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Two investment ideas to pursue in 2009

Heading into a year whose outcome is still uncertain, this Canadian advisory suggests two ideas, one based on cash, the other on China.

As you may have noticed, the market is in a bit of a black hole at the moment. Optimism is quickly followed by pessimism.

All of the forecasts you may read can probably be boiled down to this: Things will get better, we just don’t know when.

So deal with what you know, says KeyStone’s Small-Cap Stock Report. This advisory, published by an independent research firm, seeks to outline a credible path for investors in the months ahead.

There are opportunities out there, and this advisory has the successful stock picks to prove it.

But it’s not just a matter of making random stock selections and hoping to get lucky. You must have a distinct plan based on ideas that make sense in the market today.

This advisory leads off the year with two ideas for investors. One relies on measurable figures, the other on a country that still counts, China. Both ideas come with some interesting picks in stocks and income trusts.

Pay you to own their stock

“The consensus amongst ‘those in the know’ in the financial community is that we are in for a rough year market wise in 2009,” says this advisory.

“However, one must remember that, if we rewind just 12 months, many of these same ‘experts’ were projecting another year of moderate growth for Toronto’s main index based on the back of strong commodity prices. I think we all know how that story ended.”

So let’s not try to guess. Let’s hunker down with some investment ideas or themes that can serve as guideposts.

The first is “one we have been preaching quite enthusiastically over the past three months — sustainable yields,” says the advisory. “We believe, given the current state of the markets, it is a sound strategy to buy stable companies with strong cash flow and limited payout ratios that pay you to own their units or stock.”

A recipe for disaster

The value of a stock is basically the sum of all future cash flows that a firm is expected to generate. Dividends and distributions measure the cash flows returned to the shareholder. That’s basic financial theory.

But remember, dividends or distributions are not guaranteed. “It is our opinion that opportunities exist, but buying for yield alone without properly evaluating the underlying business (big name or not) is a recipe for disaster,” states the advisory in no uncertain terms.

Strong businesses can maintain and even increase their dividends or distributions, even in a market like this one. This advisory is focusing on the free cash flow payout ratio as a sign of strength.

Free cash flow is simply operating cash flow minus capital expenditures. It allows a company to increase shareholder value. “Without cash, it’s tough to develop new products, make acquisitions, pay dividends and reduce debt,” explains the advisory.

Performing well

“Given our taste for sustainable yields, we have made two recommendations which fit our criteria nicely over the past three months and have performed well,” reports the advisory.

They are both income trusts. One is K-Bro Linen Income Fund (TSX-KBL.UN), a linen and laundry supplier to hospitals and the hospitality industry. While hotels are not a great growth area at the moment, health care does not stop for a recession. The units pushed up in the declining months of 2008, slid back in early January and are now trending up again. The current price is $10.44.

The other is The Boyd Group Income Fund (TSX-BYD.UN), the largest auto collision centre operator in Canada. This company has spent three years digging itself out of a hole, and has done so successfully. The unit price has risen sharply and, at $3.24 stands close to its 52-week high.

The advisory continues to rank them highly and “would BUY them at current prices and add on dips during the year.”

Next comes China.

A screaming buy

China is not growing as fast as it was a year ago, when it was the hot property for investors looking abroad. But don’t give up on it, says this advisory — “we are still big believers in the country’s long-term growth strategy and further significance on the world stage.”

It is helpful that a number of firms in China are easily accessible, trading on the TSX and other North American exchanges.

The advisory hit the jackpot recently with fertilizer firm Migao Corporation (TSX-MGO). It was recommended in October at $3.00 to $3.50 and again in December at $3.96. “For those of you who took advantage of what was a screaming BUY at the time, the investment has already paid off handsomely as the company has jumped over 70-100 per cent, depending on your purchase price, in just a couple of months.”

Having doubled from its December price, it has slipped back a bit to sit at $5.50. The advisory’s advice is to buy on dips in 2009.

Another stock that doubled in less than a month was health care firm China Sky One Medical Inc. (NASDQ-CKSI). It has since come down a bit to sit at $12.23. Buy on dips, repeats the advisory.

Before Migao, the advisory liked another fertilizer company, Hanfeng Evergreen Inc. (TSX-HF), which it rode to prosperity and sold at $12-$14. At that point, Migao’s shares seemed to be the better value. But as Migao’s shares pause and possibly pull back, the advisory suggests that investors consider Hanfeng again. It trades at $6.15.

Another long-time favourite of KeyStone’s Small-Cap Stock Report is Sino-Forest Corporation (TSX-TRE), a major lumber harvester. The economic slowdown will affect this company, says the advisory, but below $10 it is attractive for the long-term investor. It opened today at $8.97.

There’s no need to swear off the markets, this advisory concludes. Just understand that when you can’t predict what’s ahead, you’d better have a few solid ideas to guide your steps.