Year: 2013

TDG, TransDigm Group Inc.

Hamilton

tdg feb 24 2013 btdg feb 24 2013 s

Once again, for pedagogical purposes, we repeat the discounted cash-flow formula. It is cash-flow / interest rate in its most simplistic form. That means that when interest rates, that is the discount rate, starts to approach zero the value of an income stream goes to infinity. Ergo this stock still has a lot of potential were it not that the company has a B+ rating, not bad for its size but zero is just not realistic. Still this company has embraced all the hot financial techniques to make the best use of the present. It has paid out special dividends to the tune of about $20 over the past year or so and has entered into loan arrangements that allow it to make those payments. It has very little organic growth but, so far at least, has made up for that by multiple acquisitions. It’s products are in the aerospace sector, most of which have a quasi monopoly position in their respective fields. They have it all covered except QE-forever.

      The count is not perfectly clear but it would seem to us that the risk of outstaying your welcome is now disproportionately larger than missing the boat on a few extra dollars. After a move from $20 to $150 the risk profile is now decidedly asymmetric in favour of the downside. Both the RSI and MACD are ringing warning bells. Whatever happens in the future, our only regret will be that we did not buy this company earlier.

    We suspect that the proper count would be something like 1-2, 1-2, 3, 4, 5, 4, 5. A drop at least to about $110 would be consistent with that.

BAD update

Hamilton

bad feb 24 2013bad feb 24 2013 s

We had $32 / $33 in mind as a top. Of course the stock went well above that but nevertheless we would sell. Bad is good, we know that much, but this is just a little too far for our liking even if a clear EW count does not present itself, at least not one that we can see. A sell.

CNR and CP update

Hamilton

CNR feb 23 2013cp feb 23 2013

We have no idea what the proper count should be for either of these stocks. Both have gone way beyond our wildest expectations, as has the entire transportation section with the exception of sea going companies that are not represented in the DJT index anyway. So a market-neutral approach may fit the bill. Market-neutral is a term hedge-funds have invented in order to make you believe that you cannot lose money on such a trade. It always works until after you have lost a bundle but this time is different. We propose selling 4 shares of CP and buying 5 shares of CNR. The ratio is not perfect but close enough. The reason is simple, CP is trading at a 42x p/e  against CNR at 16x.  We know these ratios are distorted by very short-term factors but there they are. CNR also yields more. Soon top management will have worked at both places and there will be no secrets left. The two should converge, an approach pioneered on a large scale by Long Term Capital, that should prove successful provided you have the stamina (which they did not). This has already happened. Next they should diverge, each going their separate way as these two companies should given their totally incomparable operations and geography.  Given the clear throw-over on the CNR chart this spread trade should blossom sooner than later. Good luck.

An alternative is simple shorting one or the other or both, we think CNR might do a little better (that is worse) than CP.