Through the first six months of 2013 the 18 stocks that comprise the Canadian Edge Portfolio Conservative Holdings posted an average total return in US dollar terms of negative 1.64 percent.

The Aggressive Holdings, meanwhile, were off by an average of 15.14 percent. This includes significant losses incurred by Colabor Group Inc (TSX: GCL, OTC: COLFF) and Just Energy Group Inc (TSX: JE, NYSE: JE), which we sold in the June issue, and IBI Group Inc (TSX: IBG, OTC: IBIBF), which we sold in a May 17 Flash Alert.

The 15 stocks that remain in the Aggressive Holdings posted an average total return in US dollar terms of negative 7.23 percent.

The S&P/Toronto Stock Exchange Composite Index was off by 6.32 percent in US dollar terms, though just 0.88 percent in local currency terms. The S&P 500 Index, meanwhile, returned 13.83 percent, the MSCI World Index 8.82 percent.

It’s been a strong year for developed-world equity markets–everywhere, it seems, but Canada, where lower commodity prices and the perception that the economy is slowing or will slow due to a housing-market correction have brought out the bearishness in the broad investment community.

Canada, with the worst-performing stock market among the G-7, has even lagged some countries now famous for their economic problems, including Greece and Spain.

Our focus, however, is on company-specific fundamentals and how those fundamentals are evolving over time. This trajectory is what will determine long-term performance.

As I write in this month’s In Focus feature, however, it’s still way too soon to declare the end of Canada’s solid economic run.

There are headwinds and obstacles, of course, including China’s evolving economic growth and the US government’s dithering over TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL project.

A slowdown in the Canadian real estate market is also weighing on sentiment, but in my view this slowdown, the result of policy decisions made by Finance Minister Jim Flaherty in order to avoid a US-style meltdown, is evidence of a government that for going on two decades now has exercised solid judgment when it comes to economic matters.

As for the CE Portfolio and company specifics, we’ve made moves in recent weeks to eliminate Holdings that have underperformed in the market and have also demonstrated weakening underlying business fundamentals, namely Colabor, Just Energy and IBI.

Below, in addition to our first earnings reporter of the new season, we have updates on other stocks that have underperformed.

First in Earnings

Conservative Holding Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) kicked off earnings season on a positive note, posting solid fiscal 2013 third-quarter results and raising its full-year free cash flow forecast.

Management also said it wants to raise the dividend by 5 percent to 10 percent within the next two years, subject, of course, to market conditions.

Total service average revenue per user (ARPU) for the first three quarters of fiscal 2013 was CAD122, up from CAD116 for fiscal 2012. Continued growth in ARPU reflects solid performance across all of Shaw’s service offerings.

Video ARPU increased slightly, while Internet ARPU continues to rise at a good pace. Internet is a growth driver for the overall business, as Shaw’s Wi-Fi service is delivered over a strong network at an attractive price relative to competitors.

Net income from continuing operations grew by 0.8 percent from a year ago to CAD240.4 million. Net earnings per share were off by 1.9 percent to CAD0.50 but beat analysts’ expectations. Revenue for the quarter was up 3.8 percent year over year to CAD1.275 billion.

Operating margin was 44.1 percent, down slightly from 44.4 percent.

Shaw generated CAD395.2 million of cash from operations, up 17.4 percent year over year. Free cash flow in the reported quarter was CAD169.2 million, down 9.7 percent from a year ago. But management now expects free cash flow for fiscal 2013 to be CAD590 million to CAD600 million versus a prior estimate of CAD568 million to CAD577 million.

As of May 31, 2013, the Video customer base was 2,069,769, reflecting a net reduction of 26,578 customers from the year-ago quarter. The Internet customer base stood at 1,879,942, reflecting quarterly net addition of 4,157 customers. Digital phone lines were 1,355,238, reflecting a year-over-year net addition of 17,719 lines. The DTH customer base was 904,400, representing a quarterly net reduction of 2,930 customers.

Cable revenue was CAD793.3 million, up 3.9 percent year over year on subscriber additions and rate increases. Quarterly operating income before amortization was CAD381.7 million, up 5.3 percent year over year.

