E-mail this article Printer-Friendly

Stripped for action — a safe solution for an uncertain market

One of Canada’s leading stock advisories has a surefire way to make your money work for you — and a couple of stocks to recommend.

We hear today that the province of Ontario is in a recession, in at least one economist’s opinion. No such pronouncement has been made about the rest of the country, and it’s certainly not the case in the west. But in these unstable times, nothing should surprise us.

With the economy and the markets facing the drip, drip, drip of erosion from the credit crisis, it may well be time for investors to take some very conservative steps.

That, at any rate, is the opinion of one of Canada’s leading advisories on equities, The Investment Reporter. Although this advisory writes almost exclusively about stocks, it has one interest-bearing alternative to propose: strip bonds.

Before we go to the strips, we’ll turn to equities, the advisory’s normal stock in trade, and pass on two recommendations. The first happens to be the whipping boy from yesterday’s Daily Buy-Sell Adviser.

Now it’s a bargain

The shares of General Electric (NYSE-GE) famously fell 12.8 per cent just two weeks ago. As we reported yesterday, this drew some harsh words about the company’s rose-coloured promises and the market’s overreaction to its fall from one U.S. advisory.

But it didn’t put The Investment Reporter off the stock. On the contrary, this advisory thinks it’s an excellent bargain. Despite losses in three of its segments, the company is showing exponential growth in a very important area — overseas markets. Its revenues grew 38 per cent in developing countries.

G.E.’s anemic first-quarter results came as a shock to many, the advisory admits. “But now the shares offer good value. As a result, GE remains a buy for attractive current income, rising dividends and long-term gains.” The shares continue to hover in the $32 range, well below their pre-nosedive levels.

Right place at the right time

On the Canadian side, the advisory has a stock that “is in the right place at the right time.” PFB Corp. (TSX-PFB) makes insulation material. Anything to do with housing tends to make people nervous these days, but that would be a mistake in this case, says the advisory.

“The fact is, the company’s insulation products are gaining popularity as building owners go for energy efficiency to cut their heating and cooling costs.” Also, PFB’s “structural insulated panel systems” are easy to assemble and cut into labour costs. The company is expanding its facility in Alberta, where there’s more than a little building going on.

PFB had a setback in earnings for 2007, thanks to higher operating costs, but sales were up. The company has more than enough cash flow to maintain its dividend of $0.24, and it’s comfortably valued at a price/earnings ratio of 14. The shares opened at $9.10 today, two dollars above the price when the advisory went to press last week.

Buy PFB for attractive income, occasional special dividends and long-term gains, says the advisory. But don’t ignore the risk involved with a rising manufacturer of insulated building products.

To eliminate risk, the advisory has another solution.

All your money working all the time

In the “better-safe-than-sorry’” category, strip bonds are near the top of the list. They offer no excitement or suspense, but they work.

Brokers create strips by buying Government of Canada bonds and “stripping off” the coupons. You can buy any of the component parts you like, coupons or principal. They have several airtight advantages.

As government bonds, they have almost no credit risk. Second, says the advisory, “strips reinvest the accrued interest at the same yield you bought them. This protects you from re-investing at lower rates.”

And this reinvestment process “means that all of your money works for you all of the time.”

You know exactly when your investment will mature and exactly how much you’ll receive. In addition, you can choose from a long list of maturity dates. In an emergency, you can sell strips, says the advisory, but you’re better off holding them to maturity (you’re likely to be paying substantial fees, so get your money’s worth).

Interest rates are low these days, as we all know, but there’s no reason you can’t find competitive yields. Ask for quotes from several brokers, says the advisory. “Make sure to consult Scotia McLeod and RBC Dominion Securities. That’s because they pride themselves on their capabilities in fixed-income investments.” And check the yields against other fixed-income investments like GICs.

How to stagger your strips

The advisory has one “don’t” and one “do” for buying strips. Do not buy them during RRSP season, when investors pour more money into strips, yields decline and the best maturity dates are snapped up (and when fees may be fatter as well).

Avoid them from January 1 to March 1.

But do stagger your strips. The advisory suggest you arrange for them to mature at different dates over a set period, such as five years. “After a year, the five-year strips become four-year strips, the four-year strips become three-year strips and so on. Each year, when your one-year strips mature, revinest the proceeds in new five-year strips.”

The five-year strips will pay more, of course. And you’ll have money for reinvestment — or to meet the mandatory withdrawls from an RRIF.

Ultimately, The Investment Reporter offers us three degrees of safety: a speculative stock that offers risk and reward in equal proportions, a blue chip that’s safe but rather sorry at the moment, and an investment that offers no surprises whatsoever.

It’s the only case we can think of in which stripping may be the best way to keep yourself covered.