tdsi action list - june 1-11

June 1, 2011

Equity Research

Action ListOur Best Ideas

A Division of TD Securities Inc. 1

Introduction The Action List is a monthly publication that identifies our analysts’ top investment recommendations. As well, it provides a list of important industry milestones to watch for in the coming month and an update on our sector stances. The report also includes updates from our Strategy and Quantitative research teams. While it is always difficult for compendium publications to be both timely and informative, we believe that our product strikes a good balance compared to the quarterly products offered by many of our competitors. At times, if we are not bullish on a particular sector, we may not have an Action List pick in that space. The performance of our Action List picks is monitored on an ongoing basis against the relevant S&P/TSX benchmarks. J. P. Benson, CFA Head of Research Please see pages 95 to 99 for important disclosure information, including disclosures on Quantitative Research. This report is strictly a summary. It should not be used as the sole basis for investment decision-making. For information relating to Justification of Target Price and Key Risks to Target Price please visit our website at https://www.tdsresearch.com/equities/disclosures.

YOUR ATTENTION IS DIRECTED TO THE IMPORTANT DISCLOSURES IN APPENDIX A.

TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

2 A Division of TD Securities Inc.


Table of Contents TD Newcrest Action List (as of May 31, 2011) ......................................................4 Action List Additions and Deletions Since Our Last Edition ..................................5 Performance Review ...............................................................................................6 Investment Strategy.................................................................................................8 Quantitative Analysis ............................................................................................12 Alternative Energy ................................................................................................18 Banks.....................................................................................................................21 Biotechnology & Health Care ...............................................................................24 Chemicals & Fertilizers.........................................................................................27 Communications ...................................................................................................30 Consumer Discretionary........................................................................................33 Consumer Staples..................................................................................................36 Diversified Financials ...........................................................................................39 Energy Producers – Intermediate Oil & Gas.........................................................42 Energy Producers – International ..........................................................................44 Energy Producers – Senior & Unconventional .....................................................47 Energy Services.....................................................................................................50 Gold & Precious Minerals.....................................................................................53 Industrial Products ................................................................................................56 Insurance ...............................................................................................................59 Media ....................................................................................................................62 Metals & Minerals.................................................................................................64 Multi-Industry .......................................................................................................67 Paper & Forest Products........................................................................................69 Pipelines, Power & Utilities ..................................................................................72 Real Estate.............................................................................................................75 Special Situations ..................................................................................................78 Technology............................................................................................................81 Transportation – Aerospace ..................................................................................84 Transportation – Railroads ....................................................................................87 Action List Rules...................................................................................................94 Appendix A. Important Disclosures......................................................................95


TD Newcrest Action List (as of May 31, 2011)

Share TargetPage Sector Action List Pick Ticker Price Price18 Alternative Energy None — — —21 Banks None — — —24 Biotechnology & Health Care None — — —27 Chemicals & Fertilizers None — — —30 Communications Thomson Reuters Corp. TRI-T $37.74 $50.00

Manitoba Telecom Services Inc. MBT-T $34.46 $39.0033 Consumer Discretionary None — — —36 Consumer Staples Alimentation Couche-Tard Inc. ATD.B-T $26.92 $33.00

Loblaw Companies Ltd. L-T $41.60 $51.0039 Diversified Financials Canaccord Financial Inc. CF-T $14.00 $19.0042 Energy Producers – Intermediate None — — —44 Energy Producers – International Bankers Petroleum Ltd. BNK-T, L $7.97 $12.5047 Energy Producers – Senior & Unconventional Canadian Natural Resources Ltd. CNQ-T, N $42.17 $53.0050 Energy Services Trican Well Service Ltd. TCW-T $23.29 $30.0053 Gold & Precious Minerals Goldcorp Inc. GG-N US$50.07 US$66.00

Eldorado Gold Corp. ELD-T; EGO-A $15.37 $22.0056 Industrial Products None — — —59 Insurance None — — —62 Media None — — —64 Metals & Minerals Teck Resources Ltd. TCK.B-T $50.82 $68.00

First Quantum Minerals Ltd. FM-T $131.76 $155.0067 Multi-Industry None — — —69 Paper & Forest Products Sino-Forest Corp. TRE-T $19.27 $34.0072 Pipelines, Power & Utilities ATCO Ltd. ACO.X-T $63.36 $69.00

Canadian Utilities Ltd. CU-T $57.11 $60.0075 Real Estate Homburg Canada REIT HCR.UN-T $12.85 $14.0078 Special Situations Progressive Waste Solutions BIN-N US$25.13 US$33.0081 Technology None — — —84 Transportation – Aerospace None — — —87 Transportation – Railroads None — — —

Additions to the Action List since our last edition.


Action List Additions and Deletions Since Our Last Edition Additions Canadian Natural Resources Ltd. (CNQ-T, N; effective May 18, 2011) We added Canadian Natural Resources to the Action List on May 18. The January fire at its Horizon Upgrader and subsequent sell-off in its shares has created a unique entry point, in our view. With expectations of a return to full productive potential in 2012, we contend that the outlook is very positive. The company also stands to benefit most from the recent narrowing in heavy differentials, a trend that is likely to persist for the foreseeable future. Deletions Torstar Corp. (TS.B-T; effective May 5, 2011) Torstar shares have performed well, returning 97% since we added them to the Action List in March 2010. After disappointing Q1/11 results announced on May 4 and with few catalysts on the horizon, we downgraded the stock to BUY. The valuation remains attractive and we still believe that the stock is well suited for value investors. Groupe Aeroplan Inc. (AER-T; effective May 27, 2011) With our 12-month return to target down to 33%, from 68% at the time of its upgrade, we removed Groupe Aeroplan from the Action List on May 27. Despite the many positives we see in the company’s business and strategic direction, we believe that 2011 is going to remain a transition period in terms of cash flow generation and earnings from the U.S. and U.K. This, combined with lingering headline risk related to Air Canada’s union negotiations and the competition bureau’s investigation into credit card regulations justify moving to a BUY, based on the reduced upside to our target.


Performance Review After reaching a mid-month low on May 13, the S&P/TSX Composite Index (total return) posted nine consecutive days of positive returns, ending with a small decline on May 31. However, this was not enough to erase the losses sustained earlier in the month, and the Composite once again finished down on the month, posting a May return of -0.9%. This now marks two consecutive months of decline, which last occurred in May and June last year. U.S. markets did not fare any better and were also down. The S&P 500, NASDAQ Composite and Dow Jones Industrial Average posted losses of 1.1%, 1.3% and 1.9%, respectively. At the sector level in Canada, high yielding and defensive sectors did best. Telecoms easily led the way, with a return of 7.4%. Consumer Staples and Utilities followed with returns of 3.6% and 3.1%, respectively. On the down side, Information Technology was once again the worst performing sector (third month in a row), shedding 4.8% in May. Research in Motion Ltd. (RIM-T) declined 10.3% in May and is now down 28.8% year to date. In the U.S., it was a similar story, with the best performers being the defensive sectors of Consumer Staples, Health Care, Telecommunications and Utilities, up 2.4%, 2.2%, 1.6% and 1.6%, respectively. The Energy sector had the biggest declines, and finished the month down 4.6%. Our Action List returned -0.7% on the month, outperforming the S&P/TSX Composite by 20 bps. Our best relative performing group was Energy Producers – Senior & Unconventional, with the addition of Canadian Natural Resources Ltd. (CNQ-T) in mid-May. Year to date, Consumer Discretionary remains our best performing group.

Total Return (%)Indices 1-Month Year-to-Date

Action List -0.7 2.8S&P/TSX Composite -0.9 3.6Equal-Weight Benchmark -0.4 7.6S&P 500 -1.1 7.8NASDAQ Composite* -1.3 6.9Dow Jones Industrial Average* -1.9 8.6 * Price return only.


TD Newcrest – Action List Performance* May 2011 Year-to-Date

-0.7

3.5

0.0

2.0

1.1

0.0

6.4

8.0

-1.7

2.6

6.5

0.0

0.0

0.0

-0.1

-4.0

0.0

0.0

0.0

-18.0

0.0

0.0

-2.1

-10.5

-11.3

-0.9

-3.4

-4.8

-2.2

-1.9

-2.7

3.7

5.6

-3.2

1.2

5.1

-0.4

0.1

0.3

0.6

-2.7

2.0

2.1

2.5

-15.2

3.5

3.5

3.3

-4.6

-2.5

-30 -20 -10 0 10 20 30

TD Newcrest Action List

Energy Producers - Senior &Unconventional

Technology

Transportation - Aerospace

Special Situations

Energy Producers - Intermediates

Consumer Staples

Pipelines, Power, & Utilities

Metals & Minerals

Real Estate

Communications

Banks

Industrial Products

Insurance

Energy Services

Energy Producers – International

Transportation - Railroads

Multi-Industry

Health Care

Paper & Forest Products

Consumer Discretionary

Alternative Energy

Diversified Financials

Gold & Precious Metals

Media

Action List Comp Group

2.8

22.0

0.0

2.7

2.2

13.4

-2.8

3.5

0.9

0.0

0.0

0.0

2.8

10.2

-4.0

7.2

-17.3

0.0

0.0

0.0

0.0

12.6

0.0

-2.3

0.0

3.6

3.8

-13.9

-7.7

-4.9

7.0

-5.7

3.8

1.6

1.8

1.9

2.2

7.5

15.1

1.5

12.9

-11.2

7.5

8.3

9.6

9.6

23.0

14.9

20.5

58.1

-100 -50 0 50 100

TD Newcrest Action List


Technology

Gold & Precious Metals

Media

Communications

Metals & Minerals

Energy Producers - Senior &Unconventional

Special Situations

Insurance

Energy Producers - Intermediates

Industrial Products

Consumer Staples

Real Estate


Pipelines, Power, & Utilities


Alternative Energy

Multi-Industry

Banks

Transportation - Railroads

Energy Services


Transportation - Aerospace

Health Care

Action List Comp Group

*% total return.


Investment Strategy John Aitkens We define an economic soft-landing as a period of time when growth slows, but does not turn negative. It has been our view that the U.S. and global economies have been in a soft landing since momentum peaked in the second quarter of last year. We still believe that the U.S. and global re-acceleration will most likely begin early next year. Market expectations have swung on either side of this soft landing view. The correction in May and June last year came amid rising fears of double-dip (a hard landing or recession). By early this year, market expectations had swung from pessimism to optimism that growth was robust and ready to accelerate. We argued that it was too soon to expect a re-acceleration of growth based on the pattern evident in past cycles, as well as the important fact that China was tightening in an attempt to slow growth. Equity markets recently corrected, led by the resources, as weak data has guided expectations back to a view more consistent with continued soft landing. We have shown that equity markets perform quite well in soft landings, as investors come to realize that the temporary slowdown will be followed by re-acceleration. However, resource stocks have typically lagged, as commodity prices have tended to be weak in past soft landings, although not as weak as in hard landings (recessions). The resource sector has performed quite well in this soft landing (until the recent correction), which we attribute to the impact of QE2 and the secular bull market in commodities that has kept us at market weight, despite the global slowdown. The resource sector typically provides great returns when global growth is accelerating; so, we do plan to return to an overweight stance this year. We expect continued weak economic data, such as the June 1, 2011 U.S. PMI release, to translate into further weakness in resource stocks, providing the buying opportunity we are looking for. Some analysts have pointed out that when the U.S. PMI moves down toward 50 from 60, bear market have sometimes followed. The PMI makes such a move in both soft and hard landings. It is best not to average these two outcomes together as stocks do well in soft landings (when the yield curve is positively sloped) and quite poorly in hard landings (when the yield curve is inverted). We have attached a chart of stocks and the PMI during the 1995-1996 soft landing and the 2001 hard landing to show the different market outcomes.


We continue to recommend a maximum weighting in stocks and a minimum weighting in bonds. We recommend underweighting defensive sectors, including gold. We continue to hold a market weight in the resource sector, which will likely come under pressure with some disappointment in global growth. The remaining higher beta sectors should be overweight (financials, technology, industrials, consumer discretionary). We anticipate returning the resource sectors to an overweight within the next few months. TSX Group Weightings Overweight Market Weight Underweight Industrials Energy Gold Consumer Discretionary Materials ex Gold Consumer Staples Financials Health Telecom Technology Utilities


Exhibit 1.

U.S. Purchasing Managers' IndexISM

Shaded Areas Represent U.S. Economic RecessionsM441 MAY 2011

70 70

60 60

50 50

40 40

30 301955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

53.5

Exhibit 2.

Steepness of U.S. Yield Curve(Ratio of TBills to Long Term Treasury Bonds)

Shaded Areas Represent U.S. Economic RecessionsW17 28 MAY 11

1.6 1.6

1.4 1.4

1.2 1.2

1.0 1.0

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0.0 0.01955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Median: 0.80Average: 0.77

0.02


Exhibit 3.

ISM PMI ( ) and S&P 500 ( right)

M4356 DEC 1996

58

56

54

52

50

48

46

44

800

750

700

650

600

550

500

450J F M A M J J A S O N D J F M A M J J A S O N D

1995 1996

Exhibit 4.

ISM PMI ( ) and S&P 500 ( right)

Shaded Areas Represent U.S. Economic RecessionsM4357 DEC 2002

60

55

50

45

40

1600

1500

1400

1300

1200

1100

1000

900

8001999 2000 2001 2002


Quantitative Analysis Chris Dutton, CFA June 2011 As previously discussed earlier last month in our Momentum Weekly, dated May 26, 2011, the current macro trends appear almost identical to those a year ago through May. We believe that until these trends change, further weakness is likely through June. Like last year, rising macro risks with European sovereign debt, and the Chinese and U.S. economies all weighed on the market through what is typically a weak seasonal period. We believe that investors should be following several key macro trends that could help time or at least confirm a cyclical bottom. Many of these trends gave us a lead signal to reduce cyclical exposure over the past several weeks and, in turn, may give us an early signal to increase cyclical exposure. However, like last year, it may still be too early, as seasonal trends in commodities tend to deteriorate through June. Last year, the S&P/TSX Composite (July 5) and the S&P 500 (July 2) bottomed in early July. We would not be surprised by a similar bottom this year. Technically, a bottom may not be reached until there is a market capitulation in which all sectors, both cyclical and defensive, decline on heavy volume. We saw a similar pattern last year. Materials Interest rates will likely remain an important factor for gold. In the past month, U.S. rates and euro rates continued their decline. At the same time, distressed European sovereign debt yields have risen. This prompted us to raise our gold position closer to a market weight. If less distressed European yields rise, such as in Spain, we will likely raise our gold exposure. We are not bullish on the base metals. Our concern here remains China and the continuing slowing trend evident in economic data like the China PMI. Copper inventories are also rebuilding. Until Chinese cyclical sectors recover, we would avoid base metals. We do, however, remain biased toward the fertilizer group, and in particular Potash Corp. of Saskatchewan (POT-T, $60, portfolio weight 4%). Corn futures remain backwardated – to us, a positive signal of a tight market. Energy In our view, the key positive factor for oil remains the current backwardated market in Brent oil futures, an indication that the international oil market is discounting tighter oil supplies. The majority of oil rallies have occurred in a backwardated market, as in 2007-2008. However, this can change very quickly and, in our view, needs to change for the benefit of the economy and the market. Without a substantial decline in oil, as in H2/96, we believe it will be very difficult for the market to recover.


Specifically, we favour energy names with higher dividend yields and some natural gas exposure. A reduction in U.S. natural gas inventories over the past month, strong seasonal trends, and the potential for a short cover rally could support higher prices. Industrials Industrials that performed well in Q1/08, when oil was rising late in the cycle, also seem to be outperforming again. Finning International Inc. (FTT-T, $28.00, portfolio weight 2%) remains a top pick, given its strong underlying earnings trend and positive commodity exposure. FTT fits well into our theme of owning stocks that service the resource sector. Consumers Defensive consumer stocks have rallied as a result of rising market risks. However, in Canada, the premium paid for this defensive exposure is coming at too high a cost, in our view. Information Technology, Telecommunication Services Technology remains one of our preferred sectors in the U.S., as we still see very strong earnings momentum. However, the uncertainty surrounding Japan is a major headwind, and, as such, we would prefer software and service stocks at this point. We continue to favour CGI Group Inc. (GIB.A-T, $22, portfolio weight 1%), following positive Q1 results. Technology, which continues to offer positive earnings momentum, is one of the more undervalued sectors, in our view. As an example, Apple Inc. (AAPL-Q, $325) trades at only 12x 2012 earnings. Financials, Utilities As expected, the Canadian banks’ earnings momentum slowed with their fiscal Q2 results. Historically, Q2 has been a weak quarter for the banks, and it was again this year. The major trading risk we see with the Canadian banks is the sharp decline in U.S. banks. Until U.S. banks stabilize, we would not add to our position. Quantitative Model Portfolio Revisions in May 2011 Large Cap Stocks Added/Increased Stocks Removed/Decreased Pengrowth Energy Corp. (2%) Sino-Forest Corp. (2.5% to 1.2%) Goldcorp Inc. (3%) Barrick Gold Corp. (5 to 3%) Bankers Petroleum Ltd.

For complete details of our Canadian Earnings Momentum Model please visit our website at www.tdsecurities.com.


Exhibit 1.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32008 2009 2010 2011

1

2

3

4

5

6

7

8

9

10

11

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

PIGS - Average 10Yr Bond YieldEuro - 10Yr Bond YieldU.S. - 10Yr Bond YieldGOLD

The rise in distressed European yields and the decline in U.S. and euro yields is very bullish for gold, in our view.

Exhibit 2.

2005 2006 2007 2008 2009 2010 2011

1600

1800

2000

2200

2400

2600280030003200340036003800

4200

4600

5000

5400580062006600700074007800840090009600

102001080011400

12600

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

TSX Diversified MetalsChina PMI (Source: China Federation of Logistics and Purchasing)

The decline in China PMI and stocks is a big risk for base metal stocks.


Exhibit 3.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-100000

-50000

0

50000

100000

150000

200000

250000

300000

20

22

24

26

28303234363840

44

48

5256606468727680869298104110116122130

144

WTI Oil - Non-Commercial (Speculative) Net Futures PositionWTI Oil - Closest Contract

Fundamentally, with a slowing global economy, we believe that oil prices are too high on speculative buying. For non-energy stocks to recover, we may need to see a substantial decline in oil prices, similar to 2006.

Exhibit 4.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

90

100

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

CNR - CloseCNR - 12Month Forward Consensus EPSCNR - Trailing Operating EPS with Next Qtr Estimate

CNR (and SNC Lavalin) have the most stable earnings within the industrial sector.


Exhibit 5.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20115

6

7

8

9

10

11

12

13

14

15

16

171819202122

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.21.31.41.51.6

gib.a - Closegib.a - 12M Forward Consensus EPSgib.a - 12M Trailing Operating EPS

In technology, the market has rotated into less cyclical software and service stocks like GIB.A.

Exhibit 6.

2006 2007 2008 2009 2010 201110

20

30

40

50

60

70

10

20

30

40

50

60

70

RY (NYSE) - CloseJP Morgan (JPM) - Close

With U.S. banks rolling over, we are not willing to add to Canadian banks at present.


