THE STOCK: CML Healthcare Income Fund
RECENT PRICE: $10.68
THE TREND
When market sentiment takes a bearish turn, investors tend to gravitate toward defensive sectors looking for relative price performance during an uncertain economic outlook. Health care stocks are a key outlet pass for money managers when the market shows weakness. Not surprisingly, summer trading volume - which has been typically light in the broader market - has picked up in shares of some North American health care companies.
The recent performance of Canadian health care equities, however limited the number listed on the Toronto Stock Exchange, looks robust compared with other stumbling sectors. The S&P/TSX Health Care Index is outperforming the broad TSX market by 21 per cent in the past three months, and the index is up 38 per cent over the past year. The index constituents number only four, so the impressive long-term price trend of SXC Health Solutions and the rallying news of Biovail`s merger plans have polished the sector`s shine.
Not to be overlooked, though, is the performance of some health care stocks not represented in the index. Extendicare Real Estate Investment Trust and Chartwell Seniors Housing REIT are examples of medical and home care services trusts that are navigating the volatile, but slipping, stock market well. Biotech stocks are part of the health care sector, although outside of a few exceptions - including Biovail - their recent performance has typically been weak. The risk inherent in pharmaceutical stocks differs from the relatively stable income streams of the service providers in the health care group. Defensive investors covet that stability.
THE TRADE
Notable among the sector movers is CML Healthcare Income Fund, a leading provider of health care diagnostic and imaging services. The fund advanced 12 per cent late last week, rising above trend line resistance, after the fund released fiscal second-quarter results and its anticipated post-conversion dividend. Like all Canadian income trusts, CML Healthcare is preparing for the January, 2011, changes to income trust tax rates, and has announced its intentions to convert to a dividend-paying corporate structure.
The fund is now in a Stock Trends Weak Bearish category, a price trend condition that often anticipates further positive moves. A rising relative price performance this summer, relative to the broad TSX market, also separates the fund from the crowd. Given the bearish sentiment evident in the trend distribution of the stock market - most TSX stocks are now Stock Trends Bearish - investors can anticipate a generally positive money flow toward this fund ahead of its conversion late this year.
THE UPSIDE
Provided this investment does not surprise to the downside, a juicy 10-per-cent yield on current distributions should satisfy unitholders. However, this commentary is focused on the fund's unit price moves. Although expectations should be modest, investors should consider a move above $11 as very positive, signalling continued relative price strength through the end of the year.
THE DOWNSIDE
With the exception of a stable period in between October, 2009, and February of this year, the fund has been in a downward price trend since early 2008. A price drop below the 13-week moving average trend line to under $10 gives technical traders reason to re-evaluate this investment.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. For more, go to stocktrends.ca.
Skot Kortje