Look for an opening when trusts convert

The Stock: Cargojet Income Fund (CJT.UN-T)

Recent price: $7.85

Trend: This will be an active trading year for many income trusts. As the January 1, 2011 date with the taxman steadily approaches the number of income trusts opting for conversion to a corporate structure is predictably swelling. Although these conversions do not fit within the typical domain of technical analysis, they do offer astute investors an opportunity to trade volatility as the changes shake out some income investors. Unit holders must grapple with these changes, deciding how a conversion affects their investment.

Investors can keep an eye on some of these announced conversions. Sometimes unit prices retreat enough to expose a potential opening for value and growth investors. Although this column does not provide insight into the fundamental valuation of the stocks and units profiled, it does attempt to highlight opportunities to trade a sector trend. Changes in the corporate structure of income trusts can generate price volatility - a fertile ground for technical trades.

The Trade: Cargojet Income Fund is the kind of Canadian success story everyone likes to hear about. A scrappy cargo airline servicing the vast geography of the country, Cargojet has triumphed where others have failed thanks to the entrepreneurial vision and management of its CEO and founder Ajay Virmani. Although the recession took its toll on Cargojet, with unitholders suffering a tough slide from the $14 level in early 2008 to a low of $2.11 at the market low, management has steered the company through tough times. The units re-emerged as Stock Trends Bullish last June, advancing from $3.80 to a peak of $10.48 at the beginning of this year as the Mississauga-based company returned to profitability.

The company recently announced its proposed change to a dividend paying corporation in plan of arrangement that would, upon unitholder approval, see a conversion to common shares by the end of the year. Since the announcement Cargojet's unit price has plummeted 20 per cent, well below trend line support at $9.38. Volume of trading has been especially high as some investors have been spurred into selling their positions. Beyond the expiring favourable tax treatment, uncertainty about future income flows is a consequence of the conversion and is always a concern with income trust investors. They need to know what distributions to expect. However, a new type of growth-focused investor may pick up the slack here.

The Upside: The unit's last period of high trading volume last November propelled the units off the 13-week moving average trend line, lifting the price from the $7.50 area to above $9.00. After the February 26th announcement of a pending conversion, the unit price dropped to a low of $7.50 before rebounding to trade between $7.80 and $8.50 last week. Technical traders should eye the support established after the initial drop favourably, looking for the units to recover the $9.40 level.

The Downside: The unit's price momentum started to deflate a month ago, well before the conversion announcement. The unit's move below trend is equal parts warning and opportunity. The next support level is at $7 - a drop below the 40-week moving average spells a bad short-term outcome for this trade.