Quantitative Model Portfolio: LargeCap (May 31, 2011) Quantitative Model Portfolio: LargeCap

Company Name Symbol Yield Date Added Average Price Current Price S&P/TSX Comp Weight Current Weight

Rel. to S&P/TSX

Comp

Percent Return from Date Added

Energy 27.0% 23.7% 0.9x 143.95%Suncor Energy SU 0.99% 12/03/2010 $37.92 $40.45 4.0% 5.4% 1.4x 6.66%Enbridge ENB 3.02% 04/20/2009 $18.36 $32.47 1.6% 4.0% 2.6x 76.85%Talisman Energy TLM 1.29% 06/07/2010 $17.51 $20.46 1.3% 3.2% 2.4x 16.87%Penn West Energy PWT 4.31% 10/04/2010 $21.40 $25.06 0.7% 3.2% 4.4x 17.10%Canadian Oil Sands COS 3.97% 03/08/2011 $32.33 $30.21 0.9% 2.8% 3.1x -6.56%Pengrowth Energy PGF 6.57% 05/16/2011 $12.65 $12.78 0.3% 2.0% 7.5x 1.03%Imperial Oil IMO 0.91% 03/30/2011 $49.91 $48.12 0.8% 1.9% 2.6x -3.59%Trican Well Service TCW 0.43% 08/12/2010 $17.18 $23.29 0.2% 1.2% 5.7x 35.58%

Materials 22.2% 18.4% 0.8x 72.43%Potash Corp. POT 0.50% 09/28/2009 $43.41 $54.62 2.9% 4.1% 1.4x 25.83%Teck Resources TCK.B 1.18% 01/12/2010 $39.74 $50.82 1.5% 3.0% 2.0x 27.88%Barrick Gold ABX 1.01% 07/25/2007 $40.63 $46.39 2.9% 3.0% 1.0x 14.17%Goldcorp G 0.82% 05/16/2011 $47.13 $48.46 2.4% 2.9% 1.2x 2.82%Yamana Gold YRI 0.94% 12/02/2010 $12.13 $12.43 0.6% 2.0% 3.5x 2.47%Eldorado Gold ELD 0.65% 02/28/2011 $16.42 $15.37 0.5% 1.9% 3.7x -6.39%Sino-Forest TRE 0.00% 09/14/2010 $18.24 $19.27 0.3% 1.3% 4.4x 5.65%

Industrials 5.8% 8.3% 1.4x 67.09%Canadian National Railway CNR 1.72% 12/01/2008 $51.77 $75.77 2.2% 4.6% 2.1x 46.35%Finning International FTT 1.81% 09/03/2010 $22.35 $28.74 0.3% 2.2% 7.4x 28.59%SNC Lavalin SNC 1.47% 02/09/2011 $61.89 $57.03 0.5% 1.4% 2.7x -7.85%

Consumer Discretionary 4.2% 3.2% 0.8x 44.26%Magna International MG 2.08% 11/05/2009 $32.51 $46.90 0.6% 3.2% 5.1x 44.26%

Financials 28.9% 23.0% 0.8x 124.71%Royal Bank of Canada RY 3.82% 02/24/2011 $56.26 $56.62 5.1% 6.2% 1.2x 0.64%CIBC CM 4.33% 10/27/2008 $58.00 $80.31 2.0% 5.4% 2.7x 38.47%Bank of Nova Scotia BNS 3.50% 12/09/2003 $34.75 $59.36 4.0% 5.1% 1.3x 70.84%RioCan REIT REI.UN 5.43% 10/13/2010 $22.46 $25.44 0.4% 2.1% 5.1x 13.27%Power Corp POW 4.17% 01/31/2011 $27.30 $27.84 0.6% 2.1% 3.5x 1.98%Sun Life Financial SLF 4.73% 04/05/2011 $30.60 $30.45 1.1% 2.1% 1.9x -0.49%

Information Technology 2.1% 6.4% 3.1x -8.57%Technology Select SPDR XLK 1.23% 02/08/2010 $23.05 $25.64 NA 4.0% NA 11.21%Reseach in Motion RIM 0.00% 11/15/2010 $60.25 $41.35 1.3% 1.3% 1.1x -31.37%CGI Group GIB.A 0.00% 02/08/2011 $20.02 $22.34 0.3% 1.2% 3.6x 11.59%

Telecommunication Services 4.3% 4.6% 1.1x 51.69%Manitoba Telecom MBT 4.93% 04/05/2011 $30.18 $34.46 0.1% 2.3% 16.5x 14.19%TELUS T 4.15% 06/14/2010 $39.49 $53.03 1.1% 2.3% 2.1x 34.28%

Utilities 1.7% 2.1% 1.2x 1.61%TransAlta TA 5.40% 04/29/2011 $21.13 $21.47 0.3% 2.1% 6.9x 1.61%

Cash Totals: 10.3% Portfolio Yield: 2.29%Equity Totals: 89.7%

Performance1-Week 4-Week 6-Month 1-Year Since Inception

(9/12/2000)Quantitative Portfolio % 1.461% 0.279% 2.245% 13.390% 154.920%S&P/TSX Comp Cap (10%) % 1.534% 0.807% 6.568% 19.279% 52.070%S&P/TSX 60 Cap (10%) % 1.426% 0.770% 6.444% 16.012% 63.438%S&P/TSX Completion % 1.821% 0.910% 6.840% 29.870% 46.796%S&P/TSX SmallCap % 2.152% 0.289% 7.272% 32.480% 52.160%S&P 500 % 2.197% -0.842% 13.947% 25.636% -9.230%NASDAQ Comp % 3.246% -0.222% 13.492% 27.582% -26.346%Dow Jones Industrial Ave. % 1.729% -1.856% 14.208% 25.397% 11.898%

Turnover: 85.2% CAGR: 9.128%

3.576%2.976% 6.963%

6.877%4.244% 8.571%

2.644%0.780%

-1.082%-2.383%

Year-to-Date (2011)

2.662%2.675%

3-Month

-2.266%-2.695%

-3.803% -1.252%

All views expressed are the opinions of Quantitative Research based on historical company fundamentals and market statistics. No guarantee of outcome is implied. Due to the quantitative and technical nature of this report, the issuers or securities recommended or discussed in the report are not continuously followed and opinions may change without notice. TDSI is under no obligation to inform you of such a change. As such, investors may not want to base their investment decision solely on this report. TD Securities Inc. may publish fundamental research on the securities of these issuers which expresses differing opinions. Clients should contact their TD Securities Inc. representative to request such material. Sources: Global Insight, Thomson Financial, CPMS, Bloomberg, S&P/TSX Index Services, S&P Index Services, TSX, NYSE, NASD, company reports.


Alternative Energy

1M 3M 6M 12M YTD Cum.1

Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 3.5 5.5 8.4 19.0 7.5 18.9S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 52.4* S&P/TSX Independent Power Producers & Energy Traders (Subindustry)¹ Since October 21, 2008

Total Return %

7090

110130150170

Oct

08

Jan0

9

Apr0

9

Jul0

9

Oct

09

Jan1

0

Apr1

0

Jul1

0

Oct

10

Jan1

1

Apr1

1

Action List Comp Group* S&P/TSX

Industry Overview Performance Summary for the Month Larger cap Canadian Alternative energy stocks had a good performance in May, with all but one stock under coverage posting positive returns. With markets experiencing something of a volatile month, investors in the sector stuck with larger names that in most cases offer secure dividend yields. Share prices of senior operators were up 3% on the month, on average, while the junior operators’ share prices fell by an average of 12%, mainly due to the poor performance of two geothermal stocks. Prospective developers saw their share prices fall by an average of 5.5%, while technology-focused stocks declined by 13.4%, on average. The WilderHill New Energy Global Innovation Index (a global renewable energy composite) recorded a decline of 4.7% in May; recall that the performance of this tech-heavy index is highly correlated with crude oil prices, which were off 8.6% during the month. These compare with negative returns of 0.9% and 1.6% for the S&P/TSX Composite Index and the S&P/TSX Clean Technology Index, respectively. Within our coverage universe, Algonquin Power & Utilities Corp. recorded the largest gain, rising 8.4% in May. Boralex Inc. posted the only decline, falling 0.6% during the month. Things to Watch For in the Coming Month Q1/11 reporting for companies within our coverage universe continues into June this year. While many Canadian-listed alternative energy companies normally report their results in the second week of May, companies that have adopted International Financial Reporting Standards (IFRS) as of January 2011 have an additional 30 days to file their results. Capstone Infrastructure, Northland Power and Innergex all plan to report their Q1/11 results during the week of June 6. The Ontario Power Authority (OPA) announced additional “capacity allocation exempt” (CAE) feed-in tariff (FIT) contracts, which are small projects of 500 kW or less that are connected to the distribution system, rather than the province’s transmission system. This latest award included 839 FIT projects, with a total capacity of 141 MW. These contracts are being awarded to applicants that submitted

Sean Steuart, CFA


applications for CAE projects between June 5 and December 7, 2010. Separately, we note that Tim Hudak, the leader of the Ontario P.C. Party, has promised to eliminate the FIT program while leaving existing FIT contracts in place, with the exception of the province’s agreement with Samsung, which he plans to cancel. Energy is likely to be an important issue in October’s provincial election. Looking south to the U.S., there is a wide belief that any federal action regarding greenhouse emissions is on hold until after the 2012 elections at a minimum. This has left state and regional level emissions programs as the current drivers of future emissions reductions. In May, New Jersey’s Governor, Chris Christie, announced that the state will pull out of the Regional Greenhouse Gas Initiative (RGGI), a regional emissions reduction regimen that includes 10 northeastern and mid-Atlantic states and has been operating since 2008. RGGI targets a 10% reduction in emissions from the power sector by 2018. Since the program launched in New Jersey, it has provided over US$100 million in revenue from quarterly carbon auctions, with half going to renewable energy and energy efficiency support programs. Separately, a recent California court ruling stated that the state did not adequately consider alternatives to the market based cap and trade system it selected as part of the Western Climate Initiative (WCI). Seven U.S. states and four Canadian provinces launched the WCI in 2007, targeting a 15% reduction in greenhouse emissions below 2005 levels by 2020. While several provinces have delayed their participation, many industry watchers still anticipate that California, by far the most important participant, will launch a cap and trade program in 2012.

Our Sector Stance We recommend that investors take a market weight sector position. While we consider the sector to be fairly valued, we continue to see an opportunity for outperformance in select cases. We believe that the better relative value in the group lies with some of the “fallen angels” (e.g., companies that have slashed dividends as a means of preserving capital, or those that have disappointed the market with respect to growth initiatives). Our top picks in the group are Boralex Inc. and Algonquin Power & Utilities Corp.


A

ltern

ativ

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ergy

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vers

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AL

BUY

= Ac

tion

List

BU

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r.Ye

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2010

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2012

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Targ

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gR

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gA

naly

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lex

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MF

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Banks


Action List 0.0 0.0 0.0 0.0 0.0 19.2Comp. Group* (0.4) 1.3 9.3 16.2 9.6 22.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 7.8* S&P/TSX Commercial Banks (Industry)¹ Since October 11, 2007

Total Return %

406080

100120140

Oct

07

Jan0

8

Apr

08

Jul0

8

Oct

08

Jan0

9

Apr

09

Jul0

9

Oct

09

Jan1

0

Apr

10

Jul1

0

Oct

10

Jan1

1

Apr

11


Industry Overview Performance Summary for the Month On average, the Big Six banks were up 0.1% on the month, outperforming the S&P/TSX Composite Index, which was down about 1.0%. U.S. banks (based on our list), including U.S. Money Center and Super Regional banks, underperformed their Canadian counterparts, and were down an average of 4.7% month over month. Things to Watch For in the Coming Month The Canadian banks have largely completed Q2/11 reporting, with only Canadian Western and Laurentian Bank left to report on June 2. We did not expect the Canadian banks’ Q2 results to match the strength and quality of Q1. It certainly has not, with three of five names coming in below lower expectations, with some broad softer underlying trends. A top watch item for a few quarters now, the feared slowdown in Domestic Retail banking is starting to come through. It is not dramatic at this point, but volumes on the Personal side remain modest. As a consequence of weaker volume trends, the industry is seeing some renewed margin pressure, particularly around Residential products. Overall, margins were off around 5–10 bps on the quarter. Meanwhile, trends in Commercial are starting to pick up a bit, and most management teams continue to cite this area as one with good potential through the rest of the year. There are some signs of an uptick in competition, but it is not as intense as we are seeing on the Personal side, and the products generally offer much wider spreads to begin with. Wholesale largely under-delivered this quarter, with what looks like a challenging start to Q3. Wholesale earnings were down even more than we expected after a strong Q1. The key driver has been weaker Trading numbers, primarily on the Fixed Income front.

Jason Bilodeau, CFA


Our Sector Stance After a strong Q1, Q2 has largely served to temper expectations and the stocks have been fairly weak. Still, even after taking a softer outlook into account, valuations are starting to look better and we foresee growth in H2/11 and 2012. Sentiment likely remains mildly negative in the immediate term, but we are starting to feel a bit better about potential returns over 12–16 months (now around 20%, versus 15% post Q1).


B

anks

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Fi

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Biotechnology & Health Care


Action List 0.0 0.0 0.0 0.0 0.0 (38.0)Comp. Group* 2.5 23.8 66.8 128.1 58.1 83.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 53.7* S&P/TSX Health Care (Sector)¹ Since July 27, 2005

Total Return %

4090

140190240

Jul0

5

Jan0

6

Jul0

6

Jan0

7

Jul0

7

Jan0

8

Jul0

8

Jan0

9

Jul0

9

Jan1

0

Jul1

0

Jan1

1


Industry Overview Performance Summary for the Month The S&P/TSX Health Care sector appreciated 2.5% in May. Valeant Pharmaceuticals International (VRX-T, VRX-N) was the most notable outperformer on the month, gaining 5.6% on mixed news. To the upside, management increased 2011 cash EPS guidance to $2.65–2.90 from $2.45–2.70, and announced its intention to acquire Lithuanian Specialty Pharma company AB Sanitas (SAN1L-VSE). To the downside, the Cephalon (CEPH-O) hostile bid was terminated on May 2. We continue to believe that Valeant has the funding, the resolve and the opportunity to maintain its aggressive acquisition agenda over the next 12–24 months. We rate Valeant a BUY in anticipation of it tracking to $4.00 in 2012 cash EPS. CML HealthCare (CLC-T) was also topical, declining 7.3% as it announced the departures of CEO Paul Bristow and COO Kent Nicholson. We interpreted the leadership shakeup as acknowledgement of CML’s shortcomings in the U.S. medical imaging market. Things to Watch For in the Coming Month 1) Nordion – Q2/11 earnings release – June 7, 2011 2) Valeant – FDA determination on Potigabine – June 15, 2011

Beyond the month, we expect: 1) CML – appointment of a permanent CEO 2) Nordion versus AECL/Government of Canada – resolution expected fall 2011 3) CML – new Ontario clinical labs contract – visibility expected Q4/11 Our Sector Stance We are market weight the Canadian Biotechnology and Health Care sector. We continue to favour companies that: 1) are heavily weighted to Canadian Health Care markets; 2) have strong, expansion prospects; 3) have little or no need for short-term borrowing; and 4) have strong competitive positions in their respective businesses.

Lennox Gibbs


With the sector having appreciated 63% over the last 12 months, we now consider many of our mid to large cap companies to be fairly valued on a fundamental basis. Within this group, M&A has emerged as a key differentiator and potential value driver. It now appears as though the best performers will likely be companies with strong prospects to complete accretive acquisitions in the near to medium term. Valeant leads this group, followed by Paladin Labs. Companies like CML Healthcare fall at the other end of the spectrum. We recently downgraded CML to REDUCE for several reasons, including the low likelihood of the company being able to expeditiously acquire the required scale to put its U.S. operation on solid footing.


B

iote

chno

logy

& H

ealth

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nive

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lth C

are

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com

e Tr

usts

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Chemicals & Fertilizers


Action List 0.0 0.0 0.0 20.8 0.0 (41.2)Comp. Group* 1.5 (7.4) 9.3 51.4 3.3 102.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 14.2* S&P/TSX Chemicals (Industry)¹ Since April 24, 2007

Total Return %

050

100150200250300

Apr0

7

Aug0

7

Dec

07

Apr0

8

Aug0

8

Dec

08

Apr0

9

Aug0

9

Dec

09

Apr1

0

Aug1

0

Dec

10

Apr1

1


Industry Overview Performance Summary for the Month Fertilizer and chemical stocks were mostly lower in May, with Agrium Inc. (AGU-N, T), Migao Corp. (MGO-T), and Methanex down 3%, 7%, and 1%, respectively. We attribute this to a weaker commodity market, which has been generally pressured lower by global growth concerns. Meanwhile, Potash Corp. of Saskatchewan (POT-N, T) was flat for the month. Things to Watch For in the Coming Month Investors should watch price movements in major crops (defined by acreage usage and fertilizer requirement intensity), such as corn and soybeans, as well as the major fertilizers – ammonia, urea, DAP and potash. Methanol trade data is neither timely nor frequent; therefore, news flow is essentially anecdotal from trade publications. Our Sector Stance Prices mostly up. The urea price jumped 17% as domestic wet weather has supported a boost in spring urea demand, and higher energy prices in China have lifted its floor export price due to higher domestic production costs. As well, there is speculation that China’s urea exports during its ‘low tariff’ season may be limited due to its sliding scale tariff calculation. The DAP and domestic potash price were both up modestly by 1% and 2%, respectively, while ammonia and the offshore potash price were unchanged. Spot methanol gained 3%, likely reflecting some temporary supply constraint. North American potash inventory increased 21% sequentially, or 249,000 tons, to 1.45 million tons (K2O basis) in April, and is now 10% higher year over year. This is the first year-over-year increase since December 2009. We attribute the increase to the lack of an India import contract renewal and weather challenges limiting U.S. fieldwork. We expect the flow of product to improve with better weather facilitating progress in planting.

Paul D’Amico, CFA


U.S. DAP inventory decreased 8% sequentially to 698,000 tons in April, but is now 49% higher year over year. We speculate that the sequential decrease in inventory is relatively low ‘mostly’ due to timing issues, as there was a lack of export contract agreements with India until late March, as well as domestic weather challenges limiting fieldwork. U.S. urea inventory decreased 12% sequentially to 335,000 tons in April, but is now 13% higher year over year. Domestically, planting has been challenged by weather, which limited drawdown in urea, like DAP, resulting in higher inventory on a year-over-year basis. However, planting progressed well through May, and the wet weather may support some switch from direct-application ammonia to urea. China April net methanol imports lower sequentially. The most recent methanol net import data of almost 500,000 tonnes from China for April 2011 is 7% lower sequentially from March, but 1% higher year over year. We remain encouraged by China’s methanol import demand. Methanol market is relatively stable. Monthly methanol reference prices and spot pricing have been essentially stable through the past few weeks. As such, our HOLD-rating on Methanex is unchanged as the stock looks fairly valued to us. Potash Corp. may move sideways for the near term, due to build in potash inventories and lack of India contract. The April North American wholesale potash inventories increased sequentially and year over year. Meanwhile, the lack of an India potash contract somewhat compounds the near term uncertainty, as a meaningful drawdown is unlikely without the incremental export tonnage. We would buy Potash Corp. closer to $52/share. Agrium reported strong Q1/11 results, but weak Q2 guidance. Agrium’s Q1/11 beat consensus and our estimate, but the implied Q2/11 EPS guidance was below consensus. Our BUY rating remains unchanged, given our favourable view of the company’s diversified business model, relatively attractive valuation, and strong fertilizer sector fundamentals. We initiated coverage of Migao with a BUY. We believe Migao’s stable margin profile through the commodity price cycle is supported by its ability to 1) leverage its strong customer relationships to pass through cost increases consistently and earn a relatively stable margin; and 2) grow its already healthy share of China’s specialty fertilizer market. In our view, Migao is an attractive way to leverage into China’s agricultural growth theme.


