

0.0

0.0

0.0

0.0

0.0

Comp. Group*

3.5

5.5

8.4

19.0

7.5

18.9

S&P/TSX Comp.

(0.9)

(1.8)

7.9

20.4

3.6

52.4

* S&P/TSX Independent Power Producers & Energy Traders (Subindustry)

¹ Since October 21, 2008

Sean Steuart, CFA

Industry Overview

Performance Summary for the Month Larger cap Canadian Alternative energy stocks had a good performance in May, with all but one stock under coverage posting positive returns. With markets experiencing something of a volatile month, investors in the sector stuck with larger names that in most cases offer secure dividend yields. Share prices of senior operators were up 3% on the month, on average, while the junior operators’ share prices fell by an average of 12%, mainly due to the poor performance of two geothermal stocks. Prospective developers saw their share prices fall by an average of 5.5%, while technology- focused stocks declined by 13.4%, on average. The WilderHill New Energy Global Innovation Index (a global renewable energy composite) recorded a decline of 4.7% in May; recall that the performance of this tech-heavy index is highly correlated with crude oil prices, which were off 8.6% during the month. These compare with negative returns of 0.9% and 1.6% for the S&P/TSX Composite Index and the S&P/TSX Clean Technology Index, respectively.

Within our coverage universe, Algonquin Power & Utilities Corp. recorded the largest gain, rising 8.4% in May. Boralex Inc. posted the only decline, falling 0.6% during the month.

Things to Watch For in the Coming Month Q1/11 reporting for companies within our coverage universe continues into June this year. While many Canadian-listed alternative energy companies normally report their results in the second week of May, companies that have adopted International Financial Reporting Standards (IFRS) as of January 2011 have an additional 30 days to file their results. Capstone Infrastructure, Northland Power and Innergex all plan to report their Q1/11 results during the week of June 6.

The Ontario Power Authority (OPA) announced additional “capacity allocation exempt” (CAE) feed-in tariff (FIT) contracts, which are small projects of 500 kW or less that are connected to the distribution system, rather than the province’s transmission system. This latest award included 839 FIT projects, with a total capacity of 141 MW. These contracts are being awarded to applicants that submitted

applications for CAE projects between June 5 and December 7, 2010. Separately, we note that Tim Hudak, the leader of the Ontario P.C. Party, has promised to eliminate the FIT program while leaving existing FIT contracts in place, with the exception of the province’s agreement with Samsung, which he plans to cancel. Energy is likely to be an important issue in October’s provincial election.

Looking south to the U.S., there is a wide belief that any federal action regarding greenhouse emissions is on hold until after the 2012 elections at a minimum. This has left state and regional level emissions programs as the current drivers of future emissions reductions. In May, New Jersey’s Governor, Chris Christie, announced that the state will pull out of the Regional Greenhouse Gas Initiative (RGGI), a regional emissions reduction regimen that includes 10 northeastern and mid-Atlantic states and has been operating since 2008. RGGI targets a 10% reduction in emissions from the power sector by 2018. Since the program launched in New Jersey, it has provided over US$100 million in revenue from quarterly carbon auctions, with half going to renewable energy and energy efficiency support programs.

Separately, a recent California court ruling stated that the state did not adequately consider alternatives to the market based cap and trade system it selected as part of the Western Climate Initiative (WCI). Seven U.S. states and four Canadian provinces launched the WCI in 2007, targeting a 15% reduction in greenhouse emissions below 2005 levels by 2020. While several provinces have delayed their participation, many industry watchers still anticipate that California, by far the most important participant, will launch a cap and trade program in 2012.

Our Sector Stance We recommend that investors take a market weight sector position. While we consider the sector to be fairly valued, we continue to see an opportunity for outperformance in select cases. We believe that the better relative value in the group lies with some of the “fallen angels” (e.g., companies that have slashed dividends as a means of preserving capital, or those that have disappointed the market with respect to growth initiatives). Our top picks in the group are Boralex Inc. and Algonquin Power & Utilities Corp.

