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For anyone out there interested in buying stocks — try these

In the midst of market chaos, a look at one Canadian advisory’s opinion on stocks that are worth buying for those who are buying stocks.

It is still true that there is no use crying over spilt milk, even when the milk is still pouring out at an alarming rate. Investors have had almost a week to decide what to do in the face of a market meltdown. For the most part, they will either hold tight, or they will sell.

No doubt, cash in its various forms will be at the top of the investment checklist for a number of people in the immediate future. But however long a crisis lasts, ultimately investors get back to investing.

So rather than try to follow and foreshadow the fate of the runaway train that is the world’s markets, let’s just talk about the poor, battered entities that make up the markets. Stocks.

Surely somebody is still interested in buying stocks. That interest was not readily apparent in yesterday’s trading, but we presume that at some point the useful trend of buying shares will begin again in earnest.

Even as the markets began staggering last week, The Investment Reporter was persisting in its job, which is to recommend stocks to Canadian investors.

From this issue we have three stocks that have taken the plunge for different reasons — one thanks to its own grievous errors, the other two through no fault of their own.

A lesson unlearned

Among Canadian stocks, the Canadian Imperial Bank of Commerce (TSX-CM) pretty much epitomizes the financial crisis that has overwhelmed the markets. No Canadian bank stuck itself with so much toxic subprime mortgage debt from the U.S. None is paying a greater price.

The bank’s total writedowns of $US3.4 billion may pale in comparison to the $18 billion absorbed by America’s biggest bank (Citigroup), but they’re scarcely pocket change.

The bank has also acknowledged that more writedowns could be necessary. (You may recall that CIBC was also heavily compromised with Enron, a lesson that apparently went unlearned.)

So what is this advisory’s recommendation on the misbehaving bank? Buy.

Yes, it’s one of our biggest banks, and it’s been around forever, but is it really a good idea to buy it just now?

Sure it is, say the advisory. In the first place, the bank has issued shares for $2.938 billion to handle its writedowns. Once you work your way through hedged and unhedged exposure, income taxes and other items on the big balance sheet, CIBC appears to be sufficiently high and dry.

Even a $4 billion writedown would leave the bank with a Tier 1 capital ratio of 9.2 per cent, well above its target of 8.5 per cent (under banking regulations, a “well-capitalized” bank must have a ratio of at least 6 per cent). With no more writedowns, it would stand at 11.4 per cent.

Shabby treatment of the public

Still, the advisory has a bone to pick with CIBC. The distribution of the new shares was clearly biased in favour of big investors, to the detriment of loyal shareholders.

“The bank,” explains the advisory, “has given four big investors a sweet deal that’s unfavorable to you.”

Caisse de Depot et Placement de Quebec, the Ontario Municipal Employees Retirement System, Cheung Kong Holdings and Manulife Financial received $1.5 billion worth of shares at only $65.26 a share. They will also receive a commitment fee equal to four per cent of their individual commitments — it calculates to $2.61 a share — which means they effectively pay $62.65 a share.

Underwriters agreed to buy $1.438 billion worth of shares for $67.05 each — then sell them to the public for a profit. “We see this as a rip-off,” complains the advisory. “Why should you pay so much more for CIBC than the big investors? Your dollars are as good as theirs. While CIBC remains a buy, its shabby treatment of the public is annoying.”

Historically, the big bank that falls the farthest behind its peers in times of trouble usually roars back to reward investors with the largest profits. CIBC may not get high marks for corporate citizenship from this advisory, but hold your nose, and buy.

Building like crazy

Here’s a story in which you don’t have to jump quite so many hurdles to get to the good part.

It’s about SNC Lavalin (TSX-SNC), the big engineering and construction firm. The theme of the story is infrastructure. It’s a word we dislike as much as you do, but it has come to stand for a blossoming phenomenon around the world.

Except in the disastrous U.S. residential housing market, people are building like crazy, or re-building. Roads, bridges, airports, arenas, public buildings and much more of the same are being constructed in the developed and developing worlds alike.

SNC Lavalin has been a Canadian leader in this field for years. Recently, however, The Investment Reporter had put it on hold. The stock was doing well, but it seemed fully valued. Indeed, it still trades at a high multiple to its expected earnings in 2008.

But it also has a big advantage in the face of the nervous situation in North America. As the U.S. slows down, SNC can keep profiting from its overseas jobs. It operates in over 100 countries. Over the past year along, it made acquisitions in Brazil, France, India and Spain — and in the United States and Canada.

Despite these acquisitions, the company holds a pittance in debt compared to its massive cash reserves of $1.133 billion. The best estimates are that its earnings rose by some 9 per cent last year, and that they will shoot up by 47 per cent next year.

The dividend is healthy as well. It has been raised every year since 1995, and increased in that time from 4.7 cents a share to 36 cents a share. It’s hardly necessary to underline the importance of dividends at times like these.

“Given SNC’s fast expected earnings growth in 2008,” concludes the advisory, “we rate it a buy for investors who can accept some risk.” Well, we’re all accepting some risk at the moment. And if SNC’s share price has fallen in recent days, it has nothing to do with its own misdeeds.

We’ll visit one more buy, one that seems to fly in the face of logic.

Not in a rut

The auto industry in North America may not be down in the same dumps as U.S. housing, but it is puttering along in rather poor condition.

So how does that make Linamar Corp. (TSX-LNR) a buy? For one thing, this Canadian auto parts maker is not stuck in a rut. It keeps growing, at home and abroad.

Over 68 per cent of its sales are generated in Canada, but it is beefing up its international profile. Almost nine per cent of its sales come from the U.S. and virtually the same amount from Mexico. 13 per cent are realized in Germany and Hungary and it is getting a foothold in China, Korea and Japan.

Linamar runs 37 factories, which means that its production won’t suffer if one plant is shut down for any reason. Better still, it has five centres for research and development. In an era of transition for the automotive industry, this is an astute approach to the future.

The company made three acquisitions in the third quarter of 2007: Ford’s Power Transfer Unit in Mexico, Ontario’s Carelift Equipment and the Swedish distributor of Linamar’s own Skyjack products. These newcomers added a little to the bottom line last year and should add a lot in 2008.

It is estimated that Linamar will earn $1.80 per share in 2008, up from $1.60 a share last year, and putting it at an attractively low price/earnings ratio of 10.9. It also pays a dividend of 24 cents a share.

Thus The Investment Reporter makes Linamar a buy for long-term gains and dividend income. The moral of the story is simple. Even in an industry that’s down a bit (or a market that’s down a lot), good companies keep on working to get better.

We snuck a quick peek at the market before sending this story off, and saw green figures. It appears that someone is buying stocks in this country this morning. We knew everybody hadn’t given up.