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Communications


Action List 6.5 6.4 12.9 22.9 13.4 2266.7Comp. Group* 5.1 5.1 8.7 22.4 7.0 75.8S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 124.6* S&P/TSX Div. Telecom. Services, Media (Industries),Commercial Printing (Subindustry)¹ Since April 26, 2002

Total Return %

0500

1,0001,5002,0002,500

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2

Apr0

3

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Industry Overview Performance Summary for the Month The stocks in our universe did better than we expected in May, largely driven by a seemingly insatiable appetite for high yielding investments. The top three performers were MTS (MBT; +14%), BCE (+10%) and Bell Aliant (BA; +8%), and the only decliners were Cogeco (CCA; -2%) and Thomson Reuters (TRI; -2%). Things to Watch For in the Coming Month TD Securities Telecom and Media Forum – June 9 US Annual Cable Show – June 14-16 CRTC Review of Regulatory Framework relating to Vertical Integration – June 20 Shaw Q3 Results – June 29

Our Sector Stance We maintain our underweight stance on the sector. Valuations for Canadian telecom stocks still look relatively full to us in the face of challenging competitive and regulatory environments. Most notably, Q1 results from both BCE and TELUS were overall no better than expected, and our forecasts did not change materially, but the stocks surged ahead on the announcement of dividend increases. Blended ARPU growth (driven by data) was favourable in Q1, but erosion continued in other key metrics such as voice ARPU, churn, COA, retention costs, and market share of sub adds (note that overall sub adds for Rogers, Bell and TELUS combined were only 72,000 in Q1/11 versus 120,000 in Q1/10, with their aggregate share dropping to about 41% from 79%, based on disclosed results for WIND and Videotron and estimates for Mobilicity and Public Mobile). We fear that results and sentiment will get worse with each passing quarter in 2011 owing to: a) increased network and distribution scale for the new entrants; b) new funding for Mobilicity and new ownership for WIND; c) foreign ownership and/or spectrum auction rules from the new majority government that could support new entrants; d) more recognition from investors that cash taxes and spectrum purchases will challenge FCF generation over the next couple of years; e) more challenging year-over-year comparisons on wireless data growth as we lap prior year periods where Bell/TELUS had already ramped up sales of HSPA

Vince Valentini, CFA


smartphones; f) increased IPTV start up costs; and g) increased pressure on landline erosion from wireless substitution. Given these risk factors, we believe that the valuations of many of the names in our sector are stretched. The dividends being paid are nice, but we do not believe that dividends alone will be sufficient to support the stocks if there is any meaningful upward movement in interest rates over the next 6–12 months. If the 10-year Government of Canada (GoC) yield increases to 4.45% by the end of 2012 (this is the latest forecast from TD Economics), and if the spreads between dividend yields and 10-year GoC bond yields remain at current levels for BCE and T.A shares, then these stocks could be at $34.00 and $42.25, respectively, even if dividends are increased by another 10% for both companies between now and then. As outlined in our report dated May 30, we would use the strength in these names to switch exposure to some of the Canadian cable stocks that have underperformed both Canadian telcos and US cablecos over the past 6–12 months. Our top overall pick remains Thomson Reuters (TRI), while our two favoured names in the telecom/cable space are Shaw Communications (SJR.B) and MTS (MBT). We expect the following events to drive outperformance by these two names over the next few months: a) an uptick in EBITDA growth in Shaw's Q3 results on June 29; b) a recovery in sentiment toward the quality of cable video services, in part owing to the showcase of new boxes at the June 14-16 annual U.S. cable convention; c) a potential wireless network sharing deal between Rogers and either Shaw or Videotron; d) foreign ownership rule changes that could be good for MBT and potentially negative for BCE, T.A and RCI.B; and e) 700 MHz spectrum auction rules that could help new entrants (including Shaw and Videotron) and hurt BCE/TELUS/Rogers.

Thomson Reuters Corp. (TRI-T, $37.74); 12-Month Target C$50.00 Vince Valentini, CFA The near term (three- to six-month) outlook for TRI shares is hazy, but we remain extremely bullish about the prospects over the next 12–18 months. Trends in the recent results and commentary from management suggest that we are getting very close to a material uplift in bottom line EPS and FCF. So, someone who buys now should basically benefit from the pain that former shareholders had to endure during the last few years of recession and Reuters integration. Manitoba Telecom Services Inc. (MBT-T, $34.46); 12-Month Target C$39.00 Vince Valentini, CFA Given two consecutive quarters of accelerating and better-than-expected EBITDA growth and margin expansion, we believe that more analysts will buy into management's three-year plan to get margins back up toward 20%. The good news for shareholders, in our opinion, is that concrete evidence of a turnaround in the Allstream segment is coming just as the doors might be opening to more potential bidders for this asset.


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Action List 0.0 10.9 11.8 12.1 22.0 (47.6)Comp. Group* 3.5 5.5 6.6 6.4 3.8 0.8S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 12.7* S&P/TSX Durables & Apparel, Retailing (Industry Groups)¹ Since April 1, 2008

Total Return %

30

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Industry Overview Performance Summary for the Month Over the past month, the comparable group of discretionary stocks increased by 0.4%, outperforming the S&P/TSX Composite Index, which decreased by 0.9%. Our consumer discretionary stocks under coverage recorded a weighted average increase of 1.1%. Things to Watch For in the Coming Month June 9: Dollarama (DOL-T) fiscal Q1/12 results. We are looking for EPS of C$0.35 versus C$0.30 a year ago. Consensus is at C$0.36. June 9: Dollarama will host its Annual General Meeting. June 10: Garda World (GW-T) will host its Annual General Meeting.

Our Sector Stance Our outlook for the consumer discretionary space remains positive. Per TD Economics, the U.S. labour market is finally improving at a pace that can sustainably lower the jobless rate. Combined with fiscal and monetary stimulus, consumer spending growth should be driven primarily by gains in real income. In Canada, even if a repeat performance of the fourth-quarter consumer spending surge is unlikely, improving employment prospects and household wealth are supportive of consumer spending. TD Economics believes that the recent strength in consumer spending growth has been much swifter than underlying income fundamentals would warrant. Household wealth has recovered most of the recession’s losses, job creation in Canada remains near its long-term average, and signs of a soft landing in the housing market bode well for consumer spending. This said, reduced retail sales activity in recent months may also suggest that consumers are beginning to think about interest rate hikes on the horizon amid growing household debt burdens. In addition, with rising gas and food prices, consumers remain cautious when it comes to opening their wallets. The focus appears to be on buying promotions and shopping discount retailers.

Jessy Hayem, CFA


As such, we expect continued growth in consumer spending in 2011, with a slowdown in H1/11 (in light of a tough comparable) followed by an acceleration in H2/11. This holds especially true for home improvement and general retailers such as RONA (RON-T) and Canadian Tire (CTC.A-T). A couple of stocks in our coverage universe performed well in 2010, with valuations trending higher. Most others still have solid upside momentum as the consumer recovers, and especially given the recent market correction, in our view. We continue to favour a stock-picking approach. In the consumer discretionary space, stocks that outperform, in our opinion, will be those that have 1) businesses with greater earnings exposure to a cyclical recovery; 2) room to grow earnings through operational improvements over and above the lift seen from the recovery; 3) strong balance sheets, and significant free cash flows that can be redeployed in value-added opportunities such as acquisitions and/or share buybacks and dividend introductions/raises; and 4) reasonable equity valuations relative to expected earnings growth.


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Action List 6.4 5.6 7.7 45.3 2.8 16.1Comp. Group* 3.7 5.3 10.6 25.3 7.5 10.3S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 56.5* S&P/TSX Consumer Staples (Sector)¹ Since July 21, 2005

Total Return %

6080

100120140160180

Jul0

5

Jan0

6

Jul0

6

Jan0

7

Jul0

7

Jan0

8

Jul0

8

Jan0

9

Jul0

9

Jan1

0

Jul1

0

Jan1

1


Industry Overview Performance Summary for the Month Over the past month, the S&P/TSX Consumer Staples Sector rose 3.7%, outperforming the S&P/TSX Composite Index, which declined 0.9%. With an (equal-weighted) return of 3.1%, our consumer staples stocks under coverage outperformed the S&P/TSX Composite, but underperformed the Consumer Staples indices. Things to Watch For in the Coming Month June 6: The Canadian government is expected to table the Federal Budget. June 7: Saputo Inc. (SAP-T) fiscal Q4/11 results. We are looking for EPS (f.d.) of $0.59 versus $0.47 a year ago. Consensus is at $0.56, with a range of $0.54–0.59. June 9: Viterra Inc. (VT-T) fiscal Q2/11 results. We are looking for EBITDA of $160 million versus $93 million a year ago. Consensus is at $158 million, with a range of $124–187 million. June 14: North West Co. (NWC-T) fiscal Q1/11 results. We are looking for EPS (f.d.) of $0.25 versus $0.36 a year ago. Using the same tax rate a year ago, we are looking for $0.25 versus $0.25. Consensus is at $0.27, with a range of $0.25–0.29. June 29: Statistics Canada May Consumer Price Index released. June 30: Empire Co. Ltd.. (EMP.A-T, not rated) fiscal Q4/11 results. Consensus is at $1.19, with a range of $1.16–1.21. Our Sector Stance Substantially higher fuel and food prices are forcing consumers to review how they allocate their spending. This is the case more so in the U.S. (than in Canada), where the economic recovery is still a little fragile and disposable incomes are tight. In general, shoppers are either cutting back on their driving somewhat – again, more of an issue in the U.S. than Canada – and gravitating even more toward items on promotion, or cutting back on discretionary spending. Consequently, the companies under our coverage generally need to battle daily for meaningful top-line growth, keeping the retail environment highly promotional. All are strong operators, although some stand out more than others. Moreover, not all are at the same stage of execution on internal programs, and this tends to lead to

Michael Van Aelst, CFA Cherilyn Radbourne, CA, CFA Derek J. Lessard


varying degrees of operational efficiency opportunities. So, with sector valuations having moved higher amid the 2010 rally, and fewer attractive investment opportunities, our investment strategy for 2011 is to focus on companies that either: 1) have extremely strong balance sheets, so that FCF can be used to make accretive acquisitions (using low-cost capital) as they come available, and employ a more active normal-course issuer bid than usual while they wait; and/or 2) have above-average internal efficiency programs that should permit them to grow earnings meaningfully in excess of their sector peers; and 3) have valuations that still make sense relative to peers and historical levels. With this in mind, Alimentation Couche-Tard Inc. (ATD.B-T) and Loblaw Companies Ltd. (L-T) are our Action List BUY picks, while Saputo remains our only other BUY-rated stock. Alimentation Couche-Tard Inc. (ATD.B-T, $26.92) 12-month Target: $33.00 Michael Van Aelst We like this stage of the industry cycle (i.e., well past the trough and entering a new, albeit moderate, growth phase) and Couche-Tard’s position within it (i.e., well above average store conditions and merchandising strategies, extensive IT systems, and a strong balance sheet). Despite an 8–9% FCF yield, nearly debt-free balance sheet and minimum 15% EPS growth anticipated over the next two years, Couche-Tard’s share price has been held back year to date by rising oil prices that have led to investor concern surrounding fuel volumes and margins, as well as lower discretionary spending in the stores. However, we expect the roll-out of the company’s expanded fresh food offering, tight operating expense control, an active NCIB, and/or accretive acquisitions to offset the fuel margin headwind (which we expect to re-balance at sustainable levels in the near term) over the course of the year. Moreover, we believe that consensus estimates are too low and can be achieved without operating income growth, i.e., simply from the reduced interest expense and share count. Loblaw Companies Ltd. (L-T, $41.60) 12-month Target: $51.00 Michael Van Aelst Although Loblaw’s recovery was pushed back by about six months as delays in the IT implementation push peak IT spending into 2012, our overall thesis remains intact – i.e., strong gross margin improvement and very tight control on non-IT operating expenses (including operational efficiencies) should combine with anticipated share gains by 2012 to drive much stronger earnings growth over the next few years. Food inflation has returned with a vengeance in Q2/11, although we expect actual inflation experienced by food retailers to be limited to the 2–3% range as shoppers swap out of products that had the greatest price hikes, while also purchasing a greater share of their basket on promotion. Still, we expect food retailers to pass on COGS inflation in full, resulting in the traditional profit benefits (for the most part). In Loblaw’s case, we expect this to add to the strong gross margin expansion trend already under way from improvements in private label and general merchandise. Loblaw remains rated as an Action List BUY.


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Action List (2.1) 0.0 0.0 0.0 0.0 63.7Comp. Group* 3.3 4.8 20.5 43.3 14.9 57.4S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 79.8* S&P/TSX Diversified Financials (Industry Group)¹ Since January 6, 2005

Total Return %

50

100

150

200

Jan0

5

Jul0

5

Jan0

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Jul0

6

Jan0

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Jul0

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Industry Overview Our asset management coverage group fell on average by 1.5% in May, which was mildly better than the S&P/TSX Composite (-0.9%), but below the S&P/TSX Capped Financials Index (-0.2%). Share price performance for all of the large cap mutual fund companies in our coverage universe was positive, with IGM Financial (IGM-T) performing the best, moving up 2.8%, AGF Management (AGF-T) up 2.6%, and CI Financial (CIX-T) up 1.1%. The smaller cap asset managers in contrast declined in May, with Gluskin Sheff & Associates (GS-T) falling a material 11.1%, and Sprott Inc. (SII-T) down as well by 3.0%. Canaccord Financial (CF-T) shares were off 2.1% in May, while shares for larger cap Power Corp. of Canada (POW-T) and Power Financial Corp. (PWF-T) were also off by 2.2 % and 1.9%, respectively. TMX Group (X-T) shares rallied in May on the back of a competing bid by the Maple Group, moving up 9.3%. For the income-yielding names, Morneau Shepell (MSI-T) was up 2.3% on the month, while First National Financial (FN-T) moved in the opposite direction, down 0.8%. Things to Watch For in the Coming Month During the first week of June, TMX will release May trading and financing statistics, and we also expect to publish our Monthly Brokerage Overview. In mid June, the Investment Funds Institute of Canada (IFIC) will release monthly mutual fund AUM and net sales data. On the earnings front, Sprott will release Q1/11 results on Thursday, June 2, and AGF Management will release fiscal Q2/11 results on Wednesday, June 22. Our Sector Stance Our outlook for asset managers remains positive, given their exposure to improving equity markets and healthy dividend yields; however, we acknowledge that potential market volatility could dampen net fund inflows. Though net sales continue to move into lower-margin bond and balanced funds, we are beginning to see signs of retail investors moving into higher margin equity funds. If this trend persists, it would be positive for asset managers’ margins. However, the Canadian banks continue to take market share due to their strong distribution platforms and

Doug Young, CFA Graham Ryding


broad wrap/fund of fund offerings, which are attracting the majority of net inflows. We believe that only the asset managers with strong fund performance and distribution platforms (proprietary, partnerships, and independent advisor support) will be able to compete. In our view, CI Financial and IGM Financial have some of the strongest fundamentals among the independent asset managers, and we rate both a BUY. Our outlook for the brokerage sector is positive as well. Looking one year out, we believe that a company like Canaccord Financial, with its focus on the commodity sector and smaller cap names, and with the addition of Genuity to its platform, has significant leverage to improving market activity. We also believe its current valuation has further upside. Canaccord is our top pick and rated Action List BUY. Canaccord Financial Inc. (CF-T, $14.00); 12-Month Target $19.00 Doug Young, CFA We believe Canaccord’s strong results over the last two quarters illustrate the considerable leverage of its platform to improving market conditions, particularly in the energy, resources, and small cap sectors. In our view the addition of Genuity also positions it well to benefit from increased merger and acquisition (M&A) activity. Another round of expense reductions should add further leverage to its model. Current valuation at 1.5x book value, which is below its historical average of 1.9x, suggests further upside potential to us.


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DA

EPS

(1)

P/E

EPS

P/E

EPS

P/E

EPS

(2)

P/E

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

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----

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estri

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---


Energy Producers – Intermediate Oil & Gas


Action List 0.0 0.0 0.0 11.7 0.0 820.1Comp. Group* (2.7) (7.4) 8.2 18.5 1.9 311.4S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 106.5* S&P/TSX Capped Energy TrustOil & Gas Exploration & Production (Subindustries)¹ Since February 19, 2001

Total Return %

50250450650850

1,050Fe

b01

Feb0

2

Feb0

3

Feb0

4

Feb0

5

Feb0

6

Feb0

7

Feb0

8

Feb0

9

Feb1

0

Feb1

1


Industry Overview Performance Summary for the Month Quarterly reporting did not act as a catalyst for sector performance as our intermediate E&P coverage group (before dividends) essentially held flat in May. In general, Q1/11 production results for our Intermediate E&P coverage group were not particularly compelling. From our analysis, only two names in our coverage group were able to demonstrate very strong quarter-over-quarter production growth on both absolute and per share basis, i.e., Trilogy Energy (TET-T) and Crescent Point Energy (CPG-T). Trilogy’s growth can, in part, be attributed to significant capital spending during the quarter and the announcement of the results from its highly prospective Montney oil pool. The company spent 100% of its previous fiscal 2011 capital expenditure guidance in Q1 and ultimately raised the year’s capital expenditure budget by 120%. Meanwhile, Crescent Point correctly predicted that break-up would be longer than usual and executed its Q1 capital program with this in mind. As a result, Trilogy and Crescent Point had the strongest share price performances in our coverage universe for the month, returning 11% and 9%, respectively. On the other end of the spectrum, Perpetual Energy’s (PMT-T) share price shed 10% month over month, we believe largely as a result of a dividend cut announced with its Q1 financials. Things to Watch For in June June should be a slow month now that all the companies in our coverage, except for Celtic Exploration (CLT-T), have finished quarterly reporting. We expect Advantage (AAV-T) to provide new 12-month production and capital expenditure guidance in mid June. Sector Stance In our view, valuations today are still at the high end of historical values based on our commodity price outlook. Accordingly, we are maintaining our market weight sector weighting. The sector trades at a P/NAVMG of 92% using year-end 2010 reserves, Futures pricing, and an 8% after tax discount rate. With an average 2012E EV/DACF ratio of 8.1x, the sector trades at the high end of its normalized historical trading range of 6–8x.

Roger Serin, P. Eng.


