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Transit sign photographed for Toronto Weekend article, Toronto March 21 2013. (Fernando Morales/The Globe and Mail)
Transit sign photographed for Toronto Weekend article, Toronto March 21 2013. (Fernando Morales/The Globe and Mail)

Schizas’ Mailbag

Oversold energy trust units aren’t a buy just yet Add to ...

Hey Lou;

I have long been a fan of REITs and have recently added to my holding as the sector seems to be bouncing back from last year’s sell-off.

I wonder if you could tell me what you think of two I am considering purchasing. Argent Energy Trust has great yield and seems poised to recover from a miss last year. HealthLease Plan looks like it is well positioned by investing in a growing market – upper end senior Housing.

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In addition – with the recent sell-off in the loonie, both do business in the U.S. and report in Canada so I was thinking that may also give them a bounce.

Please tell me what you think.

Thanks,

Dan

Hey Dan,

Thanks for the assignment.

I will examine the case for Argent Energy Trust today and save HealthLease Plan for Friday. I can understand your attraction to the income trust structure. In this miserable yield environment we find ourselves taking on a greater risk as we look for better returns. The subject of Argent Energy Trust came up yesterday when I was talking with my pal Mauro, at Art Lee Men’s Wear Limited in Oakville, who like yourself is looking for good things from the units. With a yield on distributions of 14.56 per cent I can see what has put the units on your radar.

A probe of the charts will begin the due diligence process and help identify if the units are all you hope they are.

The two-year chart provides a text book example of what can happen when an organization announces a failure to meet expectations. The sell-off that started in October of 2013 was in reaction to the trust failing to meet its production forecast for the third quarter because of a fire at a facility and drilling a duster. The patterns that are worth noting are the breach of support at $10.00 and a death cross that formed in concert with the announcement on operations. From the chart I can deduce that you are bottom fishing these units hoping for a trend reversal.

The six-month chart provides visual evidence that there were many opportunities to preserve capital as the units sold off. The decline to the 52– week low of $7.16 didn’t happen in one mad frenzy. On the contrary, there were weeks of grinding to the bottom. Now that we are retesting the lows the question you are asking is: is now a good time to buy?

The RSI is indicating is that the units are oversold which can serve as a beacon to attract buyers. The MACD is starting to turn higher but is not quite in a position to signal a buy.

The best way to proceed with Argent is to put it on your watch list and monitor its progress. The reason for the caution is that the units are still trading below the 50-day moving average and the downtrend line.

Finally, the units seem to be building a base near $7.20 but we want to confirm this bottom, not find a new one with fresh capital.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

 

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