Analyst

SS

SS

SS

SS

SS

SS

SS

Overall

Rating

LOW

MED

MED

MED

Risk

MED

MED

MED

Rating

HOLD

HOLD

HOLD

HOLD

HOLD

BUY

BUY

Return

Total

26%

17%

-5%

6%

9%

5%

6%

12-Month

Target

$11.00

$14.50

$15.00

$10.00

$24.00

$8.00

$6.50

2012E

12.8x

12.0x

12.5x

17.7x

14.0x

11.7x

12.5x

9.0x

EV/EBITDA

2011E

14.6x

16.8x

14.1x

21.2x

15.4x

10.8x

15.7x

8.2x

2010A

13.5x

15.2x

10.7x

15.7x

14.7x

12.1x

16.3x

9.8x

2012E

16.7x

11.0x

14.7x

35.4x

10.7x

11.4x

NMF

NMF

2011E

17.2x

16.8x

13.7x

28.0x

11.7x

15.8x

NMF

NMF

P/E

2010A

17.0x

11.1x

14.6x

19.2x

13.7x

26.4x

NMF

NMF

$1,648

$1,780

$2,886

$1,283

$3,957

$945

$641

EV

$1,189

Debt

$605

$885

$146

$447

$576

$704

Net

EBITDA

2011E

112.5

110.6

156.0

267.3

120.1

119.1

52.3

Yield

0.0%

8.1%

7.3%

5.8%

6.4%

4.5%

5.6%

$0.00

$0.66

$0.58

$1.09

$0.26

$1.08

$1.30

Dist.

Ind.

Cap (mm)

Market

$2,036

$1,022

$2,518

$495

$813

$672

$331

Shares

115.9

119.8

108.8

60.5

37.9

68.5

81.3

O/S

Curr.

Rep.

US$

C$

C$

C$

C$

C$

C$

Year-

Dec

Dec

Dec

Dec

Dec

End

Dec

Dec

$10.00

$17.00

$23.15

$14.91

Price

Curr.

$8.75

$8.18

$5.80

Exch.

(2) Share price, market cap, dividend, EV & 12-month target in C$

T

T

T

T

T

T

T

(1) P/AFCF (adjusted free cash flow per unit) substituted for P/E

BRC.UN

Symbol

AQN

CSE

BLX

ATP

INE

NPI

Alternative Energy Universe

Analyst(s): SS = Sean Steuart, CFA

Brookfield Renewable Power Fund (1)

Algonquin Power & Utilities Corp. (1)

Capstone Infrastructure Corp. (1)

Innergex Renewable Energy Inc.

Atlantic Power Corp. (1, 2)

Northland Power Inc. (1)

Boralex Inc.

Average

Notes:

AL BUY = Action List BUY

Banks 140 Total Return % 120 1M 3M 6M 12M YTD Cum. 1 100 80
Banks
140
Total Return %
120
1M
3M
6M
12M
YTD
Cum. 1
100
80
Action List
0.0
0.0
0.0
0.0
0.0
19.2
60
Comp. Group*
(0.4)
1.3
9.3
16.2
9.6
22.6
40
S&P/TSX Comp.
(0.9)
(1.8)
7.9
20.4
3.6
7.8
* S&P/TSX Commercial Banks (Industry)
¹ Since October 11, 2007
Action List
Comp Group*
S&P/TSX
Oct07
Jan08
Apr08
Jul08
Oct08
Jan09
Apr09
Jul09
Oct09
Jan10
Apr10
Jul10
Oct10
Jan11
Apr11

Jason Bilodeau, CFA

Industry Overview

Performance Summary for the Month On average, the Big Six banks were up 0.1% on the month, outperforming the S&P/TSX Composite Index, which was down about 1.0%. U.S. banks (based on our list), including U.S. Money Center and Super Regional banks, underperformed their Canadian counterparts, and were down an average of 4.7% month over month.

Things to Watch For in the Coming Month The Canadian banks have largely completed Q2/11 reporting, with only Canadian Western and Laurentian Bank left to report on June 2.

We did not expect the Canadian banks’ Q2 results to match the strength and quality of Q1. It certainly has not, with three of five names coming in below lower expectations, with some broad softer underlying trends.