En

ergy

Pro

duce

rs –

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rmed

iate

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vers

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= Ac

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BU

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Action List (4.0) (1.8) 39.6 23.6 21.8 23.6Comp. Group* (2.7) (7.4) 9.1 15.8 1.5 16.7S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 18.9* S&P/TSX Oil & Gas Exploration & Production (Subindustry)¹ Since August 4, 2010

Total Return %

80100120140160

Aug1

0

Sep1

0

Oct

10

Nov

10

Dec

10

Jan1

1

Feb1

1

Mar

11

Apr1

1

May

11


Industry Overview Performance Summary for the Month Share prices for the International E&P companies under coverage decreased by 4% on average in May. European- and Asian-focused companies led the group with an average 3% decrease, during a month when WTI was down 10%. Colombian-focused companies were down an average 4% in May. The top performer in the group was Parex Resources Inc. (PXT-V), up 6% on the month. On the other end of the spectrum, Petrodorado Energy Ltd. (PDQ-V) and Petrominerales Ltd. (PMG-T) were the weakest performers under our coverage, both posting a loss of 10%. Things to Watch For in the Coming Month We expect Brent crude, which we see as more important for International E&Ps as a benchmark than WTI, to continue trading at a premium to WTI, likely remaining above US$100/bbl in the short term. However, in our opinion, crude prices will continue to be volatile, with fluctuations driven largely by geopolitics and movements in the U.S. dollar. We expect ongoing exploration and appraisal drilling to provide a regular stream of news flow for the International E&Ps in our coverage. Our Sector Stance Over the long term, we expect International E&Ps to outperform due to access to large resources, and oil prices that are likely to remain above historical norms. In the short term, we note that International E&Ps significantly underperformed other Canadian-listed energy producers during Q1/11. We expect valuations to improve if companies are able to report positive drilling and operational updates. In the absence of share price increases, we expect M&A activity to increase and share buy-backs could also appear increasingly attractive. We note that both Pacific Rubiales Energy Corp. (PRE-T) and Petrominerales Ltd. (PMG-T) have recently announced normal course issuer bids and we would not be surprised to see more companies consider this option (and actually execute buying, as opposed to just announcing the potential to do so).

Jamie Somerville


Bankers Petroleum Ltd. (BNK-T, C$7.97); 12-Month Target: C$12.50 Jamie Somerville We added Bankers Petroleum to the Action List on March 30. Bankers Petroleum is developing the Patos Marinza heavy oil field in Albania, Europe’s largest onshore oil field estimated to hold 6 billion barrels of OOIP. We expect the company’s management to grow reserves and production through implementation of modern heavy oil technology prior to considering a potential corporate sale. Bankers trades at 0.99x Base NAVPS, a 61% discount to other producers in our coverage of International E&Ps.


En

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iona

l Uni

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= Ac

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List

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Energy Producers – Senior & Unconventional


Action List 3.5 3.5 3.5 3.5 3.5 3.5Comp. Group* (3.4) (7.6) 12.8 18.9 3.8 22.8S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 24.9* S&P/TSX Oil & Gas Integrated,Oil & Gas Exploration & Production (Subindustries)¹ Since December 7, 2009

Total Return %

90100110120130140

Dec

09

Feb1

0

Apr1

0

Jun1

0

Aug1

0

Oct

10

Dec

10

Feb1

1

Apr1

1


Industry Overview Performance Summary for the Month Encana Corp. (ECA-N) was the top performer among the Senior Producers, Integrateds and Unconventionals in May, posting a 2% return. The weakest performer in our space was Petrobank Energy & Resources Ltd. (PBG-T), which was down 14.0% on the month. The S&P/TSX Energy Index was down 2.0% on a month-over-month basis. Things to Watch For in the Coming Month With the U.S. accounting for approximately 25% of global crude demand, the DOE crude complex (crude, gasoline and distillates combined) can meaningfully influence pricing. For the week ended May 20, 2011, DOE total crude complex inventories rose by 2.4 mmbbls to 721.8 mmbbls. Although inventory levels are now below the five-year range, excess domestic supply remains an issue. As a result, WTI oil prices have declined to $100/bbl from $114/bbl in early May. Meanwhile, international crudes continue to trade at a premium to WTI. The Brent-WTI spread at month end was $14.03/bbl. The civil unrest in the Middle East and North Africa continues to support global oil prices. In North America, synthetic crude oil pricing continues to trade at a premium to WTI. The Syncrude Sweet Blend (SSB) differential to WTI averaged US$11.96/bbl in May (compared to a 2010 average discount of US$1.19/bbl). In our view, we expect this premium pricing to remain in effect until the Horizon mine returns to full capacity (not expected until the beginning of Q4/11). We continue to track heavy differentials closely, given the rapidly changing dynamics of heavy oil prices and their impact on Canadian bitumen and heavy oil producers. The WCS/WTI differential averaged 16.9% in May, compared to 14.3% in April and 17.4% in May 2010. We believe that heavy differentials will remain relatively tight for the foreseeable future. We are currently forecasting a WCS/WTI heavy differential of 23% for 2011, 22% for 2012, 23% for 2013-2015, and 24% longer term.

Menno Hulshof, CFA


The U.S. Midcontinent 321 crack spread closed at US$29.22/bbl in May, averaging US$29.62/bbl for the month. Although this was slightly above the April average of US$24.56/bbl, it was over twice the May 2010 average spread of US$12.72/bbl. We do not anticipate much downside to refinery margins heading into the peak summer demand months and a logistically-constrained WTI. We expect refiners to benefit from these spreads for at least the coming two quarters (Q2/11 and Q3/11). Our Sector Stance Our sector stance remains unchanged. Although crude oil prices remain above the US$100/bbl mark, we believe that US$90–95/bbl oil prices are more sustainable in the mid term. The land-locked nature of WTI has also resulted in a discount relative to its waterborne equivalents (for example Brent and Louisiana Light Sweet). Until the supply issues surrounding the Cushing, Oklahoma delivery point are resolved (i.e., additional pipeline capacity out of Cushing and into the Gulf Coast), we see Brent trading at about US$10/bbl premium to WTI for 2011. With winter officially behind us, we are now into the injection season. Our outlook on natural gas remains weak, given the current supply glut, and we still see a US$5.00–6.00/mmBtu ceiling on gas prices, given the amount of gas that would come to market once prices test that limit. Canadian Natural Resources Ltd. (CNQ-T, C$42.17); 12-Month Target: C$53.00 Menno Hulshof, CFA We added Canadian Natural Resources to the Action List on May 18. The January fire at its Horizon Upgrader and subsequent sell-off in its shares has created a unique entry point, in our view. While CNQ has traditionally commanded an EV/DACF multiple premium of 1.5–2.0x relative to its peers, this premium valuation has since shrunk to only 0.2x. In addition, and in spite of the recent delay in the original repair timeline due to forest fires, we still believe that it is well positioned to ramp production back up to design rates in the late Q3/11 timeframe. With expectations of a return to full productive potential in 2012, we contend that the outlook is very positive. The company also stands to benefit most from the recent narrowing in heavy differentials, a trend that is likely to persist for the foreseeable future.


Ener

gy P

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e

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r.O

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m)

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(mm

)20

10A

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2010

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2011

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Targ

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na C

orp.

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BUY

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ket

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(mm

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Targ

etR

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ovus

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(mm

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2011

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Targ

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Ltd

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EPS

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Energy Services


Action List (0.1) 2.9 12.6 47.7 12.6 (40.0)Comp. Group* 0.6 8.1 34.0 59.0 23.0 69.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 83.8* S&P/TSX Energy Equipment & Services (Industry)¹ Since November 12, 2004

Total Return %

050

100150200

Nov

04

May

05

Nov

05

May

06

Nov

06

May

07

Nov

07

May

08

Nov

08

May

09

Nov

09

May

10

Nov

10

May

11


Industry Overview Performance Summary for the Month In May, the S&P/TSX Energy Equipment & Services Index was up 0.6%, slightly outperforming the S&P/TSX Composite Index, which was down 0.9%. Among the oil service companies that we cover, Ensign Energy Services (ESI-T) was the top performer in May, rising 6.9%, while ShawCor’s (SCL.A-T) share price declined 6.4%. Overall, in May the drillers were up 3%, the pumpers were up 1%, and the transportation & infrastructure companies were down 4%. Things to Watch For in the Coming Month International Financial Reporting Standards (IFRS) had varying effects on companies reporting Q1/11 results in our coverage universe, but, in general, the impact was muted, with the exceptions being ShawCor and Flint Energy Services (FES-T). Q1 results generally exceeded both our and consensus expectations for the drillers and pressure pumpers. However, ShawCor and Flint’s Q1 results fell well short of both our and consensus expectations. Both companies have bid on, or will be bidding on, a significant number of projects, and success here should provide for a much stronger 2012. We recently increased our WCSB activity forecast. Stronger Q1 results and industry guidance suggest that this was appropriate. Our full year average drilling rig utilization estimates in Canada are 42% in 2011 and 49% in 2012. Driving our revised estimates are a number of positive factors, including 1) increased capital spending on oil and NGL rich gas due to stronger oil prices; 2) one of the strongest year-to-date WCSB oil licensing starts in the last six years; 3) increased well depth and drilling days per well due to the increase in horizontal well drilling; and 4) recent industry optimism. Within the oilfield services sector, the drillers have outperformed the group over the last few months and year to date, driven largely by improving day rates and utilization in both Q4/10 and Q1/11. Year to date, the drillers are up 51% versus the pressure pumpers, which are only up 8%. In our view, the pressure pumpers’ valuations are better than the drillers’, but to various degrees investors remain

Roger Serin, P. Eng.


concerned about the former’s capacity build-out. Despite the pressure pumpers’ better relative valuation metrics, we believe that any sector rotation from the drillers to the pressure pumpers will likely be in a H2/11 timeframe. Our Sector Stance We are market weight the Canadian oil service sector. Share prices of many of the oil service companies under coverage continue to trade below their historical long-term valuations on our 2012 estimates. Yet, we remain cautious about the impact of depressed natural gas pricing on North American activity. Top Pick Trican Well Service Ltd. (TCW-T; C$23.29); 12-Month Target: C$30.00 Roger Serin, P. Eng. In line with our preference for the pressure pumpers and based on relative valuation, Trican is our Action List BUY. Although we continue to monitor underlying requirements for pressure pumping capacity both in Canada and the U.S., we now believe that there will be adequate demand to support the industry’s currently announced build programs. As well, Trican is expanding its ancillary services lines in both Canada and the U.S. Based on our estimates, we expect the company to realize roughly 25% annual growth in EPS in the period 2010 to 2012.


En

ergy

Ser

vice

s U

nive

rse

AL

BUY

= Ac

tion

List

BU

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ng.

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ket

P/E

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BIT

DA

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Ove

rall

Cur

r.Ye

ar-

Rep

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ares

Cap

Ind.

2011

E20

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wth

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tal

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mbo

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ch.

Pric

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(mm

)(m

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Div

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2009

A20

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(x)

(x)

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urn

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ing

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ling

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Gold & Precious Minerals


Action List (10.5) 1.4 1.2 3.9 2.7 61.7Comp. Group* (4.6) (3.7) (7.0) 11.5 (7.7) 39.0S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 16.9* S&P/TSX Gold, Precious Metals & Minerals (Subindustries)¹ Since March 26, 2007

Total Return %

4080

120160200

Mar

07

Jul0

7

Nov

07

Mar

08

Jul0

8

Nov

08

Mar

09

Jul0

9

Nov

09

Mar

10

Jul1

0

Nov

10

Mar

11


Industry Overview Performance Summary for the Month Gold averaged US$1,515/oz in May, up US$32 or 2.2% from April’s average of US$1,483/oz. Gold hit a new record of US$1,578/oz early in the month and then tapered off reaching a low US$1,462 before closing out the month at US$1,535. The U.S. Dollar Index increased by 2.2% in May, closing the month at 74.54. Gold equities reversed direction last month with the S&P/TSX Gold Index down 3.4%; in May, just 10 of the 33 members of the index were in positive territory. The best performers were SEMAFO (SMF-T) and Kirkland Lake (KGI-T), up 11.4% and 5.5%, respectively. The poorest performers were Minefinders (MFL-T) and Great Basin Gold (GBG-T), down 18.5% and 21.5%, respectively. Things to Watch For in the Coming Month We believe the price of gold will be volatile in the short term. However, we do not expect a dramatic movement in the price of gold over the longer term as the positives balance out the negatives. Inflation fears should provide support to the price of gold. An improved economic outlook as well as rising bond yields could provide resistance. Our Sector Stance We remain positive on gold’s medium- to longer-term outlook. The fundamental factors that have underpinned the 10-year bull market for gold remain intact in our view, including: • central banks are likely to continue to be net buyers of gold, as emerging

economies look to diversify their reserve holdings; • investment demand for gold (at the institutional and retail level) should remain

strong, as individuals look to diversify their positions; • ETF demand for gold bullion continues to grow and so far has proven

relatively sticky; • questions remain about the long-term viability of the U.S. dollar as the world’s

reserve currency; • continued improvement in the U.S. economic outlook could lead to accelerated

inflation fears;

Steven Green, CFA Greg Barnes Daniel Earle Scott Parsons


• global currency and trade imbalances remain; • gold mine supply remains challenged over the longer term; • jewellery demand, which had shrunk in the face of rising prices, has shown

signs of life, increasing 16% in 2010 driven by surging Chinese demand; and • a recovering economy is likely to lead to increased demand for labour and

materials, further challenging the cost base to produce an ounce of gold. We forecast that gold will average US$1,400/oz in 2011, US$1,400/oz in 2012, US$1,200/oz in 2013, and US$1,000/oz in 2014. We project a long-term price of US$1,000/oz, based on our view that higher gold prices will be required to justify the development of the next generation of large gold mines. Goldcorp Inc. (GG-N, G-T, US$50.07) 12-Month Target: US$66.00 Greg Barnes We added Goldcorp to the Action List on April 21, 2010. In our view, progress has been smooth at the company’s flagship Penasquito project. The project achieved commercial production on September 1, 2010, and continues to ramp up to full throughput levels expected in early 2011. Looking forward, Penasquito should drive the bulk of Goldcorp’s production growth over the next few years toward its target of 3.8 million ounces by 2014. Looking beyond Penasquito, Goldcorp has an impressive development pipeline – we estimate that the company has the potential to boost its production beyond 2014 to 4.5 million ounces, roughly double that in 2009. We believe the company has the best growth profile among its senior peers, given what we view as its low political risk profile, conservative balance sheet and low-cost production. Eldorado Gold Corp. (ELD-T, EGO-N, C$15.37) 12-Month Target: C$22.00 Steve Green, CFA We added Eldorado to the Action List on March 17, 2011. Eldorado has what we view as the best growth forecast profiles among its large cap peers, with declining operating costs. We are expecting production to approach 1.4 million oz by 2015, more than double 2010 levels, reflecting new production from its four development projects and expansions at its four existing operations. We are expecting a strong year for Eldorado in 2011, with two low-cost, high grade operations expected to come on line, along with details of significant planned expansions.


G

old

& P

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vers

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Industrial Products


Action List 0.0 0.0 0.0 (1.5) 0.0 575.9Comp. Group* 0.1 3.6 9.5 31.0 2.2 266.2S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 95.8* S&P/TSX Construction & Engineering, Machinery,Trading Co's & Distributors (Industries)¹ Since December 29, 2000

Total Return %

50250450650850

1,0501,250

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10


Industry Overview Performance Summary for the Month Up 3.6%, Finning International Inc. (FTT-T) was the best performer in our universe in May. The only other company in our coverage universe to record a gain during the month was Rocky Mountain Dealerships Inc. (RME-T), up 3.1%, while Ritchie Bros. Auctioneers Inc. (RBA-N, T), down 11.4%, was the worst performer. Russel Metals Inc. (RUS-T) decreased by 7%, likely due to weaker benchmark hot roll coil (HRC) pricing negatively affecting sentiment. The HRC spot price has decreased to US$755/ton for July deliveries, which is now 15% below recent peak of US$885/ton in March. The weakness is mainly due to increased supply from domestic producers and import availability. Things to Watch For in the Coming Month • June 6: Canadian Building Permits • June 22: Architectural Billings Index • A number of companies will be reporting Q1/11 results this month, including:

IBI Group Inc. (IBG-T) on June 1; Bird Construction Inc. (BDT-T) on June 2; and Armtec Infrastructure Inc. (ARF-T) on June 8.

Our Sector Stance Engineering and Construction: Our macro outlook for this sector is generally favourable. We believe public-sector spending trends remain positive, supported by public-private partnerships (P3s) and multi-year megaprojects, which are important segments for the companies we cover. With governments looking to tackle record fiscal deficits, we expect spending to be down substantially from the peaks during the stimulus program. However, infrastructure spending levels can nonetheless be expected to be strong on a historical basis. Looking forward, 2012-2013 is expected to be the first full post-stimulus year, with budgeted infrastructure spending above the last pre-stimulus year (2008-2009). In terms of the private sector, there is still considerable uncertainty about how quickly and strongly markets will rebound from the downturn. Still, we are optimistic that an improving economic backdrop will gradually lead to a sustained

Michael Tupholme, CFA Cherilyn Radbourne, CA, CFA Tim James, CFA Paul D’Amico, CFA


recovery in these markets. A number of companies in our coverage universe had significant exposure to industrial markets, in particular the oil sands, during the last cycle. While oil sands activity levels were much improved last year, versus a very weak 2009, we believe further gains are likely in 2011 and 2012. Commercial markets still seem to be struggling somewhat, although commercial permit values appear to be rebounding from prior lows. Residential permit values had rebounded to pre-recession highs, but have since, over the past several months, been on a downward trend. Further, housing starts are projected to decline in 2011, before rebounding in 2012. In general, margin compression has been a noteworthy theme for the E&C sector over the last several quarters. For several companies we cover, recent margin performance has been well below previous highs, driven largely by a more negative mix of work. While, in the short term, we generally expect margins to remain weaker, our forecasts call for margins at most companies we cover to gradually rise over the coming quarters as they work off weaker-margin projects awarded during the downturn. This forecast improvement in margins, combined with stronger activity levels, is expected to drive double-digit EBITDA growth for all companies we cover in 2012. Steels: U.S. steel inventory looser (as we expected). The April 2011 U.S. steel inventory increased sequentially by about 160,000 tons, or about 2%, to 8.18 million tons, and is 21.6% higher year over year. Shipment volume is much lower sequentially at 3.34 million tons – average daily volume in April (21 days) of 159,300 tons is 4% lower sequentially compared to 166,200 tons in March (23 days). The volume is 11% higher year over year, which, in our view, suggests some return to ‘normal’. Russel Q1/11 beats consensus, but HOLD unchanged. Although Q1/11 EPS was essentially in line with our estimate, we lowered our 2011E and 2012E EPS estimates to reflect the weaker expected margin profile through the remainder of this year, as well as higher run-rate expenses into 2012. Although Russel’s stock price is down 12% since we downgraded it to a HOLD at the end of March, we still believe that there is likely a better entry point ahead, given the lack of positive catalysts in the near term.


