The Stock
CAE Inc.
Yesterday's closing price
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$9.89
Trend
Airline stocks never inspire a large dose of investor faith - the highly competitive and regulated industry has a long history of delivering grief to shareholders - but periodically the sector sends out a relatively good vibe for the market. Judging by the recent performance of many North American airline stocks, investors have taken off on another crazy trip. The Claymore NYSE Arca Airlines ETF, a portfolio of global airline stocks, has been hitting new highs in weekly trading over the past month.
The uplifting sector story carries across the group. Although the stocks of AMR Corp. and US Airways Group are off in recent weeks, they join Continental Airlines,Alaska Air Group, and Southwest Airlines Co. in significant share price advances since last November. Delta Air Lines enjoyed a 15-per-cent rally off its trend line last week.
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Canadian carriers also have some air below their wings. WestJet Airlines has been Stock Trends Bullish since December and Air Canada made a significant share price breakout last week as both stocks traded on high volume.
The Trade
Never mind the carriers - look at bullish aerospace stocks like Boeing Co. and Bombardier Inc.
Boeing's shares are out-performing the broad market by 26 per cent in the first quarter - tops for Dow Industrial stocks.
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Investors leery of exposing too much to airline stocks directly should have a better ride with the stocks of companies feeding the carriers' aircraft fleet renewal cycle. CAE Inc. of Montreal fits into that category.
Demand for the company's flight simulator services and products stands to reflect the rosier picture of the airline industry.
CAE's stock has been Stock Trends Bullish for seven months but has been trading relatively flat for much of the period. However, shares climbed to a new 52-week high last week, trading above $10 for the first time since the stock collapsed below that level at the end of the third quarter of 2008.
Since late January shares have advanced above the trend line as the sector has started to shine. Investors can trade building price momentum as the stock's relative price performance attracts more trading activity.
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The Upside
Should the stock advance convincingly through the $10 resistance area shareholders will have technical support for a continued bullish move above $11. The sector move provides the direction here as aerospace stocks continue to plow through 52-week highs.
Shares of CAE at its peak in the summer of 2007 averaged around $14, a plateau supported by an average price-to-earnings ratio in the range of 30-times earnings during that bullish trend.
Continued economic improvement fuelling sector growth should allow for a modest expansion of the current multiple (now 15-times forward earnings), making a $12 share price objective reasonable.
The Downside
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Although the number of weekly transactions in CAE stock elevated with last week's healthy advance, unremarkable trading volume suggests a lack of substantial institutional support.
The $10 resistance level may prove tough to ascend. An immediate retreat below trend line at $9 would invite concern. Currently, the stock would turn Stock Trends Weak Bullish at $8.80, a 12-per-cent loss for this trade.