Many converted trusts strive to remain attractive to income investors, but they also garner new attention from investors more interested in capital gains.
The Stock: Canadian Helicopters Income Fund (CHL.UN-T). Recent price $16.50
The Trend
With both the materials and energy sectors logging strong
gains in the final quarter of 2010, investors looking for more bounty in
the new year should be surveying related areas for opportunities. One
possibility is transportation stocks.
Improving economic vitality has been reflected in the relative strength
in recent weeks of shares in transportation firms and transport
equipment makers. The Dow Jones Transport index has been outperforming
the broad U.S. market.
North American railway and trucking stocks remain in solid bullish
trends, while transportation equipment stocks like Navistar
International (NAV-N), Wabash National (WNC-N), Greenbrier (GBX-N) and
Titan International (TWI-N) are also outpacing the broad stock market.
Airline and air services stocks have generated price momentum this
quarter, too.
The Trade
Canadian Helicopters Income Fund, which operates Canada's
largest helicopter transportation services company, is a deserving play
on the transport sector.
The company serves the resource sector and governments, as well as
emergency and military operations, while its training schools and
maintenance services provide additional revenue streams. Its military
contracts have helped the company weather the downturn ushered in by the
2008 market collapse and returned the units to a Stock Trends bullish
category at the beginning of this year.
More recently, the units' strong performance indicates that investors
are revaluing Canadian Helicopter for an impending reorganization. With
the Jan. 1, 2011, tax changes for income trusts fast approaching,
business income trusts are lined up at the conversion table. Last week
Canada Helicopters formally announced that it was joining the crowd and
converting to a corporate structure at year end.
Many converted trusts strive to remain attractive to income investors,
but they also garner new attention from investors more interested in
capital gains. Last week's action indicates that the market now sees
Canadian Helicopter as a stock with some upside. Units traded heavily
and are now 12 per cent above their opening price at the beginning of
December. Investors are anticipating continued price momentum as this
investment transforms.
The Upside
The change in corporate structure will shift the trading
multiples of Canadian Helicopter from its previous range as an
investment trust.
The unit price is now above $16 after clearing resistance at the spring
peak and should establish new highs in an improving economy.
The unit yield on distributions is 6.7 per cent. Because of the
corporate conversion, shareholders of the reorganized Canadian
Helicopters Group Inc. will be expecting trimmed yields and higher
price-to-earnings multiples ahead.
Where the stock peaks in the current bullish trend will reflect the new
balance between income investors and those keying in on the company's
growth prospects.
The firm now trades for almost eight times earnings. The stocks of
comparable U.S. air services fleet operators such as Bristow Group
(BRS-N) and PHI Inc. (PHIIK-Q) change hands for about 12 times forward
earnings.
The Downside
The $16 level is a likely short-term support area, but a
drop below $15 would be a reasonable sell trigger for this trade on a
bullish trend.
I have had the good fortune to be reasonably successful and enjoy the investment process. Your process would be recommended for both experts and those who are new to investing.