Satellite revenue of CAD209.6 million was up 3.3 percent year over year.  The segment’s quarterly operating income before amortization was CAD69.2 million, down 5.3 percent from the year-ago quarter. Media revenue was CAD295.2 million, up 4.1 percent year over year. Operating income before amortization was CAD111.5 million, up 1.8 percent year over year.

Shaw’s share price jumped on the earnings report and the guidance boost, closing at a five-year high of CAD25.24 on June 28 on the TSX. The stock is still trading below its USD24 buy-under target on the New York Stock Exchange.

Shaw Communications, which posted a US dollar total return of 6.68 percent for the first six months of 2013, is a buy under USD24.

Conservative Update

EnerCare Inc (TSX: ECI, OTC: CSUWF) has bounced back from an early summer swoon that took the share price as low as CAD8.80 at the close on June 26. As of this writing EnerCare is changing hands at CAD9.09 on the TSX.

There was no fundamental reason for the steep decline from CAD9.50 on May 28 to CAD9.17 on June 13 and then its four-month low about two weeks later.

First-quarter numbers, including 9 percent revenue growth but more importantly extremely positive trends on customer attrition, which declined by 50 percent, confirm the opposite: EnerCare’s business is getting stronger.

Submetering revenue grew by 30 percent, and management is expanding its service offering to include HVAC units. Renting air-conditioning and heating units will give EnerCare another way to get into peoples households, and it will help them boost revenue per customer as it adds another service to bundle with its core waterheater offering.

EnerCare posted a total return of 9.29 percent for the first six months of 2013. Management will report second-quarter results on or about Aug. 13. EnerCare, yielding 7.5 percent, is a buy under USD10.

Innergex Renewable Energy Inc’s (TSX: INE, OTC: INGXF) slow downtrend from an all-time closing high of CAD11.23 on Aug. 7, 2012, accelerated in late May, as the stock is now trading at levels last seen in mid-2010.

Insiders have been buying the stock all the way along this recent downtrend, indicating some confidence that this is an overreaction to be capitalized upon.

Developments at the company level since late May have also been positive.

Innergex closed a CAD72 million non-recourse construction and term project loan for the Northwest Stave River run-of-river hydroelectric project in British Columbia. The term of the 5.3 percent loan corresponds with the duration of the 40-year power purchase agreement (PPA) for the project with BC Hydro.

This is confirmation of the company’s ability to secure project financing. Management emphasized in its statement announcing the loan that it also provides a reminder of its solid business model, which is based on developing high-quality assets that generate stable and predictable cash flows over the long term and minimizing risks.

Construction on the 17.5 megawatt hydroelectric project began in 2011; commercial operation is expected to begin in the fourth quarter of 2013. Northwest Stave’s average annual production is estimated to reach 61,900 megawatt-hours, enough to power approximately 6,000 British Columbia households.

Innergex also closed a CAD52.8 million. 5.6 percent non-recourse term loan to refinance its stake in the Carleton wind farm in Quebec. The principal will be amortized over a term of approximately 14 years, slightly less than the remaining duration of the wind farm’s first PPA.

Proceeds will be used to reimburse the initial project financing, which has a remaining balance of CAD41.1 million and matures in November 2013. The remaining proceeds of approximately CAD11.7 million will be used essentially to reduce drawdowns on Innergex’s credit facility.

The higher refinancing amount is the result of the wind farm performing better than initially expected by the lenders.

The Carleton wind farm, in which Innergex owns a 38 percent interest and a 50 percent management stake through its Cartier Wind Energy joint venture, comprises 73 wind turbines with a total installed capacity of 109.5 megawatts and an estimated average annual production of 340,523 megawatt-hours, enough to power more than 20,000 Quebec homes each year.

All of the electricity produced is sold to Hydro-Quebec under a fixed-price PPA, which provides for an annual adjustment to the selling price based inflation. The PPA expires in November 2028.

The company also extended its CAD425 million revolving credit facility with a new five-year term ending in 2018.
Innergex, which will report second-quarter results on Aug. 8, has generated a negative total return of 17.21 percent in 2013, much of the loss incurred since late May.

With existing projects outperforming expectations, new projects coming on line and its access to financing well demonstrated, Innergex Renewable Energy is a solid buy up to USD10.

Student Transportation Inc’s (TSX: STB, NSDQ: STB) new subsidiary SchoolWheels Direct has won new work in Florida that demonstrates its ability to survive and thrive even amid tightening budgets for US school districts.

