This month I present two data tables for Canadian Edge readers to peruse.

“Portfolio Performance” highlights how Portfolio picks are performing so far in 2013, as well as how they fared in 2010, 2011 and 2012. “How The Portfolio Rates” shows how picks stack up for each criterion in the CE Safety Rating System.

“Portfolio Performance” should confirm what most CE readers already know. Mainly, we’ve taken big hits in a couple of positions this year. The biggest was at Atlantic Power Corp (TSX: ATP, NYSE: AT).

The company cut its dividend by nearly two-thirds as it released 2013 guidance that was sharply worse than 2012 numbers, which were actually pretty much in line with management’s previous expectation.

We also took a big knock at Just Energy Group Inc (TSX: JE, NYSE: JE), which cut its dividend by a more moderate but no less jarring one-third.

And while the stock has been rebounding of late and management has affirmed no dividend cut this year, PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF) is also still well under water as we await its fourth quarter numbers.

Had you owned just those three stocks, there’s little doubt you’d be considering throwing in the towel on Canada, or at least this advisory.

What may surprise is that, despite these setbacks, the average year-to-date return for all CE Portfolio stocks is still a loss of just 1.5 percent.

And that loss is entirely due to a decline of 3.7 percent in the Canadian dollar-US dollar exchange rate, which has diminished the value of US investors’ principal and dividends by an equivalent amount.

Atlantic, Just Energy and PetroBakken have been painful to own this year.

And while I continue to hold all three in the Aggressive Holdings, recovery will take time, even if management is extremely successful hitting company performance benchmarks.

But as I point out in this month’s In Focus feature, the record of dividend-cutter recovery is strong and rewarding to the patient. And in any case these are just three stocks in the context of a broad portfolio drawn from a wide range of sectors in the Canadian economy.

Don’t Leave Out Canada

Another question I’ve received recently concerns the general underperformance of Canada in the context of new highs being hit daily on the Dow Jones Industrial Average this year. Some are wondering whether they should abandon their positions in Canada and move all their eggs to another market, for example Australia.

The Land Down Under has certainly been outperforming lately. And I’m very excited about the lineup of companies we have in our Australian Edge advisory, which have now largely reported very robust fiscal 2013 first-half earnings.

But the best answer to the question is simply this: Markets and sectors sometimes outperform and sometimes underperform. Canada has had some very big years recently and, going back to the crash of 2008, it’s still far ahead of the US as well as most of the world.

Trying to move around to the hottest market not only ensures you always buy high, even if you avoid selling low. But it misses the point of diversifying among markets and sectors.

Over the long haul portfolio value is driven by the performance of individual companies as businesses. Good companies can be found in many places. But you make your best returns by buying them when they’re cheap.

Ironically, because of the recent slump Canada is now a better value than most of the world’s stock markets. And you’ll always be a loser if you sell good stocks when they’re temporarily out of favor.

Canadian stocks do face some headwinds this year, probably the greatest of which is the negative impact of energy-price differentials on activity in the energy patch. But as “How The Portfolio Rates” makes clear, the vast majority of our holdings are still matching up on our Safety Rating criteria after reporting their fourth-quarter and full-year 2012 results.

There are still a notable few left to do so, and we’ll reserve judgment on the following companies until they do turn in numbers:

• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)
• Colabor Group Inc (TSX: GCL, OTC: COLFF)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)
• Northern Property REIT (TSX: NPR, OTC: NPRUF)
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)

But for the rest that have reported, the results have continued to be very solid as management builds strong businesses that are the foundation of shareholder wealth. We’ve seen more than a few return to dividend growth, including Dundee REIT (TSX: D-U, OTC: DRETF) and Parkland Fuel Corp (TSX: PKI, OTC: PKIUF), while others have continued to raise payouts such as EnerCare Inc (TSX: ECI, OTC: CSUWF).

And we’ve seen some real blow-the-doors off numbers too, including those posted by Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) that I review below.