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----

----

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----

----

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EPS


Insurance


Action List 0.0 0.0 0.0 0.0 0.0 75.7Comp. Group* 0.3 (3.2) 11.7 4.4 1.8 28.4S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 95.8* S&P/TSX Insurance (Industry Group)¹ Since December 29, 2000

Total Return %

50100150200250

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10


Industry Overview

Performance Summary for the Month In the Lifeco sector, our group of four companies dropped on average 0.1% in May, led lower by Great-West Lifeco (GWO-T) and Sun Life Financial (SLF-T) with declines of 3.5% and 1.7%, respectively, while Industrial Alliance (IAG-T) and Manulife Financial (MFC-T) gained 3.0% and 1.6%, respectively. For context, the Lifecos, as a group, outperformed the S&P/TSX Composite (down 0.9%) and S&P/TSX Capped Financials Index (down 0.2%). Intact Financial Corp. (IFC-T) was up 3.7% on the month. Things to Watch For in the Coming Month Two common themes to focus on in the near term for lifecos are the effects from: 1) development around IFRS phase II, and 2) regulatory capital rule changes. We note that the comment period for the draft IFRS phase II has ended; we expect more discussions to surface in the near term. On the P&C side, we continue to pay close attention to 1) the development around fraud and abuse in Ontario Auto insurance, and Ontario Auto Reform overall, and 2) the eventual outcome of demutualization of The Economical Group. Sector Stance Though the Lifecos may provide decent returns over the next 12 to 24 months, we do expect a bumpy ride over the near term. We remain neutral on the sector. In terms of positives, rising interest rates and equity markets provide a good footing for the sector. As well, if macro conditions stabilize, we could see a re-rating of the sector on the back of reduced earnings volatility and a steady build up of excess capital. We believe the sector is under-owned; therefore, if we do get a rotation back in, it could add a further push to Lifeco stock prices. Lastly, Lifecos have been raising prices and scaling back features offered on certain products, which we believe should help boost new business margins. On the flip side, some legacy businesses cannot be re-priced and will likely weigh on earnings and ROEs for years. We are also awaiting clarity on what (and when) OSFI might make high level changes to Lifeco regulatory capital requirements. The eventual adoption of IFRS Phase 2 remains an overhang for the sector as well.

Doug Young, CFA


The P&C sector is cyclical, and while the pricing signals are mixed currently, we believe the ‘stage is set’ for a hardening (increasing) pricing environment in 2011, primarily in the personal (not commercial) market. As well, P&C insurers have historically held up relatively well in challenging macro conditions. Yet, we are concerned about a potential backlash against Ontario auto insurance reforms (price increases). At the same time, we are encouraged by the steps laid out in the recent Ontario budget to combat auto insurance fraud and abuse.


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Media


Action List (11.3) (13.1) 7.7 34.5 2.2 573.0Comp. Group* (2.5) (5.4) (4.3) (1.3) (4.9) 5.3S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 95.8* S&P/TSX Broadcasting, Publishing (Subindustries)¹ Since December 29, 2000

Total Return %

50250450650850

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10


Industry Overview Performance Summary for the Month May was a difficult month for both our Action List and the comp group. Our Action List declined 11.3% as Torstar shares fell on the back of soft Q1/11 results released on May 4. The comp group declined 2.5% driven primarily by a 20% decline in shares of Yellow Media. The TSX declined 0.9% for the month. We removed shares of Tortsar from the Action List in the wake of the Q1/11 results. Although Torstar shares have performed well since we added them to the Action List at a price of $6.28 in March 2010, the outlook post the Q1/11 results no longer supported such a rating. Things to Watch For in the Coming Month After a very busy May, the Canadian media space slows down somewhat in June. Transcontinental will report Q2 results on June 8, and Glacier Media and Newfoundland Capital will report Q1 results on June 13 and June 15, respectively. Torstar will hold its investor day on June 14. The annual Banff World Television Festival will take place on June 12 -15. Our Sector Stance After a very strong 2010, Canadian media stocks have struggled somewhat in 2011. This has brought valuations that were beginning to look stretched in certain instances to more reasonable levels. Big picture fundamentals remain reasonably upbeat, but are not universally so, with ROP lineage data flat in the first three months of 2011 and local advertising still struggling. We still feel pretty good about the sector over a 12-month horizon and are watching some of the stocks that have recently given up ground carefully to see if any opportunistic entry points emerge. In general, we would be market weight this sector, but, as it is very name specific, only invest selectively.

Scott Cuthbertson Michael Elkins, CA, CFA


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Metals & Minerals


Action List (1.7) (0.1) 18.3 66.1 (2.8) 22.3Comp. Group* (3.2) (2.3) 9.7 54.2 (5.7) 237.1S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 36.4* S&P/TSX Div. Metals & Minerals, Aluminum (Subindustries)¹ Since January 23, 2006

Total Return %

0100200300400

Jan0

6

Jul0

6

Jan0

7

Jul0

7

Jan0

8

Jul0

8

Jan0

9

Jul0

9

Jan1

0

Jul1

0

Jan1

1


Industry Overview Performance Summary for the Month The TSX Diversified Metals Index was down 3.2% in May, after being up 3.4% in April. In May, among the large cap producers, Teck Resources Ltd. (TCK.B-T, TCK-N) was the best performer with a negative 1.2% return, while Cameco Corp. (CCO-T, CCJ-N) was the weakest performer with a negative 3.0% return. Among the small to intermediate cap producers, Inmet Mining Corp. (IMN-T) was the best performer with a 4.7% return, while Lundin Mining Corp. (LUN-T) was the weakest performer with a negative 22.2% return. Among the developers, Ivanhoe (IVN-T) was the best performer with a negative 1.7% return, while Nautilus (NUS-T) was weakest, with a negative 9.6% return. Things to Watch For in the Coming Month We expect to see a seasonal slowdown during the summer months, when metal prices and mining equities typically trade sideways. However, investors should begin to be more forward-looking, and focus on an improving demand outlook, as well as the fundamental outlook for metals. We believe that the supply challenges facing mining companies have been intensified by the events of the past several years, which is likely to lead to continued strength in metal prices longer term, as the supply response lags structurally higher demand. Our Sector Stance Our long-term view remains very bullish. We see structurally higher demand over the long term, driven by urbanization and modernization in the developing world. Mine production will likely struggle to meet higher structural demand. In fact, Brook Hunt forecasts suggest that mine production could decline over the next 15 years, particularly that of zinc and copper. We believe that 1) developing world industrialization and urbanization will continue to drive metal-intensive demand; 2) the global financial crisis has resulted in a two-year delay (at least) in the progress of new projects; and 3) increasing sovereign risks could further hamper the mining industry’s ability to respond to higher metal prices.

Greg Barnes Craig Miller Steven J. Green, CFA


Teck Resources Ltd. (TCK.B-T, $50.82) 12-Month Target: $68.00 Greg Barnes Our two favourite commodities are coking coal and copper, both key focuses for Teck Resources, which is our large cap Action List pick in the base metals sector. We expect Teck to potentially benefit from strong pricing for both commodities in 2011 and beyond. We are most bullish on copper, given strong Asian demand and potential supply challenges over the medium and longer term. There is increasing concern that copper supply will be constrained over the medium term, as a lack of projects in the development pipeline has been exacerbated by the credit crunch over the past 12 months. Over the long term, the lack of high-quality, large-scale copper projects could drive up the marginal cost of production, and, in turn, lead to higher copper prices. We are valuing Teck based upon unchanged target multiples of 6.25x our EV/2012 EBITDA estimate (60% weighting) and 1.4x our net asset value (40% weighting). We expect it to generate significant free cash flow over the next two years, which it will likely redeploy into the expansion of its coal operations in Canada, the construction and expansion of several copper projects, and the Fort Hills oil sands project. First Quantum Minerals Ltd. (FM-T, $131.76) 12-Month Target: $155.00 Greg Barnes We believe First Quantum has the potential to be a 1 million tonnes per year (tpy) copper producer. The company has rebounded impressively, following the expropriation of US$2 billion in assets by the Democratic Republic of Congo government. With the Sentinel project rapidly emerging as a world-class copper discovery, plans for a 67% production increase at Kansanshi, and the recently closed Antares acquisition in place, we believe that First Quantum has the necessary projects to become the next global major copper producer, with production of 1 million tpy, i.e., over three times 2011 production of approximately 300,000 tons, being possible by 2017. We believe that First Quantum’s suite of large copper projects, its commanding position on the Zambian Copperbelt, and its diversified asset base, could move it to the top of the acquisition target list for any major mining company or state mining company seeking to position itself as a significant participant in the copper market. In our view, Xstrata and Vale are logical buyers of First Quantum. Precedent transaction multiples of 1.50x NAV and/or 6.25x 2012E EV/EBITDA suggest a C$155–175 takeover target valuation for First Quantum.


M

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cast

s (U

S$/lb

)

2004

A20

05A

2006

A20

07A

2008

A20

09A

2010

A20

11E

Alu

min

um$0

.78

$0.8

6$1

.17

$1.2

0$1

.17

$0.7

6$0

.99

$0.9

2

Cop

per

$1.3

0$1

.67

$3.0

6$3

.23

$3.1

6$2

.34

$3.4

3$4

.17

Lead

$0.4

0$0

.44

$0.5

8$1

.77

$0.9

5$0

.78

$0.9

8$0

.93

Nic

kel

$6.2

9$6

.71

$10.

96$1

6.87

$9.6

0$6

.66

$9.9

3$9

.80

Zinc

$0.4

8$0

.63

$1.4

8$1

.47

$0.8

5$0

.75

$0.9

8$1

.10

Ura

nium

$18.

27$2

8.08

$47.

91$9

8.54

$63.

83$4

6.80

$46.

48$6

2.78

C$/

US$

$0.7

8$0

.84

$0.8

8$0

.93

$0.9

4$0

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$0.9

8$0

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Ove

rall

C

urr.

Year

-R

ep.

Shar

esM

arke

tIn

d.EP

SC

FPS

P/E

(x)

P/C

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)12

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Tota

lR

isk

Stoc

k N

ame

Sym

bol

Exch

.Pr

ice

End

Cur

r.O

/S (m

m)

Cap

(mm

)Yi

eld

2009

A20

10A

2011

E20

09A

2010

A20

11E

2010

A20

11E

2010

A20

11E

Targ

etR

etur

nR

atin

gR

atin

gA

naly

st

Larg

e ca

p.

Teck

Res

ourc

es L

td.

TCK

.B, T

CK

T, N

$50.

82D

ec. 3

1C

$59

0.8

30,0

241.

2%$2

.09

$2.7

2$5

.13

$4.1

4$4

.66

$8.2

218

.7x

9.9x

10.9

x6.

2x$6

8.00

35%

AL B

UY

HIG

HG

B

Cam

eco

Cor

p.C

CO

, CC

JT,

N$2

7.08

Dec

. 31

C$

394.

810

,692

1.5%

$1.5

0$1

.28

$1.3

2$1

.98

$1.9

7$1

.86

21.2

x20

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13.8

x14

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$37.

0038

%BU

YH

IGH

GB

Inte

rmed

iate

to s

mal

l cap

.

Firs

t Qua

ntum

Min

eral

s Lt

d.FM

T$1

31.7

6D

ec. 3

1U

S$88

.311

,634

0.7%

$5.9

5$6

.99

$9.1

6$8

.37

$11.

22$1

3.57

18.6

x14

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11.6

x9.

6x$1

55.0

018

%AL

BU

YH

IGH

GB

Bre

akw

ater

Res

ourc

es L

td.

BW

RT

$5.9

1D

ec. 3

1C

$89

.452

8n/

a$0

.01

$1.0

8$0

.78

$0.4

1$1

.50

$1.2

45.

5x7.

5x3.

9x4.

8x$9

.00

52%

BUY

HIG

HG

B

Cap

ston

e M

inin

g C

orp.

CS

T$3

.57

Dec

. 31

US$

203.

972

8n/

a$0

.47

$0.2

4$0

.28

$0.5

1$0

.38

$0.4

914

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12.3

x9.

3x7.

2x$4

.75

33%

BUY

HIG

HC

M

Den

ison

Min

es C

orp.

D

ML,

DN

NT,

A$2

.21

Dec

. 31

US$

369.

481

6n/

a($

0.13

)($

0.06

)($

0.10

)($

0.01

)$0

.12

$0.0

4n/

an/

a18

.5x

51.9

x$2

.50

13%

HO

LDS

PEC

CM

Equ

inox

Min

eral

s Lt

d.E

QN

T$8

.12

Dec

. 31

US$

883.

07,

170

GB

Hud

Bay

Min

eral

s In

c.H

BM

T$1

4.65

Dec

. 31

C$

175.

72,

574

1.4%

$0.3

1$0

.50

$0.7

7$0

.81

$1.3

2$1

.15

29.4

x19

.0x

11.1

x12

.7x

$18.

0024

%H

OLD

HIG

HG

B

Impe

rial M

etal

sIII

T$2

0.79

Dec

. 31

C$

36.9

767

n/a

n/a

$1.3

5$1

.53

n/a

$1.8

9$2

.45

15.4

x13

.6x

11.0

x8.

5x$3

1.00

49%

BUY

HIG

HC

M

Inm

et M

inin

g C

orp.

IMN

T$6

9.50

Dec

. 31

C$

69.3

4,81

80.

3%$5

.11

$5.5

3$6

.25

$6.7

6$7

.44

$7.8

812

.6x

11.1

x9.

3x8.

8x$9

3.00

34%

BUY

HIG

HG

B

Lund

in M

inin

g C

orp.

LUN

T$7

.20

Dec

. 31

US$

583.

04,

197

n/a

$0.2

4$0

.55

$0.6

0$0

.43

$0.5

2$0

.63

12.9

x11

.7x

13.6

x11

.2x

$9.0

025

%BU

YH

IGH

GB

Mer

cato

r Min

eral

sM

LT

$3.0

9D

ec. 3

1U

S$19

7.6

611

n/a

n/a

$0.1

0$0

.16

n/a

$0.1

4$0

.25

31.8

x18

.4x

21.7

x12

.3x

$4.0

029

%BU

YH

IGH

CM

Qua

dra

FNX

Min

ing

Ltd.

QU

XT

$14.

71D

ec. 3

1U

S$19

3.5

2,84

6n/

an/

a$1

.41

$1.0

9n/

a$2

.16

$1.7

410

.3x

13.2

x6.

7x8.

3x$2

0.00

36%

BUY

HIG

HG

B

Tase

ko M

ines

Ltd

.TK

O, T

GB

T, A

$5.0

2D

ec.

C$

187.

193

9n/

a$0

.18

$0.5

0$0

.52

$0.1

8$0

.57

$0.5

910

.1x

9.7x

8.8x

8.5x

$7.0

039

%BU

YH

IGH

CM

Thom

pson

Cre

ek M

etal

sTC

M, T

CT,

N$1

0.48

Dec

. 31

US$

166.

51,

745

n/a

n/a

$1.1

2$0

.83

n/a

$1.6

2$1

.15

9.2x

12.3

x6.

3x9.

0x$1

2.50

19%

HO

LDH

IGH

CM

Dev

elop

ers

Aug

usta

Res

ourc

e C

orp.

AZC

, T,

A$4

.27

Dec

. 31

US$

141.

060

2n/

an/

a($

0.04

)($

0.04

)n/

a($

0.04

)($

0.04

)n/

an/

an/

an/

a$6

.00

41%

Spec

BU

YS

PEC

CM

Ent

rée

Gol

d In

c.ET

G, E

GI

T, A

$2.3

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ec. 3

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268

n/a

n/a

($0.

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($0.

11)

n/a

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n/a

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ec B

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SPE

CC

M

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hoe

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es L

td.

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$24.

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ec. 3

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S$65

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a($

0.74

)($

0.42

)($

0.21

)($

0.50

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0.47

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an/

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arth

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iner

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a$5

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Spec

BU

YS

PEC

CM

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tilus

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eral

sN

US,

T

$2.7

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ec. 3

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S$15

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ther

n D

ynas

ty M

iner

als

Ltd.

ND

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AK

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156

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ec B

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SPE

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M

----

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Ove

rall

Curr

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ar-

Rep.

Shar

esM

arke

tIn

d.EP

UDC

PUP/

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(x)

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lRi

sk

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k Na

me

Sym

bol

Exch

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ice

End

Cur

r.O

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m)

Cap

(mm

)Yi

eld

2009

A20

10A

2011

E20

09A

2010

A20

11E

2010

A20

11E

2010

A20

11E

Targ

etR

etur

nRa

ting

Rat

ing

Anal

yst

Nor

anda

Inco

me

Fund

NIF

.UN

T$4

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. 31

C$

50.0

$235

SG

Wes

tsho

re T

erm

inal

sW

TE.U

NT

$24.

97D

ec. 3

1C

$74

.3$1

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9.0%

$1.3

6$1

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$0.6

5$1

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$1.4

8$0

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16.9

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00-3

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OLD

HIG

HG

B

------

------

------

------

------

------

------

------

------

------

------

------

------

------

------

-----

Res

trict

ed --

------

------

------

------

------

------

------

------

------

------

------

------

------

------

------

--


Multi-Industry


Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 2.1 4.0 12.8 31.7 8.3 92.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 70.0* S&P/TSX Diversified Financials, Real Estate & Utilities (Industry Groups)¹ Since December 16, 2008

Total Return %

80100120140160180200

Dec

08

Mar

09

Jun0

9

Sep0

9

Dec

09

Mar

10

Jun1

0

Sep1

0

Dec

10

Mar

11


Industry Overview Performance Summary for the Month In May, on average our multi-industry coverage group outperformed the S&P/TSX Composite, which decreased by 0.9%. In particular, Brookfield Asset Management Inc. (BAM) decreased by 2.2%, and Brookfield Infrastructure Partners L.P. (BIP) increased by 5.3%. Meanwhile, Onex Corp. increased by 2.6%. Things to Watch For in the Coming Month We will continue to watch how the broader economic environment unfolds and the impact on various industries and sectors worldwide. Signs of improvement in economic conditions and the health of capital markets should support improved business performance and transaction activity. Our Sector Stance In the short term, we believe that opportunities still exist for distressed asset acquisitions. For additional views on Real Estate and Timber fundamentals, please refer to research by our colleagues, Real Estate and Properties analyst Sam Damiani, and Paper and Forest Products analyst Sean Steuart.

Linda Ezergailis, P. Eng. Jason Bilodeau, CFA


M

ulti-

Indu

stry

Uni

vers

e

AL

BUY

= Ac

tion

List

BU

Y

Ana

lyst

(s):

LE =

Lin

da E

zerg

ailis

, P. E

ng.;

JB =

Jas

on B

ilode

au, C

FA

Ove

rall

Cur

r.Ye

ar-

Rep

.Sh

ares

Mar

ket

Ind.

Boo

kA

OC

F Pe

r Sha

reP/

AO

CF

12-M

onth

Tota

lR

isk

Stoc

k N

ame

Sym

bol

Exch

.Pr

ice

End

Cur

r.O

/S (m

m)

Cap

(mm

)D

iv.

Yiel

dVa

lue

P/B

V20

09A

2010

A20

11E

2012

E20

09A

2010

A20

11E

2012

ETa

rget

Ret

urn

Rat

ing

Rat

ing

Ana

lyst

Broo

kfie

ld A

sset

Man

agem

ent I

nc.

BAM

.A, B

AMT,

N$3

2.88

Dec

US$

660.

6$2

1,72

0.5

$0.5

21.

6%$2

5.19

1.3

$1.6

1$1

.50

$2.1

4$2

.51

20.4

x21

.9x

15.3

x13

.1x

$36.

0011

.1%

HO

LDM

EDIU

MLE

Ove

rall

Cur

r.Ye

ar-

Rep

.U

nits

Mar

ket

Ind.

Dis

t.FF

O P

er U

nit

P/FF

O12

-Mon

thTo

tal

Ris

k

Uni

t Nam

eSy

mbo

lEx

ch.

Pric

eEn

dC

urr.