In fact, its contract with parents in Brevard County to provide transportation services for students to the area’s “Choice Schools”  is a direct result of USD30 million of cost-cutting and the closure of three schools by the Brevard Public School Board.

Approximately 2,500 Brevard students are impacted by the cuts, and parents had to find alternative means for transportation. The school district currently owns 552 buses with 434 in
daily service.

Parent organizers worked independently of the Brevard Public Schools since March to find a busing solution to the current district-operated system, which served the students in previous years. This could form the template for more work in the future.

Online registration opened in mid-May for eight of the Brevard choice schools. Soon SchoolWheels will list additional public schools, including those with choice or magnet programs, at www.schoolwheels.com. Full school year, roundtrip service will cost as little as USD7.50 per day.

SchoolWheels Direct currently provides a similar fee-based transportation system to magnet school students in Duval County, Jacksonville, Florida.

In its “Fiscal-Year End Update” Student Transportation noted that:

• Contract revenue days deferred due to severe weather during the 2012-13 school year have been recovered during the fourth quarter. Total revenue for fiscal 2013 increased by approximately 15 percent over 2012 and is consistent with previously stated estimates.
• The company has negotiated new fuel contracts with a major supplier and locked in a substantial portion of fuel usage for the coming year, minimizing its “at risk” fuel not covered by mitigation clauses or customer-paid fuel.
• It also signed a new fuel contract for propane autogas, or liquefied petroleum gas (LPG), at USD1.60 per gallon equivalent with a fixed price for three years versus a current price of USD3.65 for a gallon of diesel. This price doesn’t include any federal rebates given to alternative fuel vehicles, which currently is USD0.50 per gallon in the US.
• Customer-paid fuel contracts have increased this year to nearly 30 percent of total fuel requirements. Student Transportation will add idling systems on vehicles with GPS units to reduce idling across the fleet. These initiatives should reduce fuel costs as a percentage of revenues in fiscal 2014.
• The company has secured vehicle lease quotes in excess of requirements with annual rates of 1.9 percent to 4 percent fixed rates for terms of up to six years for new vehicles. This allows the company to use low-cost financing for new vehicles versus accessing capital markets.
• Student Transportation will add approximately 700 new LPG vehicles to its fleet this fiscal year, increasing its fleet of alternative fuel vehicles with LPG and compressed natural gas (CNG) engines to just under 1,000 vehicles, on top of the 1,800 vehicles that run on biofuels.

Management will report full fiscal 2013 fourth-quarter financial and operating results on or about Sept. 25.

Student Transportation, which posted a first-half total return of 3.62 percent, is a buy under USD7.

Share prices for our collection of Canadian real estate investment trusts (REIT), which we detailed and re-recommended in a June In Focus feature, continue to slide as official interest rates creep up in the developed world.

As we noted last month, REITs’ have managed to outperform during periods of both rising and falling interest rates. Ours have managed their loan books well and are positioned to benefit as economic growth in Canada gets back to trend.

Coincidentally, strong demand for REITs boosted the Canadian market for initial public offerings in the second quarter.

A study by PricewaterhouseCoopers found that real estate was the most active IPO sector, accounting for CAD293 million of the CAD870 million worth of new issues in the three months ended June 30. Four of the 13 new issues on the TSX–more than triple the number in the first quarter–were REITS.

Real estate remains an area of stability and growth in a volatile market, generating consistent, stable income. We look at the selloff in Canada’s REITs as an opportunity for new investors to establish positions in solid businesses with sound long-term fundamentals. Buy up to prices listed in the Conservative Portfolio.

Aggressive Update

Atlantic Power Corp’s (TSX: ATP, NYSE: AT) credit rating has been cut by Standard & Poor’s, and the company is under review for downgrade at Moody’s.

S&P cited the sale of assets, the timing and return of investment capital, slower growth assumptions and lower earnings expectations in support of its move to cut its rating to B from BB-.

Atlantic has been removed from CreditWatch, which it had been on since May 16. S&P’s “stable” outlook is based on the credit rater’s forecast that Atlantic will be able to obtain a waiver to potential covenant violations by amending its credit facility.

