Schizas’ Mailbag

Time to bail out on Chorus Aviation

Special to The Globe and Mail

An analyst warned investors to avoid Chorus Aviation stock as a result of a payment dispute between the Jazz Air parent and Air Canada. (Andrew Vaughan/THE CANADIAN PRESS/Andrew Vaughan/THE CANADIAN PRESS)

Hi, Lou

I need your help! About 10 days ago I bought 1,000 Chorus Aviation Inc. shares at $3.80 for my RRSP.

The main attraction in buying the shares was the high dividend it pays (15 per cent). I am retired, and am looking for yield. However, the stock just dropped 39 cents on an adverse arbitration decision.

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Please Lou, advise me if I should sell at this point and cut my losses, or hang on to the shares for the dividend. I read that the dividend could be cut by about 35 per cent.

Thanks,

Thakor

Hey Thakor,

Sorry for your pain. Unfortunately you may have been mesmerized by the yield and bought a stock with lots of hair on it.

What I recommend that you adopt as part of your evaluation process is to make use of the facilities available through the website stockchase.com. What the site provides is a quick survey of public comments that money managers have made about a stock. In the case of Chorus Aviation Inc. the opinions of professionals has been generally negative.

From there you want to conduct a sector analysis and see if you want to play in that sandbox. The airline sector has always been a tough place to make money and most of the players in the space have struggled since 2008. In addition you want to look at the business case for the company itself. On a micro level CHR.B has Air Canada as its dominant client and it was the arbitrator’s ruling in favour of Air Canada on a dispute between them that tanked your investment.

Also worth mentioning is the fact that the market was informed of the dispute in late 2011 which brings to mind an old saying. Never invest in a dispute! Finally you want to look to the charts to identify the trend, support, and resistance the stock is experiencing. An examination of the charts will provide greater insight as to a sell or hold decision.

The three-year chart depicts the big gap down that hit the shares once the news hit the wires that CHR.B had taken a hit in arbitration. Worth noting are the sell signals generated by the RSI and MACD in September. Also evident is the established resistance at $4.00 which would have informed traders to start looking for a pullback regardless of what surfaced in the news stream.

The six-month chart provides a close up of the early warnings generated by the MACD and RSI in September. The stock looks to be holding onto support on the 200-day moving average but we have yet to hear from the company exactly what they intend on doing with the dividend.

At this point I would advise that your first loss is usually your best loss. CHR.B is in a weak sector, with one huge client, and an dividend that is likely to get cut. Not the best reasons to hold.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it to lschizas@globeandmail.com.