Extendicare Inc’s (TSX: EXE, OTC: EXETF) results, highlighted in the March 1 Flash Alert Four Solid Reports and More on Atlantic Power, were definitely overshadowed by what Atlantic Power did the same day. But that didn’t make them any less of a bullish surprise for a company that’s consistently been counted out by many.

The Greater Danger

My point is, although it’s tempting to obsess on one or two stocks–in this case underperformers–our focus always has to be on ensuring balance and diversification across the entire Portfolio.

And of that, Canadian stocks should only be one part, just as US master limited partnerships, US utilities, Australian stocks and other sectors should be.

As I look down the Portfolio I’m seeing a lot of value. In fact several of the Conservative and Aggressive Holdings that have long traded above buy targets are now back in a bargain range. They’re definitely worthy of new money now, particularly those that have again proven their long-term value with robust fourth-quarter and full-year numbers.

Conversely, however, I’m also seeing several stocks that now trade above buy targets, some for considerably more.

One of the greatest fallacies many investors buy into is that their greatest risk lies in stocks that have fallen in value. The reality, however, is the greater danger lies in stocks that have risen so much that they’re now a disproportionate slice of investors’ overall portfolios.

If you’ve been around Canadian Edge long enough odds are you own some of our picks that fall into this category.

Keyera Corp (TSX: KEY, OTC: KEYUF) is the stock currently trading furthest above target.

This is a great company, and fourth-quarter results were robust to say the least, as we noted back in the Feb. 15 Flash Alert. But the stock is also riding buying momentum higher just now, and the yield is back under 4 percent.

I fully expect to raise my target again by end-year, when management boosts the dividend again. But the trading history of this stock is a lot more volatile than its steadily growing business. And investors have had several opportunities in recent years to take some money off the table when euphoria has grown. This is such a time in my view.

I’m not advocating wholesale selling here of Keyera or any other stock you own that’s succeeded enough to become a disproportionate piece of your portfolio. But the better you practice the principles of periodic portfolio rebalancing the better protected you’ll be if a longtime winner should suddenly stumble.

And as the events of the past month make clear, it literally can happen to any company, including longtime favorites that proved themselves by raising dividends in 2008, such as Atlantic Power and Just Energy.

Spread your bets.

More Numbers

Six more Canadian Edge Portfolio Holdings have reported earnings since last week’s series of Flash Alerts. All six stacked up on numbers for 2012, and management maintained hopeful guidance for growth in 2013.

All of these stocks continue to rate “buys” up to my listed target prices. Note, however, that Wajax Corp (TSX: WJX, OTC: WJXFF) has been downgraded to a hold. The dividend is still covered by cash flow and management intends to hold it. But keeping earnings level with 2012 will require a strong second half 2013 performance, and a little caution is required now. Wajax is now a hold.

Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF) reported flat cash flow from operations per share for both the fourth quarter and for 2012.

The fourth-quarter payout ratio for the company–which collects royalty income from franchises representing 22 percent of Canada’s realty business–came in at just 65.7 percent. The full-year ratio, which factors out seasonal impact on the one-third of revenue that’s variable, was an even more secure 56 percent.

The numbers affirm management’s generally cautious outlook for Canada’s residential property market. The government has tightened what were already fairly stiff rules for mortgage lending, and there’s been a discernible impact on activity.

These results, however, show the company is coping by virtue of superior scale and conservative financial management.

Looking ahead to the rest of 2013, the forecast is for less transaction activity in the first half than in 2012.

That’s also expected to have a further slowing impact on home prices in Canada, which management now expects will rise by an average of just 1 percent.

On the other hand, the forecast market correction has been noticeably milder than anticipated. And with tighter standards, gains that are made are considerably more solid.

My view is investors are likely to remain wary of this sector, given how fast property values have risen in recent years and the ever-present fear of a repeat of the US collapse of 2006-09, no matter how unlikely. But that could play to this company’s hand over the next year, as smaller franchisers elect to join its large, secure platform.

And the ever-present backing of Brookfield Asset Management Inc (TSX: BMA/A, NYSE: BAM) means this company can literally do any deal it wants.

