UBS's formula for surviving the correction

WHAT ARE WE LOOKING FOR?

Stock picking is challenging at the best of times, and can be downright difficult at times like this. But the brokerage firms are there to help with stock suggestions. Today, we start a series of number crunchers examining some brokerage firms' lists of recommended stocks. We begin with the list from UBS Securities Canada Inc., compiled by strategist George Vasic.

CRITERIA FOR STOCK SELECTION

The UBS portfolio consists of 12 equally weighted large-capitalization stocks with representation from the major sectors of the S&P/TSX 60 index. The specific stock selections reflect UBS Canada's own top-down market themes and are drawn from among the firm's buy-rated stocks.

The portfolio has substantially outperformed the S&P/TSX 60 since its inception in early September, 2004.

The current list features four changes from last month.

WHAT HAS CHANGED

Mr. Vasic has boosted the portfolio's exposure to energy as the recent decline in energy stocks outpaced the drop in oil prices. He did that by adding EnCana Corp., which has more than 80-per-cent upside to UBS analyst Andrew Potter's target price. The portfolio had also been significantly underweight in materials, another sector that has struggled recently. Teck Cominco Ltd. was the addition in that sector.

Manulife Financial Corp. was removed from the portfolio as it has substantially outperformed the banks over the last year and now has less upside than the banks. The financials exposure is now entirely banks. The choices there are Bank of Nova Scotia, Royal Bank of Canada and Toronto-Dominion Bank.

Bombardier Inc. was added to the list in place of CAE Ltd. and Canadian National Railway Co., and Rogers Communications Inc. was dropped in favour of Research In Motion Ltd.

The current list also includes Canadian Tire Corp. Ltd., Goldcorp Inc., Suncor Energy Inc., Tim Hortons Inc. and TransCanada Corp.

WHAT DID WE FIND?

The portfolio is heavily weighted in dividend-paying issues. RIM is the only one that doesn't pay a dividend. Some of the dividend yields are fairly substantial. Scotiabank, for example, has a 4-per-cent yield.

Furthermore, most of the stocks have relatively modest price/earnings multiples. RIM, Goldcorp and Bombardier are the main exceptions. Those three have P/Es of greater than 25 times.

When it comes to the year-to-date performances, the picture is definitely mixed, with some - including Goldcorp, Teck and Bombardier - having fared very well, while a few others - most notably Canadian Tire, Tim Hortons and two of the banks - having declined significantly.

SOURCE: GLOBE INVESTOR, UBS