S&P also noted that the company has cash on hand to manage its operations for about a year even under a hypothetical termination of its revolving credit facility. Atlantic’s portfolio of power-generation assets is also largely contracted, and the company has ample liquidity to maintain operations and for investment in new projects.

Moody’s noted Atlantic’s “apparent lack of progress” in renegotiating its credit facility as well as “substantially diminished access to capital markets” that clouds the company’s growth potential. Adding projects, as we’ve noted, is key to Atlantic’s ability to sustain its dividend, as it’s had trouble renewing contracts for some of its existing projects.

In early May 2013 Atlantic announced that it had entered negotiations with its lenders for its USD300 million revolving credit facility, due to a projected potential breach of the interest coverage covenant for the four-quarter period ending Sept. 30, 2013.

Management hasn’t announced any resolution of this issue, which Moody’s takes to be an indication that negotiations are proving more difficult than anticipated. The facility will be a key part of Atlantic making new investments to offset the cash flow lost from the sale of assets in Florida, including the Auburndale and Lake projects.

The Feb. 28, 2013, dividend cut saved Atlantic a significant amount of cash, but it also made its shares less attractive as potential currency. It also limited access to equity capital in the public markets; management’s stated strategy had been to fund its investments in growth projects with a balance of debt and equity.

One of the reasons for the reduced dividend was reduced expectations in re-contracting of projects that have produced a substantial amount of earnings. Atlantic has added four new wind projects over the past two years. But competition for new projects is intense, and management has said that it will be focusing on earlier-stage projects where it will take longer to see a return on invested capital.

Asset sales have generated approximately USD173 million, and management has paid down it outstanding revolving debt. A projected cash balance of approximately USD200 million as of June 30 will be boosted by proceeds from further asset sales set to close in the second half of 2013 of about USD42 million. But cash flow from portfolio assets has declined due to these and other sales.

Atlantic Power, the biggest loser among Portfolio Holdings with a first-half loss of 64.06 percent, remains a hold pending release of second-quarter numbers on Aug. 8.

We’ve trimmed our buy-under target for Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF), the former PetroBakken Energy Ltd, from USD15 to USD10 to better reflect market reality.

Lightstream is an oil-and-liquids focused producer with high leverage. Although it generates high netbacks for its light oil output, it is extremely sensitive to swings in commodity prices. That oil has trended upward since December ought to be good news for the share price.

But the link between Lightstream’s share price and the price of the generic front-month crude oil futures contract traded on the New York Mercantile Exchange has broken down completely since November 2012, largely because investors are pricing in a dividend cut that management has thus far resisted but that now seems inevitable.

Instead, we’ve seen a steep decline, from CAD15.08 as of mid-September 2012 to an all-time low of CAD7.61 on April 17, 2013. Lightstream last traded at CAD7.76.

With at a price-to-book value ratio of just 0.44, Lightstream is the cheapest oil and gas producer with a market capitalization greater than CAD1 billion on the Toronto Stock Exchange. It’s the fourth-cheapest among those valued at more than CAD100 million.

Lightstream is yielding 12.3 percent, suggesting considerable market skepticism about its ability to maintain the current dividend rate, fund reinvestment and grow production without adding to its already significant debt obligation.

Management, in its June 2013 corporate presentation, notes, “Consistency of our dividend is part of our long-term business plan.”

Management also states that its “business strategy matches cash inflows and outflows over the long term,” though over the past two quarters “cash out,” including CAPEX, property acquisition costs and dividend payments, has outstripped “cash in,” including funds generated by operations and asset sales.

Total debt outstanding is CAD2.05 billion, with CAD1.09 billion drawn on a CAD1.4 billion revolving credit facility that matures in June 2016. This facility was renewed during the first quarter. And market capitalization is CAD1.52 billion.

The sale of non-core assets could help funds flow match overall costs. But this too would impact ongoing cash flow from operations. There are considerable risks associated with Lighstream. But its portfolio of assets is solid.

Finding a way to fund development and production growth is essential, however, and the market is speaking very clearly about what next steps might be taken, including a dividend cut.

This is a situation where a cut would not only satisfy Mr. Market but also result in longer-term production growth and improved health of the underlying business.

Lightstream Resources is a buy for aggressive investors up to our reduced buy-under target of USD10. Note that the US over-the-counter (OTC) symbol for the stock has changed to LSTMF.