When Should You Invest in a Hot Product?

Q: Pat, here’s an interesting question. If I see a company’s product walking off the shelves in a store, should I invest in that stock?

Pat McKeough: It certainly is worth looking closer to see if the numbers add up and if the product is the equivalent to—I remember a fad many years ago, the Cabbage Patch Dolls, that didn’t last very long.

I also remember one time, I think it was in 2001, I had several people over to the house and one of them brought the first iPod. We passed it around and everyone was really impressed with it. And we had just added Apple to our buy list at that time.

So that’s a case where you could say that you saw the thing walking out of the store and that was great. You should also be on the lookout for that.

I’d say a product walking out of the store is a good reason for further study, but don’t buy blind. Because there might have been a temporary shortage of product in an area right about the time that it got a good review in a local newspaper, but that’s not necessarily going on all over the country.

So this is like a lot of things—it’s a good reason to look more closely, not a good reason to invest your money without looking more closely.

My team of experts does an enormous amount of research on your behalf when you become a client of our Successful Investor Wealth Management service. And I personally approve every transaction in every portfolio. We stress safety first and take a conservative approach to building wealth, following the same value-investing principles I’ve followed for my entire career. Click here to learn more about how you can profit from my portfolio management services.

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific advice on investment topics. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “If you follow these 3 tips, you will eliminate a lot of unnecessary risk from your investing.”

These 3 tips for lowering risk when you’re investing in stocks have long been a part of the advice we give you in our investment services and newsletters.

• Tip #1 for lowering risk: Be skeptical of companies that mainly grow through acquisitions. Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safe investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.
  
  Despite the risks, some acquisitions can be hugely profitable. So, don’t automatically discount companies that have grown through acquisitions. Just keep the risks in mind, and avoid companies that seem to push through acquisition indiscriminately, without taking into account the potential risks.
• Tip #2 for lowering risk: Don’t overindulge in aggressive investments. Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to no more than about 30% of your overall portfolio.
  
  Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.

Don't miss your chance to download Pat McKeough's free report, "Stock Market Investing Strategy: Pat McKeough's Conservative Investing Guide for Making Money & Cutting Risk." In this report, Pat gives you simple, plain-English advice that can help you cut your portfolio's volatility — even in unpredictable markets like today's. Click here to download your copy and get started right away.

• Tip #3 for lowering risk: Keep stock market trends in perspective. It pays to keep in mind that the stock market anticipates things, and no trend lasts forever. Stocks put on lengthy downturns due to business and economic problems. The downturns start going back up long before the problems get solved.

Above all: Be a cautious optimist. Don’t let media sound bites and self-serving predictions warp your decisions when you’re investing in stocks. Instead, control your risk by following our three-part strategy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities); and avoid stocks in the broker/media limelight.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

ROYAL BANK OF CANADA (Toronto symbol RY; www.rbc.com) is Canada’s largest bank, with $815.0 billion of assets.

The U.S. Commodity Futures Trading Commission (CFTC) recently accused Royal of using a complex series of trades to cut its tax bill in Canada.

Specifically, the CFTC says that divisions of the bank bought Canadian and U.S. dividend stocks (plus futures contracts on these stocks) and quickly sold them to other divisions. These transactions would let Royal earn tax credits on the dividends it received from these holdings.

The CFTC claims that this process was a wash trade, in which the bank artificially set prices for these transactions, instead of letting the market determine the prices. Royal has denied these allegations.

Don't miss your chance to download Pat McKeough's free report, "Stock Market Investing Strategy: Pat McKeough's Conservative Investing Guide for Making Money & Cutting Risk." In this report, Pat gives you simple, plain-English advice that can help you cut your portfolio's volatility — even in unpredictable markets like today's. Click here to download your copy and get started right away.

Dividend stocks: Royal Bank takes full control of investor services firm

Royal recently agreed to buy the 50% of RBC Dexia Investor Services that it does not already own. Formed in 2006, this 50/50 joint venture provides safekeeping and administration services (including holding securities and processing transactions) to institutional investors.

Meanwhile, the bank earned $1.9 billion, or $1.23 a share, in the first quarter of fiscal 2012, which ended January 31, 2012. That’s down 6.0% from $2.0 billion, or $1.31 a share, a year earlier. Lower profits from Royal’s securities trading business was the main reason for the earnings decline.

Royal set aside $267 million to cover bad loans in the latest quarter, up slightly from $264 million a year earlier. Revenue rose 4.9%, to $7.6 billion from $7.2 billion.

The bank will probably earn $4.88 a share in fiscal 2012. The stock trades at 11.5 times that estimate. The $2.28 dividend yields 4.1%.

