Gordonpape.com - Investing Today

JOIN NOW AND GET A BONUS MONTH FREE!

Some of you are already familiar with our flagship newsletter, the Internet Wealth Builder (IWB) but the great majority of Investing Today subscribers have never read it. Therefore, we're devoting this edition of IT to a compilation of articles of special interest that appeared in the IWB over the past month.

The IWB is published weekly (44 times a year) and distributed exclusively by e-mail. Target delivery date is every Monday, but we most often send it out during the weekend to allow members to make any trading decisions in advance of the opening of the stock exchanges. The main emphasis of the newsletter is on stocks, but we also cover mutual funds, fixed-income securities (we just made a 57% gain on Luscar debentures), royalty trusts, tax matters, scams and frauds, and general economic and market comment. Each issue runs to 4,000+ words and is packed with actionable information.

Our track record is one of the best you'll find anywhere. Not everything we pick is a winner - nobody's perfect. But we're right the great majority of the time and some of our gains have been huge.

Our stock focus covers the whole market range, except for penny stocks we are investors, not speculators. Our selection approach is fundamental value. The risk level of every pick is carefully detailed, and we follow up our selections regularly we never abandon them and leave members hanging because they haven't worked out. Joining me as regular contributors are Irwin Michael, founder and president of the ABC Funds, and Tom Slee, a veteran money manager and market commentator whose stock picks have been enjoying great success.

Annual membership in the IWB is $99 plus tax, which we feel is the best value in an investment letter you'll find anywhere. Your membership includes access to a special Member section of our Web site where you'll find an updated list of all our recommendations and be able to access our back issues going back five years.

And here's a special deal. Become a member before the end of May and receive an extra month free. That's right, 13 months for the price of 12. And there's no risk to you. If you decide in the first month that the IWB will not help you make money in the market, simply advise us that you want to cancel and we'll issue a refund for the full amount. So you can't lose. Here's the special url to go to: http://www.gordonpape.com/bookstore/productdetail.cfm?product_id=193

Now for the promised selection of articles:

Quick now, for $1 million, which major stock market has been the best performer in the world over the past month? Did you say Nasdaq? Is that your final answer? Yes!!!!! You have just become a millionaire!!!!

And yes, you could have become a millionaire if you'd decided 30 days ago to place a big bet on Nasdaq. That much-disparaged market, which has lost billions of dollars for investors over the past year, has been on fire. Last week alone (to May 4) the Nasdaq Composite gained 5.6%. Over the past month, it is ahead 33.7%. That surge has left everyone else eating dust. The Dow, although it has been strong, is only up 15.1% in the past 30 days. The S&P 500 has gained 14.8%. Our own TSE 300 has advanced a mere 7.6%. Looking around the globe, only one tiny market did better than Nasdaq during that period - Finland's HEX index which was up 33.9%, edging Nasdaq by two-tenths of a percentage points for grand honours among markets of all sizes. Of course, the HEX is dominated by Nokia (in the same way that Nortel used to dominate the TSE) and that company has benefited greatly from the tech resurgence. (Nokia shares closed on Friday on the NYSE at US$33.64, up US$1.24.)

As the weeks pass, it's becoming increasingly apparent that investors desperately want the bear market to be over and are putting their money where their wishes are. It wasn't so long ago that any piece of even slightly negative news would send stock prices tumbling. At the moment, however, investors are buying no matter what the news is. Maybe it's spring fever.

A week ago, for example, the markets were buoyed by the news that the U.S. economy performed much better than expected in the first quarter, posting an annualized gain of 2%. Last week, the news was much less encouraging. Word out of Washington was that the rosy first quarter estimate may be revised downward. U.S. unemployment figures came in worse than expected, with even the hitherto bullet-proof construction industry recording a net job loss. Investors were momentarily discouraged, but then decided to put a positive spin on the latest events and sent the markets back up on Friday. The new logic is that weak employment numbers just make it more likely that the Federal Reserve Board will cut rates again when it meets on May 15. Lower interest rates are great new for stocks. Hooray - let's buy!

This euphoria comes as a spring tonic after a downright depressing market winter. But it carries dangers as well.

Even though Nasdaq dropped over 60% from its high by the time it reached its nadir, many tech stocks are still expensive by conventional valuation standards. It just goes to show you how wildly inflated prices had become. Now some of those still-expensive stocks are moving up again. There is a serious risk that some investors will see this as the birth of a new high-tech run and rush to put in more money.