For now the important thing is Brookfield Real Estate Services’ dividend rate is well secured by solid numbers. Debt isn’t a factor, and the franchise is secure with opportunities to grow.

Buy Brookfield Real Estate Services, which is yielding 8.6 percent at current levels, up to USD14 if you haven’t yet.

Pembina Pipeline Corp’s (TSX: PPL, NYSE: PBA) fourth-quarter revenue surged 170 percent, thanks to the Provident Energy Ltd merger and a steady pace of additions of new fee-generating assets.

Quarterly cash flows also nearly tripled, while operating margin and gross profit doubled.

Adjusted cash flow from operating activities per share (ACFO)-the primary metric for overall profitability–rose 51.2 percent. That covered the monthly dividend by a solid 1.44-to-1 margin; the payout ratio was 69.5 percent. The full-year payout ratio was 84.2 percent, spurred by a 4.4 percent increase in ACFO.

Impressively, Pembina posted these numbers despite generally weak pricing for many natural gas liquids (NGLs). The company took on NGLs pricing exposure when it merged with Provident. The key challenge for management was minimizing the impact of price swings and spreads on cash flows. And despite best efforts, the company still expected to make only gradual progress.

As a result, NGLs weakness did take a toll on results, particularly for the full year.

But as the acceleration of growth in the fourth quarter demonstrates, it’s been more than offset by strong performance and growth of the fee-generating assets, which include infrastructure serving oil sands, conventional energy and NGLs.

Pembina is most definitely in line to benefit from approval of the Keystone XL pipeline, as it’s a major provider of infrastructure to oil sands developers.

The exclusive transportation contract with Syncrude is no longer the only cornerstone of this growth. But any expansion by the Exxon Mobil Corp (NYSE: XOM) led partnership will flow right to the bottom line in take-or-pay contracts, which basically get paid on whether pipeline capacity is used or not.

What really makes this company attractive for the long term, however, is that its recently augmented CAD1.04 billion capital spending plan for 2013–and CAD4 billion additional “unrisked” potential growth projects–don’t depend on Keystone or any other project getting approved. That includes CAD1 billion in NGLs infrastructure expansion announced this week.

Management has stated it intends to raise its dividend at an average pace of 3 percent to 5 percent a year going forward, financed by cash flows from its expanding asset base. Since last year’s boost came in March, I look for another one later this month. If so, I’ll raise the buy target.

Until then Pembina Pipeline is still a buy up to USD30 for those who don’t already own it.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) continues to grow profitability as though the price of its primary product, natural gas, were at USD10 per million British thermal units rather than its current USD3.60.

The keys are the same as they ever were: extremely low-cost reserves and production and conservative financial policies that ensure it gets above ground and to market.

Fourth-quarter production soared 26 percent, or 17 percent per share, to 49,754 barrels of oil equivalent (BOE) per day. Reserves per share were increased by 15 percent, pushing Peyto’s net asset value under extremely conservative assumptions to at least USD25 per share. And the company maintained one of the longest reserve lives in its industry at 15 years for proven reserves alone (90 percent or better chance of development).

Better, rising production and reserves actually reduced costs by increasing scale. Cash costs per BOE, for example, fell another 22 percent. Operating costs were just CAD0.32 per thousand cubic feet (CAD1.92 per BOE), while total royalties, operating costs, transportation, general and administrative and interest costs were just CAD1.05 per thousand cubic foot. That’s CAD6.30 per BOE, down from CAD8.10 per BOE a year ago.

Not many companies make good money selling natural gas at a price of less than USD5 per thousand cubic foot. Fewer can turn the trick at USD3, but only Peyto can still produce all in at USD1.

Not even those economics could prevent a 27 percent drop in realized selling prices from pushing down full-year funds from operations (FFO) by 6 percent. Fourth-quarter FFO, however, rose 8 percent, pushing the payout ratio down to 28 percent from 30 percent a year earlier.

And the company continued to invest heavily in growth, ensuring further upside both for reserves and production–as well as profitability even if energy prices remain weak.

If there’s a negative in these very strong numbers it’s that investors have again bid Peyto up over my buy target.