In the latest edition of The Successful Investor, we examine the viability of the CFTC’s case against Royal Bank and assess the possible consequences for the bank. We also look at the potential risks and rewards of the bank’s raised stake in Dexia Investor Services. We conclude with our clear buy-sell-hold advice on the stock.

You get our recommendation on Canada’s big five banks and more leading Canadian dividend stocks when you try a risk-free introductory subscription to The Successful Investor. As a new subscriber, you can save $50.00 — and get all the details on “My #1 Stock Pick for 2012.” Click here to take advantage of this special subscription offer.

Peter Lynch, the world’s top mutual fund manager from the 1970s through the early 1990s, maintains that it’s a good idea to invest in companies you’re familiar with, companies you see in action regularly. That stock market advice could certainly be put to the test by the many Canadians who pour through the doors of the country’s best known coffee and fast food chain every day.

TIM HORTONS INC. (Toronto symbol THI; www.timhortons.com) operates 3,295 coffee-and-donut stores in Canada and 714 in the U.S. It also has five recently-opened outlets in the Persian Gulf.

The company’s new menu items, such as espresso-based coffee drinks, continue to be extremely popular. Warmer-than-usual winter weather has also spurred customer traffic.

These two factors pushed up Tim Hortons’ sales by 12.5% in 2011, to $2.9 billion from $2.5 billion in 2010. If you exclude the positive impact of foreign currency rates, sales rose 7.4% in 2011. Same-store sales rose 6.3% at its U.S. outlets, and 4.0% in Canada.

However, earnings fell 38.7% in 2011, to $382.8 million from $624.0 million. That’s mainly because the 2010 earnings included a $361.1-million gain on the sale of its 50% stake in a baking joint venture. The company used the proceeds to buy back $572.5 million of its shares. Because of fewer shares outstanding, earnings per share fell only 34.4%, to $2.35 from $3.58.

Stock market advice: Tim Hortons continues dividend increases and share buybacks

Tim Hortons also raised its quarterly dividend by 23.5%, to $0.21 a share from $0.17. The new annual rate of $0.84 yields 1.6%. The company plans to buy back a further $200 million of its shares over the next year.

The stock is up 25% in the past year, and trades at 19.3 times its forecast 2012 earnings of $2.74 a share. That’s a reasonable p/e ratio in light of the company’s iconic brand and high market share.

In the latest edition of The Successful Investor, we look at the risks associated with the company’s ambitious expansion plans. We also assess the outcome of a class-action lawsuit by the franchisees, who claimed the company overcharged them for baked goods. We conclude with our clear buy-sell-hold advice on the stock.

You get our recommendation on Tim Hortons and many more Canadian stocks when you try a risk-free introductory subscription to The Successful Investor. As a new subscriber, you can save $50.00 — and get all the details on “My #1 Stock Pick for 2012.” Click here to take advantage of this special subscription offer.

Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

Last week, one Inner Circle member asked for stock investing advice on one of the world’s largest chemical manufacturers. Pat notes that the company has made headway with new specialty chemicals, but that its future is closely tied to the economic recovery.

Q: Pat: What is your opinion about adding Dow Chemical to a portfolio? I have recently heard they are sitting on a lot of cash reserves and have a high dividend yield. Thanks.

A: Dow Chemical Co., (symbol DOW on New York; www.dow.com), is the world’s second-largest chemical maker. (BASF SE of Germany is the largest).

Based in Midland, Michigan, Dow makes over 5,000 products at 197 plants in 36 countries. Europe, the Middle East and Africa account for 35% of its revenue, followed by the rest of the world (33%) and the United States (32%).

Dow operates through six main divisions: Performance Plastics, Performance Materials, Feedstocks & Energy, Coatings & Infrastructure Solutions, Agricultural Sciences and Electronic and Functional Materials.

In 2011, Dow’s revenue rose 11.8%, to $60.0 billion from $53.7 billion in 2010. The company raised its prices by 13% to cover the higher cost of oil and natural gas liquids like ethane, which it needs to make its products. This offset a 1% drop in sales volumes, and was the main reason for the higher revenue.

The company’s earnings for the year rose 28.5%, to $3.6 billion from $2.8 billion. Earnings per share rose 19.2%, to $2.05 from $1.72, on more shares outstanding. Without unusual items, such as gains on asset sales, earnings per share would have risen 28.9%, to $2.54 from $1.97.

The earnings increase was mainly due to savings from a series of restructurings over the past few years. These measures included closing plants and cutting jobs.