O/S

(mm

)C

ap (m

m)

Dis

t.Yi

eld

2011

EYi

eld

2009

A20

10A

2011

E20

12E

2009

A20

10A

2011

E20

12E

Targ

etR

etur

nR

atin

gR

atin

gA

naly

st

Broo

kfie

ld In

frast

ruct

ure

Partn

ers

L.P.

BIP.

UN

, BIP

T, N

$24.

75D

ecU

S$15

7.4

$3,8

95.7

$1.2

45.

0%$1

.24

5.0%

$1.0

3$1

.79

$2.3

8$2

.56

24.0

x13

.8x

10.4

x9.

7x$2

3.00

-2.1

%H

OLD

HIG

HLE

Ove

rall

Cur

r.Ye

arR

ep.

Shar

esM

arke

tIn

d.In

d.12

-Mon

thTo

tal

Ris

k

Stoc

k N

ame

Pric

eEn

dC

urr.

O/S

(mm

)C

ap (m

m)

Div

.Yi

eld

2008

2009

2010

2011

ETa

rget

Ret

urn

Rat

ing

Rat

ing

Ana

lyst

One

x C

orp.

OC

X-T

$36.

41D

ecC

$11

8.3

$4,3

07$0

.11

0.3%

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

$42

15.7

%BU

YM

EDIU

MJB

EBIT

DA




Action List (18.0) (11.2) (13.4) 5.9 (17.3) (42.9)Comp. Group* (15.2) (7.4) (6.3) 8.1 (11.2) (26.4)S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 95.8* S&P/TSX Paper & Forest Products (Industry)¹ Since December 29, 2000

Total Return %

060

120180240

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10


Industry Overview Performance Summary for the Month The S&P/TSX Paper & Forest Products (Industry) Index declined 15.2% in May, versus the S&P/TSX Composite Index’s relatively modest decline of 0.9%. In May, Sino-Forest Corp. (TRE-T) shares declined by 18.0%; the company accounts for more than half of the weighting in the S&P/TSX Paper & Forest Products Index. Our thoughts on current commodity markets: Pulp – Global pulp price momentum is mixed, with US$20–30/tonne list increases announced for June in North America and Europe, but also with reports of spot price declines in China. The May North American NBSK pulp list price is US$1,020/tonne – equal to the all-time record set in Q3/10. Newsprint – Following a strong rally that ended in mid-2010, North American newsprint prices have been stable at US$640/tonne. We consider the domestic newsprint market to be relatively balanced. No new price increases have been announced. Uncoated Freesheet: Price momentum within the UFS grade spectrum is mixed. The current 20-lb cut-size price of US$1,045/ton has declined by US$25/ton over two months, but producers have announced a US$60/ton price increase for June. The current 50-lb offset roll price of US$945/ton reflects US$25/ton of the April US$40/ton price increase. Wood Products: The current Western SPF lumber price is US$227/Mfbm. Prices peaked in early January and current momentum is negative (current list prices are 29% below January’s peak). The current North Central OSB price of US$170/Msf (7/16” basis) is 22% below the peak reached in mid-January. Things to Watch For in the Coming Month We will watch for success of recently announced commodity price increases, particularly in pulp and uncoated freesheet. In June, the pulp and paper market will move into a seasonally weaker demand period, but demand for wood products should remain steady through the early summer. Our Sector Stance We suggest that investors with a 12- to 24-month investment horizon adopt a market weight position in North American P&FP equities. The group typically underperforms the broader market through the summer months – a trend we believe started in May. Our top picks among pulp and paper producers are AbitibiBowater

Sean Steuart, CFA Graham Meagher, CFA


Inc. (ABH-N, T), Domtar (UFS-N, T), Boise (BZ-N), Cascades (CAS-T), Clearwater Paper (CLW-N), and Mercer (MERC-Q). Our top pick among wood product producers is Sino-Forest (TRE-T). Sino-Forest Corp. (TRE-T, C$19.27); 12-Month Target: C$34.00 Sean Steuart, CFA Despite a general slowdown in China’s economic growth, the fundamental wood fibre deficit in the country (more than 50%) continues to grow (albeit at a decelerating rate), supporting further upward momentum for timber prices in China over the long run. We also note that for the next several years, a significant portion of Sino-Forest’s operating costs are capped (the initial acquisition cost of fibre under the six master acquisition agreements has a ceiling). We believe that this lowers the company’s mid-term risk profile. In our view, the replanting economics of eucalyptus trees are also compelling. The species has a shorter growing cycle (six years, or less than half the time for pine and fir) and a higher mature yield. Select mature eucalyptus plantation yields are more than 250 m3 per hectare (comparable pine/fir yields are 120 m3 per hectare). Sino-Forest will report Q1/11 results on June 14, 2011. We forecast Q1/11 EPS of US$0.23 versus Q1/10 EPS of US$0.18 and the consensus estimate of US$0.22. The company’s next strategic growth initiative is a seventh master acquisition in Shaanxi and Yunnan provinces (266,000 hectares over 10 years). The capped acquisition price equivalent of US$49 per m3 is 7% higher than more recent precedent deals, indicating a more competitive environment for timber acquisitions. In our view, Sino-Forest has the balance sheet strength to follow through on its ambitious mid-term growth plans. The company ended Q4/10 with cash and equivalents of US$1.3 billion and net debt of US$646 million (a modest 16.8% net debt-to-cap ratio). From our perspective, this leaves the company well positioned to pursue its aggressive growth plans. In our opinion, Sino-Forest does not need near-term financing, but, over time, we believe that the framework agreement with China Development Bank Corp. will allow for higher leverage levels and a more efficient capital structure, with a lower cost of capital. At the end of March, Sino-Forest signed a 15-year term loan facility with China Development Bank Corp. for US$50 million, which will go toward partially funding the company’s replanting program (200,000 hectares through 2012). We believe that the equity offers investors a unique combination of earnings growth and solid underlying asset value. The fibre deficit in China continues to grow, and we believe Sino-Forest is positioned to benefit from improving domestic demand for wood products. We consider the shares undervalued relative to the long-term growth prospects. We reiterate our Action List BUY recommendation.


Pa

per &

For

est P

rodu

cts

Uni

vers

e

AL

BUY

= Ac

tion

List

BU

Y

Ana

lyst

(s):

SS

= S

ean

Steu

art,

CFA

; G

M =

Gra

ham

Mea

gher

, CFA

Ove

rall

Cur

r.Ye

ar-

Rep

.Sh

ares

Mar

ket

Ind.

EPS

P/E

(x)

EV/E

BIT

DA

12-M

onth

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Pipelines, Power & Utilities


Action List 8.0 12.2 12.0 19.4 7.2 269.3Comp. Group* 5.6 10.0 15.5 33.5 12.9 173.7S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 141.7* S&P/TSX Utilities (Sector),Oil & Gas Storage & Transportation (Subindustry)¹ Since June 2, 2003

Total Return %

100

200

300

400

Jun0

3

Jun0

4

Jun0

5

Jun0

6

Jun0

7

Jun0

8

Jun0

9

Jun1

0


Industry Overview Performance Summary for the Month In May, the S&P/TSX Utilities Index outperformed the S&P/TSX Composite, which decreased by 0.9%. The Government of Canada 10-year bond yield, a key metric for valuations in the sector, ended the month at 3.07%, down from the previous month’s close of 3.21%. Valuations for our covered large-cap utility names increased, as price-to-forward-earnings multiples ended the month at 18.8x, compared to 18.4x last month. Things to Watch For in the Coming Month We await an update in June on Capital Power Income L.P.’s strategic review process. Our Sector Stance We believe select value opportunities still exist. We view the sector as a safe haven, and believe it is attractive to investors wishing to take a more defensive stance. In the long term, we encourage investors to focus on names with solid growth potential through energy infrastructure investment opportunities, such as ATCO (ACO.X-T) and Canadian Utilities (CU-T).

Linda Ezergailis, P. Eng. Robert Hope, CFA


Canadian Utilities Ltd. (CU-T, C$57.11); 12-Month Target: C$60.00 Linda Ezergailis, P. Eng. Canadian Utilities is a holding company consisting of regulated Alberta utilities, power generation facilities located primarily in that province, and an Industrials business that manufactures modular buildings and provides industrial noise solutions. The company utilizes a dual share structure, with the majority of voting shares controlled by ATCO, which, in turn, is controlled by R.D. Southern. We believe Canadian Utilities’ long-term outlook is positive, largely driven by the high level of transmission investment that is required in Alberta. This transmission investment should result in strong growth in the company’s low-risk regulated earnings. Canadian Utilities’ recent cash balance of $5.19 per share should help finance its substantial utilities capital expenditures program and, longer term, we believe the company may have the capacity to accelerate dividend growth. ATCO Ltd. (ACO.X-T, C$63.36); 12-Month Target: C$69.00 Linda Ezergailis, P. Eng. ATCO is a diversified utility holding company, with a 52.8% stake in Canadian Utilities Ltd. as well as an Industrials business that manufactures modular buildings and provides industrial noise solutions. The company utilizes a dual share structure and is effectively controlled by R.D. Southern. We believe ATCO’s outlook is positive, largely due to its 52.8% interest in Canadian Utilities. ATCO, through Canadian Utilities, is expected to benefit from the high level of transmission investment that is required in Alberta, which should result in strong low-risk regulated earnings growth.


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Real Estate


Action List 2.6 10.2 10.2 10.2 10.2 38.3Comp. Group* 1.2 5.4 16.0 36.4 15.1 238.6S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 95.8* S&P/TSX Real Estate (Industry), S&P/TSX Capped REIT¹ Since December 29, 2000

Total Return %

50100150200250300350

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10


Industry Overview

Performance Summary for the Month In May 2011, Canadian real estate equities outperformed the broad market. The S&P/TSX Capped REIT Index’s total return was up 1.2%, bringing the 2011 year-to-date return to positive 15.1%, versus the S&P/TSX Composite’s 0.9% monthly loss and 3.6% gain year to date. Canadian REITs underperformed relative to their U.S. counterparts in May 2011, as the MSCI U.S. REIT Index posted a 1.4% gain during the month, bringing its year-to-date return to a positive 14.1%.

In May 2011, the average FFO Yield Spread for the REIT sector (non-hotel) decreased by just 1 bps to 3.91%, as the FFO Yield (inverted P/FFO) declined to 6.98% from last month’s 7.12%, and the 10-year Government of Canada bond yield decreased 13 bps to 3.07%. The LTM range for the FFO Yield Spread is 3.57–5.33%, and the range since 1997 is 2.1–10.9%.

2011 Leaders and Laggards – In our coverage universe, on a total return basis, the top three performers for 2011 year to date are Extendicare REIT (+39%), Homburg Canada REIT (+20%), and Boardwalk REIT (+19%). The bottom three are Royal Host (-30%), Northern Property REIT (+5%) and Crombie REIT (+5%).

Things to Watch For in the Coming Month The remaining Q1/11 earnings releases end on June 14 for our coverage space.

Sector Fundamentals Office – Canada’s national office vacancy rate of 9.3% in Q1/11 was down slightly from Q4/10’s 9.5%, and the 10.1% recorded a year ago (Source: CBRE). Retail – We see the potential for this sector to be one of the first to stage a meaningful recovery, as the economy improves. Retailer demand has bounced off the bottom, and shopping centre vacancy rates have been falling. Recent announcements reinforced our stance that more U.S. retailers have or are expected to announce plans to expand into Canada. In all, these moves could represent significant space demand that would tighten vacancy rates further and potentially help bring about a resurgence of new development. Multi-residential – According to CMHC, the national vacancy rate decreased to 2.6% in October 2010, versus 2.8% in October 2009. Average rents for two-bedroom apartments in existing structures increased by

Sam Damiani, CFA Jonathan Kelcher, CFA


2.4%. Looking ahead, we see rental demand remaining relatively flat (but positive) near term in central and eastern Canada, assuming employment growth remains constrained, although a softening housing market could benefit at the margin. In western Canada, we expect improving rental demand conditions to continue through 2011. Also, FRPO is expecting a 3.0% rent increase guideline for Ontario in 2012. Lodging – According to STR/HVS, RevPAR grew 5.6% year over year in 2010, rebounding from the 12.2% decrease in 2009. Between STR/HVS and PKF Consulting, the average 2011 Canadian RevPAR growth forecast is 4.6%. In the U.S., PKF Hospitality Research forecasts a 7.1% increase. Our Sector Stance We have seen cap rate compression over the past year, which we believe is a result of the current low government bond yield environment and availability of capital in general. Valuations currently allow for acquisitions to be accretive. We believe valuations are vulnerable if bond yields rise significantly over a short period of time, or if the economy heads into another recession, neither of which we expect. On availability of capital, we expect continued strong investor demand for high-yield investments, as long as the yield curve remains low. Overall, we are maintaining our market-weight sector rating. Since early 2009, valuations have recovered to well above mid-cycle levels. We recommend names with higher asset quality, good growth profiles and/or meaningful relative undervaluation. Homburg Canada REIT (HCR.UN-T, $12.85); 12-Month Target $14.00 Sam Damiani, CFA Homburg Canada REIT owns primarily office and retail properties with a current emphasis on Quebec, Calgary, and the Atlantic provinces. Since its May 2010 IPO, Homburg Canada REIT has grown its market cap by 80% and its market float by 175%. We believe the REIT’s IPO pricing was significantly undervalued, likely caused by the connection to Homburg Invest, which has had poor share price performance. Our thesis is that this connection will continue to diminish, and will ultimately no longer be a factor as the REIT’s fully dedicated management team successfully executes its own strategy. Since the IPO, Richard Homburg has let his ownership in the REIT fall to less than 29% from 52%, and recently gave up all his board and management roles at Homburg Invest. Also, the REIT’s management team has completed two follow-on equity offerings and over $250 million of acquisitions. We expect further acquisition activity over the balance of this year. Target Corp.’s recent first-round selection of Zellers leases included three of the REIT’s six locations, and, most importantly, both of the two major property locations, i.e., Place Alexis Nihon and Place Longueuil. Finally, we believe consensus NAV estimates may have undervalued the REIT’s largest asset – the CN Central Station in downtown Montreal. With two leases to CN Railway Co. extending to 2027 and 2037, plus renewal options and with strong embedded rental rate increases, we believe this property’s cash flows are worth a premium. In summary, we believe the relative discount Homburg Canada still trades at (14.8x 2011E P/AFFO versus the peer average of 15.5x) will largely disappear over the near to medium term.


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Special Situations


Action List 1.1 1.1 10.1 27.4 0.9 187.3Comp. Group* (1.9) (1.4) 8.5 33.6 1.6 62.7S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 98.1* S&P/TSX SmallCap¹ Since June 9, 2004

Total Return %

50100150200250300

Jun0

4

Jun0

5

Jun0

6

Jun0

7

Jun0

8

Jun0

9

Jun1

0


Industry Overview

Performance Summary for the Month The top performers in our coverage universe in May 2011 were TransForce Inc. (TFI-T), up 11.4%, EnerCare Inc. (ECI-T), up 9.5%, Superior Plus Corp. (SPB-T), up 5.6% and Davis + Henderson Corp. (DH-T), up 5.0%. The lowest returns were posted by Contrans Group Inc. (CSS-T), Trimac Transportation Ltd. (TMA-T) and Vitran Corp. (VTNC-N), which were down 5.6%, 4.0% and 3.8%, respectively. Notable events in May included: • IESI-BFC Ltd. (BIN-N, T) changed its name to Progressive Waste Solutions. • Chemtrade Logistics Income Fund (CHE.UN-T) announced the acquisition of

Marsulex Inc. for a total consideration of $419.5 million. • Parkland Fuel Corp. (PKI-T) acquired Cango Inc., a major independent retail

fuel marketer in Ontario (annual sales of about 400 million litres) along with seven retail fuel outlets from Overwaitea Food Group (about 25 million litres) for a combined total purchase price of $22 million. In addition, Parkland announced an $85 million equity offering involving the sale of 6,300,000 common shares at $12.10/share, which includes an over-allotment of 930,000 common shares.

• TransForce Inc. (TFI-T) announced the approval of a new corporate structure which includes the nomination of five Executive Vice-Presidents in order to assist Alain Bedard (CEO) in dealing with the company’s development and growth strategy.

• The DATA Group Income Fund (DGI.UN-T) announced that it has obtained a final order from the Ontario Superior Court of Justice approving a previously announced statutory plan of arrangement. The arrangement will result in the reorganization of the fund's income trust structure into a dividend paying public corporation, named Data Group Inc.

• We resumed/transferred coverage of Davis + Henderson Corp. (DH-T) maintaining our HOLD rating, following the company’s US$231.8 million acquisition of Mortgagebot Inc. We believe that the markets are fully valuing the company, which we see as having a solid long-term outlook for organic

Damir Gunja Sophia Taylor, CA


growth in revenue and dividends in the low single digit range, offset by risks associated with integrating acquisitions, mainly in 2011.

Things to Watch For in the Coming Month Estimated earnings release dates in June: • Supremex Inc. (SXP-T) Q1/11 results – June 1 • Ag Growth International Inc. (AFN-T) Q1/11 results – June 9 • GLV Inc. (GLV.A-T) Q4/11 results – June 9 • Vicwest Inc. (VIC-T) Q1/11 results – June 13 Our Sector Stance Progressive Waste Solutions remains our top pick, as we believe that it offers above-average opportunities for both organic and acquisition-based growth. While we remain somewhat cautious on the pace of an economic recovery, we believe that the transportation names, TransForce in particular, offer good leverage to an extended upturn and should generate material upside in the out-years as a result of the acquisition of DHL Canada’s Canadian operations (now called Loomis Express). Two other names we would highlight with 30% plus total potential returns are Great Canadian Gaming Corp. (GC-T) and The DATA Group Income Fund (DGI.UN-T) from a valuation perspective. On balance, we remain cautious, and continue to look for more signs of organic revenue growth in our coverage universe as an earnings driver, rather than cost management initiatives alone. Progressive Waste Solutions (BIN-N, US$25.13); 12-Month Target: US$33.00 Damir Gunja Progressive Waste Solutions is the third-largest North American waste management company, providing vertically integrated non-hazardous solid waste collection and landfill disposal services for commercial, industrial, municipal and residential customers in 12 U.S. states, the District of Columbia, and six Canadian provinces. We believe that the company possesses a leading North American waste management platform, particularly with the addition of the WSI and Fred Weber assets, a strong track record, and reasonable yield. We believe that the valuation will migrate higher to at least match, if not surpass, U.S. peers, with numerous catalysts on the horizon, based on 1) improving operating and financial results on the back of the economic recovery, 2) the company’s unique positioning for multiple tuck-in and platform-based acquisitions to drive incremental growth, and 3) a potentially improving profile with U.S. investors. Our price target of US$33.00 is based on 8.5x our fiscal 2012 EBITDA forecast.


