The Stock: Canadian Helicopters Income Fund . Recent price: $16.50
Trend: With both the materials and energy sector logging strong gains in the final quarter of 2010, investors looking for more bounty in the new year should be surveying related sectors for opportunities. One possibility is transportation stocks.
A signal of improving economic vitality is the relative strength in recent weeks of stocks in transportation 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 , Wabash National Corp. , Greenbrier Companies Inc. and Titan International Inc. - 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, through its operating business as 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, 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. Trading in the units last week indicate 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 now 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) trade at 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 bullish trend trade.
Skot Kortje