Stock investing advice: Dow gets profitable boost from specialty chemicals

The company is also producing more specialty chemicals, which are more profitable than regular chemicals. In addition, specialty chemicals are often protected by patents. This helps shield Dow from competition.

As part of this expansion, Dow paid $15.7 billion for specialty chemical maker Rohm and Haas Co. in April 2009. The purchase made Dow the world’s largest specialty-chemical maker.

In the second quarter of 2011, the company raised its quarterly dividend by 66.7%, to $0.25 a share. The shares now yield 2.8%. The stock now trades at 11.7 times the $3.05 a share that Dow will probably earn in 2012.

In the most recent Inner Circle Q&A, Pat looks at Dow’s need for a sustained global economic recovery to stimulate demand for its products and whether sales gains in Asia will continue to offset slower growth in North America and Europe. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

Pat McKeough responds to many personal questions on investing in stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, one member sought long-term advice on one of North America’s best-known big-box discount chains, which faces stiff competition in a race for retail revenue that has spread well beyond North America.

Q: Hi Pat: I would like your analysis of Costco as a long-term investment. Thank you.

A: Costco Wholesale Corp., $87.63 (symbol COST on Nasdaq; www.costco.com), owns and operates warehouse-sized stores that sell a wide variety of goods. It also sells merchandise online.

The company charges its customers a membership fee, usually $55 a year, to shop in its stores. It buys most of its inventory directly from manufacturers, which lets it sell these goods for less than traditional retailers. Food accounts for roughly half of its sales.

Costco has 568 outlets, including 433 in the U.S., 82 in Canada, 22 in the U.K., 13 in Japan, eight in Taiwan, seven in South Korea and three in Australia. It operates an additional 32 stores in Mexico through a 50/50 joint venture.

Costco gets roughly 30% of its sales and 40% of its earnings from outside the U.S. By September 2012, the company plans to open 19 new stores, and move one more to a larger building. Most of these outlets will be in Asia, Spain and France.

Investing in stocks: Discount gas stations help boost Costco sales

In its 2012 second quarter, which ended February 12, 2012, Costco’s revenue rose 10.0%, to $23.0 billion from $20.9 billion a year earlier. Same-store sales rose 8%, mainly because higher gasoline prices offset the impact of unfavourable foreign exchange rates. Costco operates discount gas stations at 60% of its stores. Nearly 30% its customers buy gas and shop on the same trip to the store.

Earnings rose 13.2%, to $394 million, or $0.90 a share, from $348 million, or $0.79 a share.

Costco’s long-term debt of $1.4 billion is a low 3.7% of its market cap. It holds cash of $5.8 billion, or $13.30 a share.

The company faces strong competition from discount stores like Wal-Mart, as well as other warehouse-store chains, such as Sam’s Club (which is owned by Wal-Mart) and Baja’s Wholesale Club. That makes it hard for Costco to raise its prices, which hurts its profit margins but helps it hang on to customers. Costco’s member renewal rate is around 85%.

Costco will probably earn $3.83 a share in fiscal 2012. The stock trades at 22.9 times that estimate. The $0.96 dividend yields 1.1%.

In the latest Inner Circle Q&A, Pat looks at whether growth in international markets can offset Costco’s slower growth in North America caused by the stiff competition among discount warehouse chains. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, there was a question about a stock that has been on the rise, Canada’s biggest private liquor store operator. Pat examines the company’s prospects for future growth in Canada as well as the possible risks and rewards of U.S. expansion.

Q: Pat: Can I have your recommendation on Liquor Stores N.A.? Thank you.

A: Liquor Stores N.A. Ltd. (symbol LIQ on Toronto; www.liquorstoresna.com), is Canada’s largest private liquor store operator, with 238 outlets. Of that total, 174 are in Alberta, 35 are in B.C., 20 are in Alaska and nine are in Kentucky. Liquor Stores’ banners include Liquor Depot, Liquor Barn and Brown Jug.

Alberta privatized retail liquor sales in 1993, prompting Irv Kipnes to found Liquor Depot and Henry Bereznicki to start Liquor World that year. Kipnes and Bereznicki, both Edmonton-based real estate developers, merged their companies and founded Liquor Stores Income Fund in 2004.

The fund first sold units to the public at $10 and began trading on Toronto in September 2004.

Liquor Stores Income Fund converted to a regular corporation on December 31, 2010, in response to Ottawa’s income trust tax.

Stock investing advice: Liquor Stores sales get a big boost from Alberta

The company’s strategy is to offer customers more choice—typically two to three times more products than its competitors. Liquor Stores lets each store juggle its product mix to meet local tastes.