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Action List 0.0 0.0 0.0 0.0 0.0 (21.0)Comp. Group* (4.8) (23.0) (18.0) (18.4) (13.9) 34.3S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 157.1* S&P/TSX Technology (Sector)¹ Since January 31, 2003

Total Return %

0100200300400

Jan0

3

Jan0

4

Jan0

5

Jan0

6

Jan0

7

Jan0

8

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9

Jan1

0

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1


Industry Overview Performance Summary for the Month The S&P/TSX Information Technology Index declined 4.8% last month. The comparable S&P 500 IT index declined 1.9%. Things to Watch For in the Coming Month In June, we will receive quarterly updates from software and IT services providers Adobe, RIM, Oracle and Accenture. Additionally, we are expecting quarterly updates from the following companies under coverage: – Descartes Systems Group Inc. (DSG-T, DSGX-Q) on June 2 – Enghouse Systems Ltd. (ESL-T) on June 2 – 20-20 Technologies Inc. (TWT-T) in mid-June – EXFO Inc. (EXF-T; EXFO-Q) in late June Our Sector Stance: Neutral Since Google reported results on April 14, almost 90% of the S&P 500 IT sector has issued first quarter results. On balance, results continue to meet or surpass expectations, with 78% of S&P 500 IT stocks ahead on revenue and 76% of the group ahead on EPS. Smaller S&P 600 and Russell 2000 names have shown similar performance. Despite Q1 results being largely ahead of expectations, guidance and earnings revisions have been more mixed than in previous quarters. According to our calculations, estimate revisions for software names remain predominately positive, with fiscal year consensus revenue expectations rising for 21 of 27 S&P 500 software names (78%). Hardware and semiconductor revision momentum is more evenly split between positive and negative. In our view, this is due in part to uncertainty relative to the impact from events in Japan, which affects software stocks to a lesser degree.

Scott Penner, CFA


Our sector stance on the technology sector was recently revised down to market weight, based on 1) declining earnings momentum in the March quarter; 2) lower target returns for many names under coverage; and 3) historically lower returns for tech stocks in the summer months. MacDonald, Dettwiler & Associates (MDA-T) and CGI Group Inc. (GIB.A-T, GIB-N) remain our top large cap picks. Among small cap names, our top picks include RuggedCom (RCM-T), EXFO (EXF-T; EXFO-Q) and Descartes (DSG-T; DSGX-Q).


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Transportation – Aerospace


Action List 2.0 4.3 4.4 28.2 (2.3) 113.7Comp. Group* (2.2) 4.4 26.0 34.6 20.5 41.8S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 184.2* S&P/TSX Aerospace & Defense (Subindustry),Airlines (Industry)¹ Since October 11, 2002

Total Return %

50100150200250300

Oct

02

Oct

03

Oct

04

Oct

05

Oct

06

Oct

07

Oct

08

Oct

09

Oct

10


Industry Overview Performance Summary for the Month In May, the S&P/TSX Aerospace, Defense (Subindustry) and Airlines (Industry Group) Index declined by 2.2%. Things to Watch For in the Coming Month • The following companies are scheduled to report quarterly results during the

month: Transat A.T. (June 9), Bombardier (June 1), Vector Aerospace (TBA), Northstar Aerospace (June 9) and Magellan Aerospace (TBA).

Our Sector Stance Air Transportation: The demand environment continues to improve for Canadian airlines, and, while they are adding capacity to select regions, they are also demonstrating a willingness to slow growth plans in order to facilitate the higher air fares required to offset persistently high jet fuel prices. We expect this upward pressure on air fares to limit traffic growth in H2/11, but believe that it will only slow or temporarily reverse the earnings growth that the airlines have been reporting over the past year. All three scheduled airlines in Canada are increasing their presence in the Eastern triangle business travel market and Air Canada is planning (union approval pending) to become more aggressive with lower-cost capacity in leisure markets. WestJet and Transat are expected to continue to increase southbound leisure market capacity during the winter of 2011-2012. This could keep pressure up on the earnings contribution from these markets for years to come, which is cause for particular concern for Transat, given that a significantly greater proportion of its annual earnings is linked to these markets. We expect WestJet to deliver positive operating earnings growth in 2011, while earnings at Air Canada decline, as rising fuel and maintenance costs offset improved demand. Balance sheet deleveraging, the successful resolution of labour negotiations, and improving confidence in the sustainability of record earnings will be key to moving Air Canada shares higher, in our view. Earnings growth and multiple expansion will be most important at WestJet. We prefer Air

Tim James, CFA


Canada and WestJet to Chorus Aviation, due to their superior leverage to improving air travel demand and relative valuations, although rising fuel prices have tempered this preference to a certain extent. Chorus has limited exposure to rising oil prices and offers an attractive 11.9% dividend yield, which we believe is increasingly attractive in a high fuel price environment. Aerospace: The short-term outlook for regional and business aircraft remains challenging despite ongoing strength in the large commercial aircraft market. The strength of large cabin business jets is continuing to dominate the overall business aircraft market. Demand for large narrowbody (150 to 200 seats) commercial aircraft continues to significantly outperform the small narrowbody (110 to 149 seats) market relative to historical trends. Bombardier’s commercial backlog beyond 2011 is a growing concern, and we believe a regional aircraft production cut is increasingly likely in H2/11. CAE’s exposure to the complete range of civil sub-segments and its training revenue is allowing it to be an earlier beneficiary of the cyclical recovery. We believe that funding delays on certain U.S. military contracts are a short-term setback, and not representative of a broader trend affecting the CAE business. Following Bombardier’s share price outperformance in early 2011, we shifted our relative preference to CAE from Bombardier. Since then, Bombardier’s shares have corrected by almost 10%, but with a lack of orders for its commercial aircraft, we still prefer CAE’s risk to reward profile. Héroux-Devtek and Northstar Aerospace remain our top picks in the small cap aerospace supplier group. We like Héroux-Devtek for its valuation, positive earnings surprises, strong balance sheet, growing track record of operational execution, and potential upside from an acquisition. Though Northstar has struggled to gain the earnings consistency that we expect from it over the long term, given its low valuation, exposure to the military helicopter market and attractiveness as a consolidation target, we believe the stock offers the greatest upside in the group.


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Transportation – Railroads


Action List 0.0 0.0 0.0 0.0 0.0 0.0Comp. Group* 2.0 3.7 10.6 20.2 9.6 24.2S&P/TSX Comp. (0.9) (1.8) 7.9 20.4 3.6 22.9* S&P/TSX Railroads (Subindustry),¹ Since June 8, 2010

Total Return %

90100110120130

Jun1

0

Jul1

0

Aug1

0

Sep1

0

Oct

10

Nov

10

Dec

10

Jan1

1

Feb1

1

Mar

11

Apr1

1

May

11


Industry Overview Performance Summary for the Month Canadian National Railway Co. (CN; CNR-T, CNI-N) led the group in May, closing up 3%, followed by Union Pacific Corp. (UNP-N) and CSX Corp. (CSX-N), which each rose 1%. Canadian Pacific Railway Ltd. (CP; CP-T, N) and Norfolk Southern Corp. (NSC-N) were both down 2% for the month. Things to Watch For in the Coming Month June 7-8: Norfolk Southern will host an investor and analyst conference including a tour of its Juniata Locomotive Shop in Altoona, Pennsylvania. June 13: CP will host an investor update meeting in New York. June 15: Distribution date of CSX’s 3-for-1 stock split. June 22: The U.S. Surface Transportation Board will hold a public hearing on the current state of competition in the railroad industry. Volumes: Carload volume growth to date in the second quarter has slowed relative to the first quarter; however, we believe most of the deceleration reflects the impact of spring flooding and other severe weather events, rather than a deterioration in underlying freight demand. Slower shipments of utility coal have also been a contributing factor, as utility stockpiles remain above target levels in some areas, and natural gas substitution continues to affect demand for coal. As of Week 20, total Big Six Class I carloads are tracking up 3% year over year to date in the second quarter and up 5% year over year to date in 2011. Of the 17 traffic categories that we track based on data collected by the Association of American Railroads, 13 are showing growth year to date, and as such, we would characterize year-to-date traffic gains as fairly broad-based. On an absolute basis, the year-to-date carload growth has been led by intermodal, chemicals and motor vehicles and equipment. By railroad, Burlington Northern Santa Fe has achieved the strongest volume growth year to date, up 7% year over year. Carload volumes are up 6% year over year to date at Norfolk Southern and CN, and up 4% year over year at CSX and

Cherilyn Radbourne, CA, CFA


Union Pacific, while CP’s carload volumes are down 5% year over year as the company struggles with difficult weather conditions. Pricing: We believe pricing remains on track for ‘inflation-plus’ gains in 2011. Truck pricing appears to have hit an inflection point in Q3/10, and we still expect regulatory initiatives to shrink U.S. trucking capacity, which should have positive implications for intermodal demand and rail pricing. Operating Leverage: While fuel surcharge revenue carries a 100% operating ratio, such that higher fuel prices tend to increase the operating ratio, all else being equal, we expect continued operating ratio improvement across the group in 2011. The exception is CP, largely due to expected deterioration in H1/11. Dividends: CSX recently announced a 38% increase in its quarterly dividend, and indicated that it is now targeting a dividend payout ratio of 30–35% based on trailing 12-month EPS. Likewise, Union Pacific hiked its quarterly dividend by 25%, and commented that the increase represented a significant step toward its target payout ratio of approximately 30%. We expect dividend payout ratios across the industry to rise to these levels over time, which is one of the key reasons we are attracted to the rail stocks as a group. Regulatory Landscape: The U.S. Surface Transportation Board will hold a hearing on June 22 to examine the current state of competition in the rail industry and possible policy initiatives to promote rail-to-rail competition. We believe the hearing poses headline risk at a minimum, but remain of the view that, in an environment of limited highway funding, policymakers will want to shift more traffic to rail not less, which argues against new regulation that would compromise the rails’ ability to invest in infrastructure. We believe that the Federal government intends to deregulate the Canadian Wheat Board (CWB), likely with effect as of August 1, 2012. We view the prospect of deregulation as a modest positive for CN and CP, because the CWB would no longer be involved in railcar allocation, and deregulation should prompt capacity rationalization, whereby the larger elevators, with more efficient railcar loading capacity, would gain share at the expense of small elevators. Valuation: The rails are trading at an average P/FTM EPS multiple of 14.8x, which is modestly ahead of the group’s historical average P/FTM EPS multiple of 14.0x (in a range of 12.3–15.7x), but up slightly from 14.6x as at April 30. Our BUY-rated stocks are CN, CP, and CSX. We rate NSC and UNP as HOLD. Our Sector Stance We are maintaining our market weight sector recommendation. Medium to long term, we believe the railroads are positioned to gain modal share from trucks, based on rising fuel prices, increasing highway congestion, and more stringent environmental regulation.


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Notes


Action List Rules • The maximum number of companies allowed on the Action List for any sector

will normally be limited to the lesser of five companies or 20% of the number of companies in the universe of coverage.

• Equal weightings are assumed for all Action List stocks. • All return calculations are total-return calculations. • Returns do not assume taxes or commissions. • Dividends are included the day the stock goes ex-dividend. • If there are no stocks in an Action List, a 0% return is assumed. • Stocks traded mainly in U.S. dollars are converted to Canadian dollars for

return calculations using The Globe and Mail’s quoted exchange rate for the day after the closing price. Dividends are converted the day the stock goes ex-dividend, using the next day’s Globe and Mail quoted exchange rate.

• When changes to the Action List are made, the price used to update returns is

the closing price on the day the associated Action Note is issued. If the Action Note is issued after 16:00 EST, the next day’s closing price is used.

Examples: (1) if an Action Note comes out Tuesday before 16:00, Tuesday’s close will be used. (2) if an Action Note comes out Tuesday at 16:30, Wednesday’s close will be used. • If an analyst becomes restricted on a stock, the stock may not be added or

deleted from the Action List.


Appendix A. Important Disclosures Alternative Energy Atlantic Power Corp. (ATP-T) 1, 2, 4, 9 Boralex Inc. (BLX-T) 1, 2, 4 Brookfield Renewable Power Fund (BRC.UN-T) 1, 2, 4 Capstone Infrastructure Corp. (CSE-T) 1, 2, 4 Innergex Renewable Energy Inc. (INE-T) 1, 2, 4, 10 Northland Power Inc. (NPI-T) 1, 2, 4 Banks Bank of Montreal (BMO-T, BMO-N) 1, 2, 4, 9, 10 Bank of Nova Scotia (The) (BNS-T, BNS-N) 2, 4, 9, 10 Canadian Imperial Bank of Commerce (CM-T, CM-N) 2, 4, 9, 10 Canadian Western Bank (CWB-T) 2, 4, 9, 10 Genworth MI Canada Inc. (MIC-T) 1, 2, 4, 9 Laurentian Bank of Canada (LB-T) 2, 4, 10 National Bank of Canada (NA-T) 2, 4, 9, 10 Royal Bank of Canada (RY-T, RY-N) 2, 4, 9, 10 Toronto-Dominion Bank (The) (TD-T, TD-N) 1, 2, 4, 5, 9 Biotechnology & Health Care CML Healthcare Inc. (CLC-T) 2, 4, 9 Nordion Inc. (NDZ-N, NDN-T) 9 Paladin Labs Inc. (PLB-T) 1, 2, 4 Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T) 2, 5, 9 Chemicals and Fertilizers Agrium Inc. (AGU-N, AGU-T) 2, 4, 9, 10 Methanex Corp. (MEOH-Q, MX-T) 9 Migao Corp. (MGO-T) 9 Potash Corp. of Saskatechwan Inc. (POT-N, POT-T) 9 Communications BCE Inc. (BCE-T, BCE-N) 1, 2, 4, 9, 10 Bell Aliant Inc. (BA-T) 1, 2, 4 Cogeco Cable Inc. (CCA-T) 9, 12 Cogeco Inc. (CGO-T) 12 Manitoba Telecom Services Inc. (MBT-T) 9, 10 Quebecor Inc. (QBR.B-T) 1, 2, 4, 12 Rogers Communications Inc.¹ (RCI.B-T, RCI-N) 1, 2, 4, 9, 14 Shaw Communications Inc. (SJR.B-T, SJR-N) 1, 2, 4, 9, 14 TELUS Corp. (T.A-T, TU-N) 1, 2, 4, 9, 10, 14 Thomson Reuters Corp.¹ (TRI-T, TRI-N) 2, 4, 9 Consumer Discretionary Canadian Tire Corporation, Ltd. (CTC.A-T) 9, 10 Dollarama Inc. (DOL-T) 9 Dorel Industries Inc. (DII.B-T) 2, 12, 15 Garda World Security Corp. (GW-T) 1, 2, 4, 9 Gildan Activewear Inc. (GIL-T, GIL-N) 5, 9 RONA Inc. (RON-T) 1, 2, 4, 9, 10 Uni-Select Inc. (UNS-T) 1, 2, 4 Consumer Staples Alimentation Couche-Tard Inc. (ATD.B-T) 9, 12 Jean Coutu Group (PJC) Inc. (The) (PJC.A-T) 9, 12 Loblaw Companies Ltd. (L-T) 2, 4, 9 Maple Leaf Foods Inc. (MFI-T) 1, 2, 4 Metro Inc.¹ (MRU.A-T) 9, 12 Rogers Sugar Inc. (RSI-T) 1, 2, 4 Saputo Inc. (SAP-T) 9 Shoppers Drug Mart Corp. (SC-T) 2, 9 Tim Hortons Inc. (THI-T) 2, 4, 9 Diversified Financials AGF Management Ltd.¹ (AGF.B-T) 9, 14 CI Financial Corp.¹ (CIX-T) 2, 4, 9 First National Financial Corp. (FN-T) 2, 4 IGM Financial Inc.¹ (IGM-T) 2, 4, 9 Onex Corp. (OCX-T) 9, 12 Power Corp. of Canada (POW-T) 9, 12 Power Financial Corp. (PWF-T) 2, 4, 9 TMX Group Inc.~ (X-T) 9 Energy Producers - Intermediate Advantage Oil & Gas Ltd. (AAV-T, AAV-N) 9 ARC Resources Ltd. (ARX-T) 2, 4, 9 Baytex Energy Corp. (BTE-T, BTE-N) 2, 4, 9 Bonavista Energy Corp. (BNP-T) 1, 2, 4, 9

Canadian Oil Sands Ltd. (COS-T) 9 Celtic Exploration Ltd. (CLT-T) 1, 2, 4, 9 Crescent Point Energy Corp. (CPG-T) 1, 2, 4, 9 Crew Energy Inc. (CR-T) 1, 2, 4, 9 Daylight Energy Ltd. (DAY-T) 2, 4, 9 Enerplus Corp. (ERF-T, ERF-N) 2, 4, 9 Freehold Royalties Ltd. (FRU-T) 2, 4 MEG Energy Corp. (MEG-T) 1, 2, 4 NAL Energy Corp. (NAE-T) 2, 4, 9 NuVista Energy Ltd. (NVA-T) 1, 2, 4, 9 Paramount Resources Ltd. (POU-T) 1, 2, 4, 9 Pengrowth Energy Corp. (PGF-T, PGH-N) 2, 4, 9 Penn West Petroleum Ltd. (PWT-T) 2, 4, 9 Perpetual Energy Inc. (PMT-T) 1, 2, 4, 9 PetroBakken Energy Ltd. (PBN-T) 2, 4, 9 Progress Energy Resources Corp. (PRQ-T) 2, 4, 9 Trilogy Energy Corp. (TET-T) 9 Vermilion Energy Inc. (VET-T) 1, 2, 4, 9 Zargon Oil & Gas Ltd. (ZAR-T) 1, 2, 4 Energy Producers - International Bankers Petroleum Ltd. (BNK-T, BNK-L) 1, 2, 4, 9 BNK Petroleum Inc. (BKX-T) 2, 4 C&C Energia Ltd. (CZE-T) 1, 2, 4 Canacol Energy Ltd. (CNE-V, CNEC-CB) 1, 2, 4 Gran Tierra Energy Inc. (GTE-T, GTE-A) 9 Niko Resources Ltd. (NKO-T) 9 Pacific Rubiales Energy Corp. (PRE-T, PREC-CB) 9, 10 Parex Resources Inc. (PXT-V) 1, 2, 4 Petrodorado Energy Ltd. (PDQ-V) 1, 2, 4 Petrominerales Ltd. (PMG-T) 1, 2, 4, 9 Porto Energy Corp. (PEC-V) 1, 2, 4, 5 TransAtlantic Petroleum Ltd. (TNP-T, TAT-A) 2, 4 Energy Producers - Senior & Unconventional Aurora Oil & Gas Ltd. (AEF-T, AUT-A) 1, 2, 4 BlackPearl Resources Inc. (PXX-T) 1, 2, 4, 9 Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) 2, 4, 9, 10 Cenovus Energy Inc. (CVE-T, CVE-N) 2, 4, 9 Encana Corp. (ECA-N, ECA-T) 2, 4, 9 Husky Energy Inc. (HSE-T) 1, 2, 4, 9 Imperial Oil Ltd. (IMO-T) 9 Nexen Inc. (NXY-T) 2, 4, 9, 10 Petrobank Energy & Resources Ltd. (PBG-T) 2, 4, 9, 10 Suncor Energy Inc.¹ (SU-T) 2, 4, 9, 10 Talisman Energy Inc. (TLM-T, TLM-N) 2, 4, 9 Energy Services Ensign Energy Services Inc. (ESI-T) 9 Mullen Group Ltd. (MTL-T) 2, 4, 9 Precision Drilling Trust (PD-T, PDS-N) 1, 2, 4, 9 Savanna Energy Services Corp. (SVY-T) 1, 2, 4 ShawCor Ltd. (SCL.A-T) 2, 10, 12 Trican Well Service Ltd. (TCW-T) 9 Trinidad Drilling Ltd. (TDG-T) 1, 2, 4, 9 Gold & Precious Metals Agnico-Eagle Mines Ltd. (AEM-N, AEM-T) 2, 4, 9, 10 Alamos Gold Inc. (AGI-T) 9 Barrick Gold Corp. (ABX-N, ABX-T) 2, 4, 9, 10 Canaco Resources Inc. (CAN-V) 1, 2, 4 Centerra Gold Inc. (CG-T) 2, 4, 9 Continental Gold Ltd. (CNL-T) 1, 2, 4, 9 Detour Gold Corp. (DGC-T) 1, 2, 4, 9 Eldorado Gold Corp. (ELD-T, EGO-A) 9 Energold Drilling Corp. (EGD-T) 1, 2, 4, 5 Exeter Resource Corp. (XRC-V, XRA-A) 1, 2, 4, 9 Extorre Gold Mines Ltd. (XG-T) 1, 2, 4 Franco-Nevada Corp. (FNV-T) 9 Gammon Gold Inc. (GAM-T, GRS-A) 9 Goldcorp Inc. (GG-N, G-T) 9, 10 Guyana Goldfields Inc. (GUY-T) 2, 9 IAMGOLD Corp. (IMG-T, IAG-N) 9 Jaguar Mining Inc. (JAG-T) 9 Kinross Gold Corp. (KGC-N, K-T) 9

