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Eye on Equities

A healthy year of gains seen for REITs Add to ...

A good number of real estate investment trusts and operating companies have awarded investors with tidy returns over the past 52 weeks - but after taking a fresh look at the sector, Desjardins Securities Inc. believes many are still undervalued.

Analyst Jeff Roberts is expecting several of these high-yielding vehicles to continue to rack up gains over the next year.

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"Demand for properties remains very strong, financing conditions are quite healthy and property fundamentals across Canada are improving," said Mr. Roberts. "Under these conditions, real estate investment trusts and real estate operating companies should generate healthy cash flow growth results in both 2011 and 2012."

Mr. Roberts believes that cap rates - the ratio between the net operating income produced by an asset and its capital cost - may decline slightly further but are likely to stabilize in the second half of this year.

And while he's fairly bullish overall on the Canadian real estate sector, he especially favours trusts and operating companies with significant exposure to Western Canada - namely Alberta. The sickly Calgary office market is beginning to improve, and the major Alberta apartment markets should outperform the rest of the country over the next few years, he maintains.

Upside: Mr. Roberts' top pick is Mainstreet Equity , a mid-market apartment owner with strong cash flow growth prospects that he contends is undervalued. His target price is $22.50.

He also has "buy" ratings on Melcor Developments , Allied Properties REIT , Boardwalk REIT , Calloway REIT , Cominar REIT , Dundee REIT , Homburg Canada REIT , Huntingdon REIT , H&R REIT , Killam Properties , Retrocom REIT and RioCan REIT .

The recent rally in shares of IBM has brought them to a "balanced risk/reward profile," said Canaccord Genuity analyst Eyal Ofir. The company is aiming to achieve earnings per share of $20 (U.S.) in 2015, and while the recent events in Japan shouldn't elongate that goal, it may make it more difficult for IBM to beat and raise its bottom line expectations over the next two to three quarters, he said. "IBM generates almost 11 per cent of revenue from Japan and, while impacts here could be short-lived, another element of uncertainty is the hardware group's supply chain," Mr. Ofir noted.

Downside: Canaccord downgraded IBM to "hold" from "buy" and maintained a $180 target price.

While Yellow Media Inc. may have some success in its transformation from a directory publisher to a broader, online-oriented marketing solutions company, print declines will approach double-digit rates by fiscal 2012 and more than offset online growth, warned Canaccord Genuity analyst Aravinda Galappatthige. "Moreover, if the print declines worsen - to the 15 to 20 per cent levels we are seeing in most international markets - YLO's earnings before interest, taxes, depreciation and amortization and free cash flow will be impacted significantly," he said. Mr. Galappatthige also wonders whether the dividend can be sustained in the long term, given his expectations of consistent declines in free cash flow over the next couple of years.

Downside: Canaccord initiated coverage with a "sell" rating a $4.45 (Canadian) target price.

Related: Yellow Media’s dividend under the microscope

Cogeco Cable Inc. reported strong fiscal second-quarter results and remains on track to hit its guidance for the year, noted CIBC World Markets Inc. analyst Robert Bek. Growth remains weak in Portugal and margins there continue to lag, but Mr. Bek believes that challenges in that market are already reflected in the stock price.

Upside: Mr. Bek, who rates the stock as a "sector outperformer," raised his price target by $1 to $46.

Related: Cogeco Cable profit, revenue rise

Aurizon Mines Ltd. , which operates the Casa Berardi underground mine in Quebec, released first-quarter gold production figures that were 12 per cent below guidance, as it was forced to mine lower-grade areas. The outlook for output for the year was tweaked lower and cash costs are now expected to be modestly higher, noted Wellington West Capital Markets Inc. analyst Paolo Lostritto.

Downside: Mr. Lostritto cut his price target by 40 cents to $8.

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