A top watch item for a few quarters now, the feared slowdown in Domestic Retail banking is starting to come through. It is not dramatic at this point, but volumes on the Personal side remain modest. As a consequence of weaker volume trends, the industry is seeing some renewed margin pressure, particularly around Residential products. Overall, margins were off around 5–10 bps on the quarter. Meanwhile, trends in Commercial are starting to pick up a bit, and most management teams continue to cite this area as one with good potential through the rest of the year. There are some signs of an uptick in competition, but it is not as intense as we are seeing on the Personal side, and the products generally offer much wider spreads to begin with. Wholesale largely under-delivered this quarter, with what looks like a challenging start to Q3. Wholesale earnings were down even more than we expected after a strong Q1. The key driver has been weaker Trading numbers, primarily on the Fixed Income front.

Our Sector Stance After a strong Q1, Q2 has largely served to temper expectations and the stocks have been fairly weak. Still, even after taking a softer outlook into account, valuations are starting to look better and we foresee growth in H2/11 and 2012. Sentiment likely remains mildly negative in the immediate term, but we are starting to feel a bit better about potential returns over 12–16 months (now around 20%, versus 15% post Q1).

Analyst

Analyst

JB--------------------------------------------------------------------------

JB

JB

JB

JB

JB

JB

JB

JB

Restricted -------------------------------------------------------------------------------

MEDIUM

MEDIUM

Overall

Overall

Rating

Rating

LOW

LOW

LOW

LOW

LOW

LOW

Risk

Risk

Rating

Rating

HOLD

HOLD

HOLD

HOLD

BUY

BUY

BUY

BUY

Return

Return

12.0%

18.1%

20.4%

12.7%

21.4%

11.7%

33.1%

Total

Total

6.0%

12-Month

12-Month

Target

Target

$57.00

$83.00

$68.00

$66.00

$67.00

$94.00

$33.00

$34.00

2012E

2012E

10.7x

11.4x

10.8x

10.5x

11.5x

9.8x

9.9x

8.0x

P/E

P/E

2011E

2011E

10.5x

11.5x

12.8x

12.4x

11.4x

12.8x

10.8x

8.5x

2012E

2012E

$5.35

$5.25

$7.60

$5.20

$5.90

$2.60

$8.10

$3.30

2011E

2011E

$7.05

$2.35

$4.56

$5.00

$5.44

$3.10

$4.62

$7.42

EPS

EPS

2010

2010

$4.55

$6.25

$3.69

$6.45

$1.97

$2.96

$3.92

$4.81

Yield

Yield

3.8%

3.5%

3.0%

3.5%

1.7%

4.5%

3.9%

4.3%

Ind.

Ind.

$2.08

$2.16

$1.56

$2.84

$3.48

$2.80

$1.04

$2.64

$0.52

Div.

Div.

Ind.

Ind.

Cap (mm)

Cap (mm)

$64,109

$13,227

$81,420

$31,827

$74,182

$35,381

Market

Market

$1,250

$2,770

$2,252

O/S (mm)

O/S (mm)

Shares

Shares

1438.0

1080.0

163.4

888.3

571.4

396.3

105.2

23.9

75.0

Curr.

Curr.

Rep.

Rep.

C$

C$

C$

C$

C$

C$

C$

C$

C$

Year

Year

Dec

End

End

Oct

Oct

Oct

Oct

Oct

Oct

Oct

Oct

Financial Services – Insurance Universe

$80.95

$26.33

$59.36

$52.30

$56.62

$30.02

$61.92

Price

Price

$83.51

$80.31

Curr.

Curr.

Analyst(s): JB = Jason Bilodeau, CFA

Canadian Imperial Bank of Commerce

Banks Universe

Canadian Western Bank

Toronto-Dominion Bank

Royal Bank of Canada

Genworth MI Canada

Bank of Nova Scotia

Bank of Montreal

Laurentian Bank

National Bank

AL BUY = Action List BUY

Biotechnology & Health Care

240

190

140

90

40

Action List Comp Group* S&P/TSX Jul05 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10
Action List
Comp Group*
S&P/TSX
Jul05
Jan06
Jul06
Jan07
Jul07
Jan08
Jul08
Jan09
Jul09
Jan10
Jul10
Jan11

Total Return %

 

1M

3M

6M

12M

YTD

Cum. 1

Action List

0.0

0.0

0.0

0.0

0.0

(38.0)

Comp. Group*

2.5

23.8

66.8

128.1

58.1

83.6

S&P/TSX Comp.