Lake Shore Gold Corp. (LSG-T) 1, 2, 4 Minefinders Corp. Ltd. (MFL-T, MFN-A) 9 New Gold Inc. (NGD-A, NGD-T) 9 Northgate Minerals Corp. (NXG-A, NGX-T) 1, 2, 4 Osisko Mining Corp. (OSK-T) 9 Primero Mining Corp. (P-T) 1, 2, 4 Rubicon Minerals Corp. (RMX-T, RBY-A) 1, 2, 4, 9 San Gold Corp. (SGR-t) 1, 2, 4 Tahoe Resources Inc. (THO-T) 1, 2, 4 Yamana Gold Inc. (AUY-N, YRI-T) 2, 9 Industrial Products Aecon Group Inc. (ARE-T) 1, 2, 4, 9 Armtec Infrastructure Inc. (ARF-T) 1, 2, 4 Churchill Corp. (The) (CUQ-T) 2, 4 Finning International Inc. (FTT-T) 2, 9 IBI Group Inc. (IBG-T) 1, 2, 4 Russel Metals Inc. (RUS-T) 2, 4, 9 SNC-Lavalin Group Inc.¹ (SNC-T) 9 Toromont Industries Ltd. (TIH-T) 2, 4 Viterra Inc. (VT-T) 1, 2, 4, 9, 10 Wajax Corp. (WJX-T) 1, 2, 4 Insurance Great-West Lifeco Inc.¹ (GWO-T) 1, 2, 4, 9 Industrial-Alliance Life Insurance Co.¹ (IAG-T) 9 Intact Financial Corp.¹ (IFC-T) 2, 9, 16 Manulife Financial Corp.¹ (MFC-T, MFC-N) 1, 2, 4, 5, 9, 10 Sun Life Financial Inc. (SLF-T, SLF-N) 1, 2, 4, 9, 10 Media Astral Media Inc. (ACM.A-T) 9, 14 Cineplex Inc. (CGX-T) 2 Corus Entertainment Inc. (CJR.B-T, CJR-N) 2, 9, 14 Newfoundland Capital Corp. Ltd. (NCC.A-T) 12 Torstar Corp. (TS.B-T) 2, 14 Transcontinental Inc. (TCL.A-T) 9, 10, 12, 15 TVA Group Inc. (TVA.B-T) 14 Yellow Media Inc.¹ (YLO-T) 1, 2, 4, 9 Metals & Minerals Augusta Resource Corp. (AZC-T, AZC-A) 1, 2, 4 Breakwater Resources Ltd. (BWR-T) 1, 2, 4, 9 Cameco Corp. (CCO-T, CCJ-N) 2, 9, 10 Capstone Mining Corp. (CS-T) 9 Equinox Minerals Ltd. (EQN-T) 2, 4, 9 First Quantum Minerals Ltd. (FM-T) 9, 10 HudBay Minerals Inc. (HBM-T) 2, 9 Inmet Mining Corp. (IMN-T) 9, 10 Ivanhoe Mines Ltd. (IVN-T, IVN-N) 9 Lundin Mining Corp. (LUN-T, LMC-N) 9, 10 Macarthur Minerals Ltd. (MMS-V) 1, 2, 4 Mercator Minerals Ltd. (ML-T) 9 Nevsun Resources Ltd. (NSU-T, NSU-A) 9 Northern Dynasty Minerals Ltd. (NDM-T, NAK-A) 9 Pan American Silver Corp. (PAAS-Q, PAA-T) 9 Quadra FNX Mining Ltd. (QUX-T) 5, 9 Silver Wheaton Corp. (SLW-N, SLW-T) 9 Taseko Mines Ltd. (TKO-T) 1, 2, 4, 9 Teck Resources Ltd.¹ (TCK.B-T, TCK-N) 2, 9, 12 Thompson Creek Metals Company Inc. (TCM-T, TC-N) 5, 9 Multi-Industry Brookfield Asset Management Inc.¹ (BAM-N, BAM.A-T, BAMA-XEN) 1, 2, 4, 5, 9, 10, 16 Brookfield Infrastructure Partners L.P. (BIP-N) 2, 14 Paper & Forest Products Canfor Corp. (CFP-T) 2, 9 Cascades Inc. (CAS-T) 9 Domtar Corp.¹ (UFS-T, UFS-N) 2, 4, 9 Fibrek Inc. (FBK-T) 2, 4 Fortress Paper Ltd. (FTP-T) 1, 2, 4 International Forest Products Ltd. (IFP.A-T) 1, 2, 4, 5, 12 Norbord Inc. (NBD-T) 1, 2, 4 Sino-Forest Corp. (TRE-T) 1, 2, 4, 9, 15 Tembec Inc.^ (TMB-T) 5 West Fraser Timber Co. Ltd.¹ (WFT-T) 1, 2, 4


Appendix A. Important Disclosures Cont’d Pipelines, Power & Utilities AltaGas Ltd. (ALA-T) 1, 2, 4, 9 ATCO Ltd. (ACO.X-T) 14 Canadian Utilities Ltd. (CU-T) 1, 2, 4, 9, 14 Capital Power Corp. (CPX-T) 1, 2, 4, 9, 16 Capital Power Income L.P. (CPA.UN-T) 1, 2, 4 Emera, Inc. (EMA-T) 1, 2, 4, 9, 10 Enbridge Inc. (ENB-T, ENB-N) 1, 2, 4, 9, 10 Enbridge Income Fund Holdings Inc. (ENF-T) 1, 2, 4 Fortis Inc. (FTS-T) 1, 2, 4, 9, 10 Inter Pipeline Fund (IPL.UN-T) 1, 2, 4 Keyera Corp. (KEY-T) 2, 4 Pembina Pipeline Corp. (PPL-T) 1, 2, 4, 9 Provident Energy Ltd. (PVE-T) 1, 2, 4, 9 TransAlta Corp. (TA-T, TAC-N) 1, 2, 4, 9, 10 TransCanada Corp.¹ (TRP-T, TRP-N) 2, 4, 9, 10 Valener Inc. (VNR-T) 2, 4 Veresen Inc. (VSN-T) 1, 2, 4 Real Estate Brookfield Office Properties Canada (BOX.UN-T) 1, 2, 4 Brookfield Office Properties Inc. (BPO-N, BPO-T) 1, 2, 4, 9 Calloway REIT (CWT.UN-T) 1, 2, 4, 9 Canadian Apartment Properties REIT (CAR.UN-T) 1, 2, 4 Chartwell Seniors Housing REIT (CSH.UN-T) 1, 2, 4, 9 Crombie REIT (CRR.UN-T) 1, 2, 4 Dundee REIT (D.UN-T) 1, 2, 4

Extendicare REIT (EXE.UN-T) 2, 4, 9 Firm Capital Mortgage Investment Corp. (FC-T) 1, 2, 4 First Capital Realty Inc. (FCR-T) 1, 2, 4, 9 H&R REIT (HR.UN-T) 1, 2, 4, 9 Homburg Canada REIT (HCR.UN-T) 1, 2, 4 InnVest REIT (INN.UN-T) 1, 2, 4 Killam Properties Inc. (KMP-T) 1, 2, 4 Leisureworld Senior Care Corp. (LW-T) 1, 2, 4 Northern Property REIT (NPR.UN-T) 1, 2, 4 Primaris Retail REIT (PMZ.UN-T) 1, 2, 4 RioCan REIT (REI.UN-T) 1, 2, 4, 9 TransGlobe Apartment REIT (TGA.UN-T) 1, 2, 4 Whiterock REIT (WRK.UN-T) 1, 2, 4 Special Situations Ag Growth International Inc. (AFN-T) 1, 2, 4 Chemtrade Logistics Income Fund (CHE.UN-T) 2, 4 Contrans Group Inc. (CSS-T) 2, 4, 12, 15 DATA Group Income Fund (The) (DGI.UN-T) 1, 2, 4 Davis + Henderson Corp.¹ (DH-T) 1, 2, 4 Enercare Inc. (ECI-T) 2 FirstService Corp. (FSV-T, FSRV-Q) 1, 2, 4, 12 GLV Inc. (GLV.A-T) 12, 15 Great Canadian Gaming Corp. (GC-T) 9 IESI-BFC Ltd. (BIN-N) 2, 9 Just Energy Inc. (JE-T) 1, 2, 4, 9 Noranda Income Fund (NIF.UN-T) 2, 4, 10

Parkland Fuel Corp. (PKI-T) 1, 2, 4 Pizza Pizza Royalty Income Fund (PZA.UN-T) 9 Superior Plus Corp. (SPB-T) 1, 2, 4, 9 Supremex Inc. (SXP-T) 9 TransForce Inc. (TFI-T) 9 Technology 20-20 Technologies Inc. (TWT-T) 2 CGI Group Inc. (GIB.A-T, GIB-N) 2, 4, 9, 12 Constellation Software Inc. (CSU-T) 1, 2, 4 DragonWave Inc. (DRWI-Q, DWI-T) 9 EXFO Inc. (EXFO-Q, EXF-T) 12 MacDonald, Dettwiler and Associates Ltd. (MDA-T) 2, 4 Open Text Corp. (OTEX-Q, OTC-T) 9 Transportation - Aerospace, Railroads ACE Aviation Holdings Inc. (ACE.A-T, ACE.B-T) 10, 13 Air Canada (AC.A-T, AC.B-T) 1, 2, 4, 15 Bombardier Inc. (BBD.B-T) 9, 12 CAE Inc. (CAE-T, CGT-N) 9 Canadian National Railway Co.¹ (CNR-T, CNI-N) 9, 10 Canadian Pacific Railway Ltd. (CP-T, CP-N) 2, 4, 9 Chorus Aviation Inc. (CHR.B-T) 9, 10 Groupe Aeroplan Inc. (AER-T) 1, 2, 4, 9 Héroux-Devtek Inc. (HRX-T) 2, 4 Transat A.T. Inc. (TRZ.B-T, TRZ.A-T) 13 Vector Aerospace Corp. (RNO-T) 1, 2, 4 WestJet Airlines Ltd.¹ (WJA-T) 9

1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12 months with respect to the subject company.

2. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has received compensation for investment banking services within the last 12 months with respect to the subject company.

3. TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to receive compensation for investment banking services within the next three months with respect to the subject company.

4. TD Securities Inc. or TD Securities (USA) LLC has provided investment banking services within the last 12 months with respect to the subject company.

5. A long position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.

6. A short position in the securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.

7. A long position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.

8. A short position in the derivative securities of the subject company is held by the research analyst, by a member of the research analyst’s household, or in an account over which the research analyst has discretion or control.

9. TD Securities Inc. and/or an affiliated company is a market maker, or is associated with the specialist that makes a market, in the securities of the subject company.

10. TD Securities Inc. and/or affiliated companies own 1% or more of the equity securities of the subject company. 11. A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or a research analyst involved in the

preparation of this report has, during the preceding 12 months, provided services to the subject company for remuneration. 12. Subordinate voting shares. 13. Restricted voting shares. 14. Non-voting shares. 15. Common/variable voting shares. 16. Limited voting shares. Additional Important Disclosures ~ TD Securities Inc. will be a participating dealer in the establishment of the Alpha Trading System along with other

investment dealers - CIBC World Markets, National Bank Financial, RBC Capital Markets, Canaccord Capital Corp., BMO Nesbitt Burns and Scotia Capital.

^ The Research Analyst responsible for coverage of this stock is related to David J. Steuart, a member of the Board of Directors of Tembec Inc.


─ Pierre H. Lessard, Executive Chairman of the Board of Metro Inc., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Nadir Mohamed, President and Chief Operating Officer of Rogers Communications Inc. is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Hugh J. Bolton, Director of Teck Resources Ltd., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ John M. Thompson, Director of Thomson Reuters Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Wendy K. Dobson, Director of TransCanada Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Henry H. Ketcham, Chairman of the Board, President & CEO of West Fraser Timber Co. Ltd., are members of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Hugh J. Bolton, Director of WestJet Airlines Ltd., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Brian Levitt and Carole S. Taylor, Directors of BCE Inc., are members of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Frank McKenna, a Director of Brookfield Asset Management Inc., is a Deputy Chair of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Brian Levitt, Director of Domtar Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Pierre H. Lessard, a Director of SNC-Lavalin Group Inc., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ William E. Bennett and Hugh J. Bolton, Directors of Capital Power Corp., are members of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Hugh J. Bolton, Director of Canadian National Railway Co., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ Helen K Sinclair, Director of Davis + Henderson Income Fund, is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank.

─ TD Securities Inc. acts as an agent on behalf of AGF Management Ltd. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of CI Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Great-West Lifeco Inc. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of IGM Financial Inc. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Industrial-Alliance Life Insurance Co. in the execution of securities

transactions. ─ TD Securities Inc. acts as an agent on behalf of Intact Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Manulife Financial Corp. in the execution of securities transactions. ─ TD Securities Inc. acts as an agent on behalf of Gluskin Sheff + Associates in the execution of securities transactions. TD

Securities Inc. has a prime brokerage arrangement with Gluskin Sheff + Associates. ─ TD Securities Inc. acts as an agent on behalf of Sprott Inc. in the execution of securities transactions. ─ TD Securities Inc. acted as Co-Financial Advisors to Yellow Media Inc in the definitive agreement to sell Trader

Corporation's automotive assets ("Trader Auto") to fund advised by Apax Partners. ─ TD Securities Inc acted as Financial Advisors to Sirius Canada Inc in the definitive agreement to combine XM Canada and

Sirius Canada Inc in an all-stock merger. ─ TD Securities Inc. acted as financial advisor to Berkshire Partners LLC and OMERS Private Equity Inc in the definitive

agreement to jointly acquire Husky International Ltd. and its subsidiaries ("Husky") from Onex Corporation and its affiliated funds.

Price Graphs For full disclosures, please visit our website at https://www.tdsresearch.com/equities/coverage.disclosure.action.


Research Ratings Action List BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next

12 months and it is a top pick in the Analyst’s sector. BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next

12 months. SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material

event risk associated with the investment that could result in significant loss. HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12

months. TENDER: Investors are advised to tender their shares to a specific offer for the company's securities or to

support a proposed combination reflecting our view that a superior offer is not forthcoming. REDUCE: The stock’s total return is expected to be negative over the next 12 months. Overall Risk Rating in order of increasing risk: Low (7.2% of coverage universe), Medium (33.8%), High (48.8%), Speculative (10.2%) Distribution of Research Ratings

^ Percentage of subject companies under each ratingcategory—BUY (covering Action List BUY, BUY andSpec. BUY ratings), HOLD and REDUCE (coveringTENDER and REDUCE ratings).

* Percentage of subject companies within each of thethree categories (BUY, HOLD and REDUCE) for whichTD Securities Inc. has provided investment bankingservices within the last 12 months.

Current as of June 1, 2011

Investment Banking Services Provided*

41%

55%

4%

0%10%20%30%40%50%60%70%80%

BUY HOLD REDUCE

Distribution of Research Ratings^

HOLD44%

REDUCE4%

BUY52%

Research Dissemination Policy TD Newcrest makes its research products available in electronic and/or printed formats and simultaneously distributes them to its institutional clients who are entitled to receive them. The Action Notes are distributed by email, and are available in PDFform on First Call, Bloomberg, Reuters, Capital IQ, FactSet and TheMarkets.com. Research Reports are distributed by email; they are also printed and distributed by courier to our entitled clients. PDFs of Reports are available on First Call, Bloomberg and Reuters. All research is available by password to entitled institutional clients at https://www.tdsresearch.com/equities. Quantitative Research Disclosure All views expressed are the opinions of Quantitative Research based on historical company fundamentals and market statistics. No guarantee of outcome is implied. Due to the quantitative and technical nature of this report, the issuers or securities recommended or discussed in the report are not continuously followed and opinions may change without notice. TDSI is under no obligation to inform you of such a change. As such, investors may not want to base their investment decision solely on this report. TD Securities Inc. may publish fundamental research on the securities of these issuers which expresses differing opinions. Clients should contact their TD Securities Inc. representative to request such material. The large cap quantitative model portfolio is created and disseminated by TD Newcrest, a division of TD Securities Inc. The portfolio is used as the basis for the TD Canadian Quantitative Research Portfolio Fund, managed by First Trust Advisors LP. The research analyst responsible for the quantitative model portfolio, and/or a member of the research analyst’s household, and/or an account over which the research analyst has discretion or control, holds a long position in the TD Canadian Quantitative Research Portfolio Fund.


Analyst Certification Each analyst of TD Securities Inc. whose name appears on page 1 of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report. Disclaimer This report is produced entirely by TD Securities Inc. Although the information contained in this report has been obtained from sources that TD Securities Inc. believes to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinions, estimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice. TD Securities Inc. will furnish upon request publicly available information on which this report is based. TD Securities (USA) LLC has accepted responsibility in the United States for the contents of this research. TD Securities Limited has accepted responsibility in Europe for the contents this report. Canadian clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Inc. Canadian retail investors are served by TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank. U.S. clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities (USA) LLC. European clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Limited. Insofar as the information on this report is issued in the U.K. and Europe, it has been issued with the prior approval of TD Securities Limited and only to persons falling within Articles 19 and 49 of the Financial Services & Markets Act 2000 (Financial Promotion) Order 2001, namely persons sufficiently expert to understand the risks involved. This report has been distributed in Hong Kong through The Toronto-Dominion Bank (Hong Kong Branch), which is regulated by the Hong Kong Monetary Authority. TD Securities Limited is providing financial services to wholesale clients in Australia in reliance on Class Order CO 03/1099. No recipient may pass on the information contained in this report to any other person without the prior written consent of TD Securities Inc. TD Newcrest is the trade name that TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited use to market their institutional equity services. TD Securities Inc., TD Securities (USA) LLC and TD Securities Limited are wholly owned subsidiaries of The Toronto-Dominion Bank. TD Securities Limited is authorised and regulated by the Financial Services Authority. Copyright 2011 by TD Securities. All rights reserved. Full disclosures for all companies covered by TD Newcrest can be viewed at https://www.tdsresearch.com/equities/disclosures by TD Newcrest’s institutional equity clients.

tdsi action list - june 1-11

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