In the third quarter of 2011, the company earned $15.8 million, or $0.48 a share. That’s a big jump from the $2.9 million, or $0.15 a share, that it earned a year earlier. However, the latest figure includes a $4.9-million gain on the settlement of a lawsuit. The company also had a $4.8-million foreign exchange gain in the latest quarter, compared to a $1.8-million loss a year earlier. Cash flow per share rose 10.2%, to $0.54 from $0.49.

Sales rose 3.6%, to $157.1 million from $151.6 million. Same-store sales rose 7.1% in Canada, mainly due to a 10.1% increase in Alberta. That’s mainly because the company is keeping its stores open longer and spending more on promotions. Same-store sales rose 1.2% in the U.S.

Liquor Stores’ long-term debt of $101.7 million is a manageable 26.2% of its market cap. It also holds cash of $895,000, or $0.04 a share.

The company pays a monthly dividend of $0.09 a share, which yields a high 6.3% on an annualized basis. In the latest quarter, it paid out 50.0% of its cash flow as dividends.

The company entered the U.S. in 2008, when it bought 19 Brown Jug stores in Alaska. It followed that with its purchase of eight Liquor Barn stores in Kentucky in 2009.

The stock trades at 16.2 times the $1.06 a share its forecast to earn in 2012.

In the latest Inner Circle Q&A, Pat looks at the company’s growth potential in a Canadian market dominated by government monopolies and at whether it can sustain its high dividend yield. He also examines the pros and cons of its U.S. expansion. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice, including how to develop the right investing strategy. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Tip of the week: “The less you worry about things you can’t control, the better investor you’ll be.”

Of course investors worry; it’s not in human nature to avoid worrying altogether. But it pays to remember that most things we worry about never happen. As humans, we are bred to overreact to, dwell on or even brood over any hint of risk.

There are always investment-related worries to occupy our minds. Today, they range from the escalating war of words over the potential Iranian nuclear threat to the seemingly endless process of defusing the European debt crisis.

Why we’re patterned to overreact to unseen threats

For hundreds of thousands of years of prehistory, humans lived together in small tribes. As hunter-gatherers, they were steadily on the move. They were also under constant threat from predators and members of other tribes. At night, if you woke to every sound from the bushes, you lost some sleep, but you cut your risk of being eaten by a sabre-toothed tiger or killed by an enemy sneak attack.

If you possessed the ability to worry constantly about unseen threats, you were more likely to live till you reached puberty, so you could pass along your worrywart genes to the next generation.

Don't miss your chance to download Pat McKeough's free report, "Stock Market Investing Strategy: Pat McKeough's Conservative Investing Guide for Making Money & Cutting Risk." In this report, Pat gives you simple, plain-English advice that can help you cut your portfolio's volatility — even in unpredictable markets like today's. Click here to download your copy and get started right away.

Investors may be more sensitive to risk than others

Today we face much less risk from animal predators and human marauders. But many people still carry this hair-trigger fear response. We spend more time than we should worrying about things that have very little chance of actually happening—or will work themselves out much less dramatically than some of the more strident commentators would have us believe.

That’s especially true of investors, who generally think more about the future than other people. It’s true all the more of tsinetwork.ca readers, as well as subscribers to our newsletters.

Many of you are the kind of people who seek out information from a variety of written sources, where it’s much more extensive and detailed than what you get from a glance at newspaper or Internet headlines, the evening news or commentaries on cable TV. However, some of that information is biased, overblown or incorrect.

This doesn’t mean you should ignore potential threats. You simply need to put them in perspective.

Anxiety recedes with investment quality, diversification and balance

You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.

You get a much better return on time spent if you devote less of it to worrying, and more of it to an investing strategy built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.

There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run.

If you want a worry-free approach to investing based on investment quality and diversity, you really should have a subscription to The Successful Investor. You can try an introductory subscription for first-time subscribers at a savings of $50.00 off the regular annual rate. Click here to get started right away.

Pat McKeough responds to many personal questions on specific stocks and other investing topics from the members of his Inner Circle. Every week, his comments and recommendations on a selection of the most intriguing questions of the past week go out to all Inner Circle members. And every Friday, we offer you one of the highlights from these Q&A sessions.

This week, one Inner Circle question concerned a potentially fast-growing stock market investment, convenience store chains. Pat looks at how one U.S. chain is doing following its successful fight to resist a takeover bid from a big Canadian chain.

Q: What are your thoughts on Casey’s General Stores as an investment? Thank you.

A: Casey’s General Stores, (symbol CASY on Nasdaq; www.caseys.com), operates over 1,700 convenience stores under the Casey’s General Store and Just Diesel brands.