There are a few reasonable buys among the quality tech companies, but very few. In most cases, the recent price move has been fed by the same force that caused the bubble of the late '90s - expectation of large revenue and profit increases in the coming months. That could materialize, but the high-tech sector is not out of the woods yet, not by a long shot. So our advice is to be cautious when it comes to technology stocks. Look at each potential buy carefully, and see whether its price is reasonable in relation to its current earnings and revenues, and analysts' projections for the next year. It would not surprise me at all to see Nasdaq correct again sharply.

Also, don't become mesmerized by this tech stock renaissance. Maintain a balanced portfolio. There are plenty of good stocks out there from other industries, some of which offer excellent potential. Don't ignore them just because Nasdaq is once again pulling rabbits out of a hat and pigeons out of the air. It may all be an illusion.

Four Seasons Hotels added to Blue Chip Portfolio

(By Gordon Pape - from the edition of April 30/01)

We've been on the lookout for some time for more top-quality stocks to add to the IWB Blue Chip Portfolio. However, we resisted buying when markets were high and prices were unreasonable in many cases.

Now, after a prolonged slump, we believe that markets are close to the bottom of the current cycle, if they have not already touched it. Accordingly, we will move more aggressively to add new stocks while valuations are still good.

A few weeks ago, we bought Thomson Corp. for the Blue Chip Portfolio, adding our first electronic communications firm to the list. Today we are going to introduce another new sector, hospitality, with the purchase of the top hotel chain in the world (as rated by Zagat), Four Seasons.

This is a company that is very close to home - literally. Its head office is on Leslie St., just a few blocks from our home in the North York area of Toronto.

The company was founded in 1960 by Isadore Sharp, who is still very active as chairman and CEO. It opened its first property in Toronto in 1961. Growth in the early years was relatively slow but over the past decade the company has expanded around the world. Today it is the leading operator of luxury hotels and resorts. You'll find Four Seasons Hotels in the world's most sophisticated cities (the George V in Paris, the Pierre in New York, the Regent Beverly Wilshire in Los Angeles). You'll also find Four Seasons resorts in some of the world's most exotic destinations, including Bali, China, the Maldives, and Nevis. New hotels and resorts are scheduled to open during the next three years in Shanghai, Prague (recently opened), Sharm El Sheikh, Budapest, Amman, Cairo, Qatar, and Alexandria, among others. Clearly, this is a company on the move.

It is also a company with a strong corporate culture. Its employees are known not only for their high level of training but for their loyalty to the firm. In the hospitality industry, an offer to work for Four Seasons is regarded as the pot of gold at the end of the rainbow. As anyone who has ever set foot in a Four Seasons Hotel knows, the standards are impeccable, whether you are just dropping by for dinner or staying for three weeks. If anything ever goes wrong, the employees will tie themselves in knots to make it right.

This organization, folks, is Class, with a capital C.

It is also very profitable, which is what we are most interested in as investors, after all. Earnings in fiscal 2000 came in at $103.1 million ($2.98 basic earnings per share), up 19.2% from the previous year. Consolidated revenue increased 25.2% to $347.5 million. The balance sheet is strong; as of Dec. 31, 2000, the company's cash reserve was $218.1 million.

The first quarter results for 2001 are due to be released on May 10. As of right now, RBC Dominion Securities is projecting that earnings per share will rise 19.1%, to $3.55, in 2001 and will come in at $4.38 in 2002. At a current price of $87.91, this means the p/e ratio based on 2001 estimated earnings is 24.8 - not cheap but certainly not unreasonable given the growth history of this company. Also, the shares are well down from their 12-month high of $119.95.

Some investors may have qualms about buying a hotel stock during a time of economic slowdown. Clearly, if we should lapse into a severe recession (which is looking increasingly unlikely), Four Seasons' profits could suffer. However, historically it has been shown that luxury hotels are more recession-resistant than the hospitality industry as a whole. Even if there is some slippage, it should be temporary and the downside on the stock appears relatively limited.

This is not a stock to buy if you're looking for income. The company pays a semi-annual dividend of only $0.055 per share ($0.11 a year), so cash flow is not a strong point. Rather, this a stock to own if you're looking for long-term growth potential with limited risk.

The shares trade under the symbol FSH in Toronto and New York. We will buy 50 shares for the IWB Blue Chip Portfolio at $87.91 for a total investment of $4,395.50.

We are setting a one-year target price of $105 on the stock, which would represent an increase in value of about 20%. However, if the markets make a sharp turnaround, the potential for even larger gains is there. (RBC Dominion, for example, has a one-year target of $145 on this stock!) Our downside limit is $70.

