Following recent Algo Engine buy signals, we’ve seen solid price performance in TCL, SYD & AMC.
At the time of the algo buy signal, we highlighted these stocks to members as preferred buying opportunities.
However, we now see the stocks as near full value. Yields have compressed relative to 12 month EPS growth and investors should look to take profit, or sell at the money covered call options.
Both SYD and TCL are core investor holdings where we’ve applied “buy-write” strategies to enhance the cash flow. A combination of the December dividend and the call option income is generating 10 – 12% annualised cash flow.
Over the last two weeks, yield sensitive names like SYD, TCL and GPT have all dropped over 10% from recent highs.
One of the main drivers has been the change in interest rate expectations from G-7 central bankers and the subsequent rise in short-term paper.
Moving forward, we see more likelihood of G-7 rates reverting lower within the year’s range and providing upside potential in the stocks above.
Other stocks we like on the basis of lower local rates are: AMC, WOW and MPL.
We see reasonable upside potential in the names and will employ the derivative overlay strategy (selling covered calls) to enhance the portfolios returns.
Transurban
Sydney Airport
General Property Trust
We continue to like the setup in CTX, WOW and IPL. We also feel that TCL and SYD are now approaching oversold levels.
Our Algo Engine has flagged a buy signal in TCL with the price trading at or near $11.60.
With a 10% underlying dividend growth supported by free cash flow, we feel TCL should trade back up into the $12.25 level, as bond yields retrace from their current short-term rally.
Over the last three weeks, shares in local infrastructure and property trusts have really taken a beating.
Some of the yield-sensitive names have lost between 5 and 10% as Australian interest rates in the 2yr to 5yr tenors have followed global interest rates higher.
One of the major aspects of the recent rise in rates has been the consensus amongst G-7 central bankers that the era of low rates and financial stimulus will be coming to an end.
It’s our base case that the market has gotten ahead of itself with the prospects of sustainable higher yields.
With global equity markets still at elevated levels, a material repricing, or “risk-off” period, in the market would increase the demand for “safe haven” government bonds, which would ease rates lower.
The specific stocks that we are following include GPT, TCL and SYD.
The ALGO engine triggered buy signals in these three names at yesterday’s close.
Given the sharp sell off that these names have seen over the last few weeks, we feel the upside potential is an reasonable trade.
GPT
TCL
SYD
Recent price action in the local ASX market suggests we’ve entered a period of heightened volatility and potential for downside risk. Since posting the high for-the-year at 5945.00, the index for Australian shares has dropped almost 4%.
Looking across the spectrum of ASX top 100 stocks, we have found several names which can offer defensive value in a broadly sideways to lower share market.
These include: IPL, MPL, WOW, CTX, QBE, SHL, SYD, TCL, AMC, and IAG.
We consider these stocks to have the potential for moderate capital growth and, combined with a buy/write strategy, will offer 10 to 12% cash flow on an annualized basis.
ASX: XJO Index
The current sell-off in TCL will soon offer a reasonable entry level.
With US yields remaining under pressure, we continue to like yield sensitive names. Especially, if we can pick them up at a discount following investors taking profit from the recent strong rally.
The chart below shows the value range to enter TCL.
With bond yields moving lower in the US, we’ve seen strong buying interest in domestic yield sensitive names.
The rally is nearing the peak and taking profit or selling tight covered calls is advised. History shows yields compressing below 4% will act as resistance for further share price advances.
The Algo Engine triggered a sell signal in Transurban (TCL) yesterday at $11.72.
The stock has rallied over $1.00 since last week’s announcement that tolls to pay for an upgrade of the Inner City By-Pass in Brisbane.
From a broader perspective, TCL has traded between the $12.65 high made in August, and the low of of $9.45 posted in early November.
The $11.72 level is a bit higher than the 50% retracment of of this range, but we see stiff chart resistance at $12.00. We see the first level of support in the $10.80 area.
We own TCL in client portfolios from lower levels and we’ve been bullish in recent weeks on TCL and utilities, in general. This view has been predicated on the faltering backdrop for the the global relation trade.
The rally in TCL will soon stall at near $12.00 and investors should sell call options into September, with a view towards maintaining exposure to the upcoming $0.25 dividend in June.
Chart-Transurban
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