But as anyone who’s watched this stock knows full well, energy markets are volatile.

And I’m confident patient investors will be able to buy in to Peyto Exploration & Development below my raised buy target of USD25.x

TransForce Inc’s (TSX: TFI, OTC: TFIFF) dramatic increase in scale over the past several years is paying off with steady performance at a time when the freight transport industry is slumping.

Fourth-quarter revenue rose 5.6 percent, excluding the fuel surcharge that protects the trucker’s margins.

Free cash flow moved up another 8 percent, and adjusted net income rose 14.7 percent to CAD0.39 per share, covering the dividend with a comfortable 33.3 percent payout ratio.

Fourth-quarter results are a deceleration from numbers put up earlier in the year. Full-year revenue, for example, was up 17 percent, spurring a 33 percent rise in earnings before debt interest and taxes.

Fourth-quarter cash flow margins, however, rose to 8.2 percent of revenue, besting 7.6 percent of a year ago and the full-year average of 7.9 percent.

That’s a clear testament that company efforts to integrate its now far-flung and diversified services are paying off and will remain a powerful force for growth in 2013. Fourth-quarter revenue was flat at Package & Courier (38.9 percent of sales), but income was higher. And the same was true for other divisions, though Specialized Energy Services was flat as drilling activity slackened in both Canada and the US.

Stronger cash flows means more funds available for investment, and management invested CAD80.4 million of CAD256 million in free cash flow generated in 2012. The company also bought back CAD61.9 million of its own stock and cut long-term debt by CAD55.1 million.

All this will strengthen the company in 2013 in an environment management does not expect to “significantly improve” before the end of the year. And it also puts TransForce in position to further acquire valuable assets from floundering rivals.

The primary challenge with the stock now is price. Another dividend increase is likely when the company declares its July payout. I expect a double-digit increase.

But until then my buy-under target for TransForce remains on dips to USD17 or lower.

Vermilion Energy Inc (TSX: VET, OTC: VEMTF) will list its shares on the New York Stock Exchange (NYSE) starting March 12. That’s likely to get this stock a lot more attention, even as the company continues to distinguish itself more and more as an energy producer that can profit in the most difficult environments.

Fourth-quarter average daily production was flat against year-earlier levels due to a decision to shut in dry Canadian natural gas and wait on better prices. Full-year output, however, moved higher by 7 percent, as the company continues to execute on development in Australia and Europe as well as light oil output in Canada’s Cardium trend.

Unlike most other Canadian producers, Vermilion sells more than 70 percent of its output into markets where energy prices are much higher than in North America. That was a major factor in its 9 percent increase in full-year FFO, though again fourth-quarter tallies were mostly flat.

Fourth-quarter FFO covered the dividend comfortably with a 41.9 percent payout ratio, pointing the way to another increase by early 2014.

Vermilion’s biggest investment the past several years has been as a part owner of the Corrib field off the Irish coast. This project has yet to produce its first dollar of revenue for the company and continues to consume a large amount of capital, but the payoff is near. The final phase of tunneling, construction and installation activities are now on track to bring the first gas to market in late 2014, with peak production levels in mid-2015.

When Corrib comes on stream it will bring a huge lift to Vermilion’s global output and cash flow. But in the meantime the company is handling the financial burden quite well, with the debt-to-cash flow ratio still at a modest 1.2-to-1.

And it continues to invest in production and reserves elsewhere as well, including a major stake in the Duvernay gas trend that could come into its own just as Canadian gas becomes exportable to Asia.

Vermilion’s drilling program replaced 235 percent of reserves in 2012, boosting total proved reserves by 9.1 percent and proved-plus-probable reserves by 12.7 percent.

Including Corrib, 81 percent of funds flows from operations were ploughed back into its resource base, ensuring continued robust growth for 2013 and beyond.

My buy-under target for Vermilion is USD52, reflecting this year’s 5.3 percent dividend increase. That’s where I intend to keep it until the next dividend increase.