(0.9)

(1.8)

7.9

20.4

3.6

53.7

* S&P/TSX Health Care (Sector) ¹ Since July 27, 2005

Lennox Gibbs

Industry Overview

Performance Summary for the Month The S&P/TSX Health Care sector appreciated 2.5% in May. Valeant Pharmaceuticals International (VRX-T, VRX-N) was the most notable outperformer on the month, gaining 5.6% on mixed news. To the upside, management increased 2011 cash EPS guidance to $2.65–2.90 from $2.45–2.70, and announced its intention to acquire Lithuanian Specialty Pharma company AB Sanitas (SAN1L-VSE). To the downside, the Cephalon (CEPH-O) hostile bid was terminated on May 2. We continue to believe that Valeant has the funding, the resolve and the opportunity to maintain its aggressive acquisition agenda over the next 12–24 months. We rate Valeant a BUY in anticipation of it tracking to $4.00 in 2012 cash EPS. CML HealthCare (CLC-T) was also topical, declining 7.3% as it announced the departures of CEO Paul Bristow and COO Kent Nicholson. We interpreted the leadership shakeup as acknowledgement of CML’s shortcomings in the U.S. medical imaging market.

Things to Watch For in the Coming Month

1)

Nordion – Q2/11 earnings release – June 7, 2011

2)

Valeant – FDA determination on Potigabine – June 15, 2011

Beyond the month, we expect:

1)

CML – appointment of a permanent CEO

2)

Nordion versus AECL/Government of Canada – resolution expected fall 2011

3)

CML – new Ontario clinical labs contract – visibility expected Q4/11

Our Sector Stance We are market weight the Canadian Biotechnology and Health Care sector. We continue to favour companies that: 1) are heavily weighted to Canadian Health Care markets; 2) have strong, expansion prospects; 3) have little or no need for short-term borrowing; and 4) have strong competitive positions in their respective businesses.

With the sector having appreciated 63% over the last 12 months, we now consider

many of our mid to large cap companies to be fairly valued on a fundamental

basis. Within this group, M&A has emerged as a key differentiator and potential

value driver. It now appears as though the best performers will likely be

companies with strong prospects to complete accretive acquisitions in the near to

medium term. Valeant leads this group, followed by Paladin Labs. Companies like CML Healthcare fall at the other end of the spectrum. We recently downgraded

CML to REDUCE for several reasons, including the low likelihood of the

company being able to expeditiously acquire the required scale to put its U.S. operation on solid footing.

Analyst

Analyst

LG

LG

LG

LG

LG

LG

LG

LG

LG

LG

MEDIUM

MEDIUM

MEDIUM

MEDIUM

Overall

Overall

Rating

Rating

SPEC

HIGH

HIGH

HIGH

HIGH

HIGH

Risk

Risk

REDUCE

REDUCE

REDUCE

Rating

Rating

HOLD

HOLD

HOLD

HOLD

HOLD

BUY

BUY

Return

Return

Total

Total

-18%

15%

54%

15%

58%

14%

NA

4%

9%

0%

12-Month

12-Month

Target

Target

$60.00

$22.00

$44.00

$12.50

$11.50

$10.00

$4.00

$3.00

$3.50

NA

2012E

2012E

13.1x

14.9x

26.7x

13.0x

15.8x

8.7%

5.6x

6.0x

5.6x

nmf

Cash Yield

P/E (x)

2011E

2011E

24.4x

19.2x

21.9x

25.1x

13.8x

16.6x

8.7%

nmf

nmf

nmf

2010A

2010A

16.3x

25.5x

20.0x

26.2x

27.1x

8.7%

nmf

nmf

nmf

nmf

($0.31)

2012E

2012E

$0.35

$0.05

$1.49

$4.00

$0.86

$0.60

$0.40

$1.10

$1.51

Distributions

($0.31)

($0.26)

2011E

2011E

$0.08

$2.73

$0.57

$0.03

$1.10

EPS

$1.61

$1.01

$0.81

($0.51)

($0.42)

($2.60)

($0.03)

2010A

2010A

$2.05

$0.35

$0.12

$1.54

$1.10

$1.11

Value

Yield

3.6%

7.9%

5.0%

$418

Ent.

-

-

-

-

-

-

$0.75

$0