Action now: Buy

(Note: Four Seasons closed at $94.40 on May 4, five days after this recommendation was made.)

PrimeWest moved up sharply during the last week, reaching $9.94 bid at one stage, close to our target of $10, before settling back to end the week at $9.77. I have made enquiries and there is no news at PrimeWest. It looks as though the recent strength is due to investors turning to energy because oil prices are remaining firm and the yields appear ever more attractive. In fact, the whole sector has been strong. For example, Arc Energy and Pengrowth (another IWB recommendation) traded at new highs during the last few days. The move in PrimeWest seems dramatic because the units were oversold after the Cypress Energy acquisition, a good deal that some analysts thought was too expensive. Well, they were wrong. Now the trust is coming back into line with its peers. My own feeling is that PrimeWest will continue to do well and I have moved the target up to $10.50.

We originally recommended PrimeWest in October 1999 at $7.05. So to date we have enjoyed capital appreciation of 38.6%, as well as excellent (and escalating) cash flow. My estimate for distributions in 2001 is $2.56 (see IWB #2112), which works out to a cash-on-cash yield of 26.2% based on the current share price.

Still with commodities, Alcan (AL) has been a tear in the last few weeks, trading through our target price of $65 and closing on Friday at $67.40. This is a situation where everything is going right at the same time. Every time the loonie drops one cent, Alcan adds $11 million to its bottom line. Meanwhile, the company's competitors are shutting down production because of power shortages or, in some cases, to sell excess electricity. As a result, aluminum prices remain firm while other commodities are plummeting into a bottomless pit. Finally, Alcan is now capitalizing on its $4.9 billion acquisition of Switzerland's algroup. This is expected to produce cost savings of $200 million a year.

My only concern is where we go from here. At present, the stock is selling at 14 times this year's expected earnings. That's not expensive but it's no longer a bargain, especially as Alcan's growth may slow. As a matter of fact the company's first quarter operating results of $0.59 a share (compared to $0.78 a year earlier), although well above the street's expectation of $0.51, were not encouraging. Management anticipates weakening demand for aluminum, with Asian consumption almost flat for the balance of this year and North American sales down 5%. Even the battered loonie is finally showing some strength and is now working against Alcan.

Accordingly I think that we should take profits. The stock, now at $67.40, is up 46.5% since we added it to our Buy List in October 1999, priced at $46. It's made a major move since our last update in mid-January, when we gave a Buy signal at $51.50. That's a good performance in a difficult market and Alcan is still a great company, however, the stock now has limited upside potential.

Since our original purchase, we have received six quarterly dividends of US$0.15 a share for a total of US$0.90 - roughly C$1.35. This brings our total gain on this stock to 49.5%.

Originally recommended Oct. 2, 2000 (IWB #2036) at $12.20. Closed Friday at $15.00.

Surrey Metro's first quarter 2001 results paired with its remarkable year-end results are a reflection of a continuously stable and strong company. Earnings per share for the first three months of 2001 were $0.45 compared to $0.41 for the same period last year.

While Surrey's share price has appreciated to the $15 level, we feel that its solid fundamentals and low valuations continue to label this stock as a compelling value play. As expected, Surrey recently announced a share buyback plan of 325,000 shares representing 6.42% of its outstanding non-voting shares.

Action now: Over the last month Surrey Metro has moved up to the $15 level. We continue to recommend it as a buy at $14.75 or lower.

How other picks have performed

Here is the status of some of our other current recommendations. Prices are as of the market close on Friday, May 4.

CN Rail (CNR). Originally recommended Jan/00 at $37.95. Closed Friday at $59.31. Gain to date: 56.3%.

Bombardier (BBD.B). Originally recommended June/99 at $10.95. Closed Friday at $21.94. Gain to date: 100.4%

Celestica (CLS). Originally recommended April/99 at $25. Took part profits Dec./99 at $68.10. Closed Friday at $83.00. Gain on part profits: 172.4%. Gain on balance still holding: 232%.

Talisman (TLM). Originally recommended Sept./99 at $49. Closed Friday at $58.50. Gain to date: 19.4%.

MDS Ltd. (MDS). Originally recommended May/97 at $13.63. Half profits taken June 19/00. Closed Friday at $20.70. Gain on half profit sale: 63%. Gain on balance still holding: 51.9%.

Canadian Oil Sands Trust (CO.UN). Originally recommended Dec./97 at $25.25. Closed Friday at $36.85. Gain to date (not including distributions): 45.9%.

That's just a sample. There are lots more where those came from.