Wajax Corp’s (TSX: WJX, OTC: WJXFF) fourth-quarter and full-year 2012 numbers were by no means a disaster. Fourth-quarter revenue was 3 percent lower than a year ago, largely due to reduced activity from its customers in the western Canada oil and gas industry.

But the company did see continued favorable trends for its forestry and construction customers. And full-year revenue and earnings actually hit records.

Challenges began in the second half of 2012, as the oil and gas sector began curtailing drilling activity in the wake of widening oil-price differentials. That didn’t carry over to the oil sands industry, which is dominated by large companies embarked on long-term spending plans. But it has hurt two of Wajax’ key divisions, Power Systems and Industrial Components. And management now expects the pain to carry over into the first half of 2013.

The company’s generally positive outlook for the full year relies heavily on a comeback in the second half of the year. Fourth-quarter 2012 order backlog declined 9 percent and 31 percent from third-quarter and full-year tallies, respectively, which will likely reduce first-half sales.

The key is what happens after that, and there are more than a few “ifs” involved.

During Wajax’ fourth-quarter conference call CEO Mark Foote basically ruled out prospects for a “meaningful improvement in the oil and gas market during 2013.” That’s actually encouraging, as it means management’s expectation for a strong second half doesn’t depend on it. And if one does occur it will provide an unlooked for boost in company fortunes.

Rather, the forecast for improvement–and thereby achieving 2013 earnings that at least match 2012–lies mainly in executing on internal matters such as managing inventory and integrating the recent mergers with Kaman and Sourcepoint. Results from those efforts are only going to come in clear over several quarters.

And given the rise in the fourth-quarter payout ratio to 96 percent, we could see dividend coverage go below 1-to-1 in the first and/or second quarter of 2013 before we see a turn.

Wajax has certainly seen ups and downs before in its business. And management obviously has a healthy appreciation of the cyclical pressures its customers operate under. There’s absolutely nothing to indicate the dividend of better than 8 percent is in any danger now.

But the company did cut its payout twice in 2009, in response to a dramatic drop off of activity in Canada’s energy patch. And while conditions now are nowhere close to that bad and the company is arguably a lot bigger and stronger, I’m going to be cautious at least until I see some evidence the offsetting measures are having an impact.

That means keeping Wajax a hold, very likely until the next earnings announcement on or about May 8.

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–March 1 Flash Alert II
• Artis REIT (TSX: AX-U, OTC: ARESF)–March 1 Flash Alert II
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–March 21 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–March Portfolio Update
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–February Portfolio Update
• Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–Feb. 27 Flash Alert
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–February Portfolio Update
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–Feb. 27 Flash Alert
• Dundee REIT (TSX: D-U, OTC: DRETF)–Feb. 22 Flash Alert
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–March 1 Flash Alert II
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–March 14 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–Feb. 15 Flash Alert
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–March 13 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–March Portfolio Update
• RioCan REIT (TSX: REI, OTC: RIOCF)–Feb. 15 Flash Alert
• Shaw Communications Inc (TSX: SJR/A. NYSE: SJR)–February Portfolio Update
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Feb. 13 Flash Alert
• TransForce Inc (TSX: TFI, OTC: TFIFF)–March Portfolio Update

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Feb. 13 Flash Alert
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–March 14 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–February In Focus
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–March 1 Flash Alert I, March 1 Flash Alert II
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 22 Flash Alert
• Colabor Group Inc (TSX: GCL, OTC: COLFF)–March 22 (estimate)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–March 14 (confirmed)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–March Best Buys
• Extendicare Inc (TSX: EXE, OTC: EXETF)–March 1 Flash Alert II
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–March 21 (confirmed)
• Just Energy Group Inc (TSX: JE, NYSE: JE)–February Best Buy
• Newalta Corp (TSX: NAL, OTC: NWLTF)–Feb. 15 Flash Alert
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 13 Flash Alert
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Feb. 27 Flash Alert
• PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–March 21 (estimate)
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–March Portfolio Update
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–March Portfolio Update
• Wajax Corp (TSX: WJX, OTC: WJXFF)–March Portfolio Update