The company’s stores are located in eleven Midwestern states, but they are mainly concentrated in Iowa, Missouri and Illinois.

Casey’s gets 71% of its revenue by selling gasoline, but its stores also offer food, including freshly prepared pizza, donuts and hamburgers, as well as beer and other beverages.

In the three months ended October 31, 2011, Casey’s revenue rose 32.1%, to $1.8 billion from $1.3 billion a year earlier. Earnings jumped 73.5%, to $37.6 million from $21.7 million. Earnings per share rose 94.1%, to $0.99 from $0.51, on fewer shares outstanding.

However, if you exclude the $0.30 a share that Caseys spent to fend off a hostile takeover bid a year earlier, its earnings per share would have been $0.81 in the year-earlier quarter.

Stock market investment: Caseys looks to expand in three Southern states

Casey’s holds cash of $86.2 million, or $2.24 a share. Its long-term debt of $673.5 million is a reasonable 32.1% of its market cap. The shares yield 1.1%.

Casey’s earnings have lagged behind its revenue growth lately, because strong competition for cigarette sales has hurt its profit margins. It is also paying more for food ingredients, including cheese, coffee beans, flour and meat.

The company has lots of room to expand by purchasing smaller chains and opening new stores. For example, it now plans to build a number of new stores on its recently purchased land in Arkansas, Kentucky and Tennessee.

Casey’s shares are up 54% since March 2011. Even so, the stock trades at a reasonable 15.0 times this year’s forecast earnings of $3.60 a share.

In the latest Inner Circle Q&A, Pat examines Caseys prospects in light of the potential risk of its acquisition policy. He also looks at whether it can boost its profit margins in an improving U.S. economy and gain from its plan to favour prepared food over fresh food. He concludes with his clear buy-hold-sell advice.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer outsourcing services. It also operates in 15 other countries. Canada and the U.S. each accounted for 47% of its revenue in the latest fiscal year; Europe and Asia supplied the remaining 6%.

The company often uses acquisitions to fuel its growth. CGI’s most important purchase in the past few years was its $932.2-million acquisition of Stanley Inc. in September 2010. Stanley provides computer outsourcing services to military and civilian agencies of the U.S. government.

CGI’s revenue rose 3.1%, from $3.7 billion in 2007 to $3.8 billion in 2009 (the company’s fiscal years end September 30). Unfavourable currency rates cut revenue by 2.4%, to $3.7 billion, in 2010. Thanks to the Stanley acquisition, revenue rebounded to $4.3 billion in 2011.

Earnings rose at a much faster pace: up 84.7%, from $235.6 million in 2007 to $435.1 million in 2011. CGI prefers to use its excess cash to buy back shares instead of paying a dividend. Because of fewer shares outstanding, earnings per share rose 125.7%, from $0.70 in 2007 to $1.58 in 2011.

Don't miss your chance to download Pat McKeough's free report, "Stock Market Investing Strategy: Pat McKeough's Conservative Investing Guide for Making Money & Cutting Risk." In this report, Pat gives you simple, plain-English advice that can help you cut your portfolio's volatility — even in unpredictable markets like today's. Click here to download your copy and get started right away.

Best Canadian stocks: CGI wins five-year cloud computing contract with U.S. government

CGI had to borrow some of the cash it needed to buy Stanley. That raised its long-term debt to $1 billion on September 30, 2010, from just $265.4 million a year earlier. However, CGI had cut its debt to $917.8 million by December 31, 2011. That’s just 18% of its market cap.

The company is also in a strong position to profit from growing demand for cloud computing. (That’s where data is kept on centralized servers that users connect to over the Internet.) For example, CGI recently won a $20.8-million U.S., five-year contract to modernize and manage several U.S. government websites, including www.USA.gov.

In all, CGI booked $1.4 billion of new contracts during the quarter ended December 31, 2011. New clients accounted for 52% of this total; the remaining 48% came from extensions and renewals. Its order backlog was $13.6 billion at the end of the quarter, up from $13.0 billion a year earlier. That’s equal to 3.2 times its annual revenue.

In the latest edition of The Successful Investor, we examine whether CGI can minimize the risk involved in its acquisition strategy and sustain its earnings growth by adding new contracts. We conclude with our clear buy-sell-hold advice on the stock.

You get our recommendation on CGI Group and many more of the best Canadian stocks for conservative investors when you try a risk-free introductory subscription to The Successful Investor. As a new subscriber, you can save $50.00 — and get all the details on “My #1 Stock Pick for 2012.” Click here to take advantage of this special subscription offer.