Transurban chart to take the scenic route

There’s a lot to like about Transurban (TCL), but not the way that has traded in the last few days. This begs the question that, despite all the pundits loving it, do we buy it at $12, or can we get it closer to $10? Imagine that, grabbing TCL when it is trading near $10 with a yield of over 5 per cent.

Most of the major broking houses believe TCL to have more upside from here. As recently as yesterday we saw Ord Minnett initiate coverage with a 12 month target of $13.50. It may well reach that but TCL is likely to take the scenic route first.

The recent results in August saw some fairly solid numbers from TCL. Earnings growth of 8 per cent, free cash flow up 15 per cent, and enough growth in the pipeline to keep yield-chasers happy. The elephant in the room of course is a prospect of rising bond yields, but the market seemed to be taking that in its stride, until last week. However, let’s have a look at the last few months. The stock tumbled during June, falling from nearly $13 to nearly $11. In the two months after that, we can see that TCL steadily increased in price. However, conviction was low. We know this because there was a noticeable lack of volume. Volume traded was trending down the whole time. When a stock falls dramatically and then struggles higher on low volume, we refer to this movement up as a rising flag. It is a corrective pattern against the preceding sell-off. Usually it is just a matter of time until it breaks down from this flag and resumes the downtrend. We can now see this happening with TCL. It was heavily sold off last week, and to be sure that it means something, volume jumped up (circled). Despite the lovely targets from the broking community, it looks like TCL is going to get cheaper first. Applying some technical analysis here, we can see possible targets in the low $10’s. We have clients looking to buy TCL for the yield. We also like the company, but our advice has been to wait for cheaper levels. The next dividend is at the end of December.

Any advice is general only. Fairmont Equities uniquely combines both fundamental and technical analysis. Visit our website and get our free newsletter. Join the thousands of investors that receive our analysis and educational articles every week.