In our trading and investing efforts, we try to invest with the underlying trend as much as possible. Trend following is one of the core aspects of technical analysis. Trend followers believe that once a long-term confirmed trend is in motion, the odds are more than 50/50 that the trend will continue.
Many value investors have found out the above to their detriment. Many cheap companies, for example, many times take far more time than originally envisaged to reverse. This is the problem with trading and investing against the underlying trend and why value investing always needs to be a serious long-term endeavour.
Speaking of long-term trends, we like the look of Lancaster Colony Corporation (NASDAQ:LANC) at present. If we look at the monthly chart below, we can see that although shares are well down from their 2019 peak, both the 50- and 200-month moving averages continue to trend upwards. Suffice it to say, the long-term trend remains bullish.
Opportunity may be brewing as price has not been this close to the 50-month average for quite some time. Therefore, let's see if we can decipher whether Lancaster Colony Corporation is just going through another correction or if something fundamentally has changed at the firm.
First of all, if we look at the daily chart, we can see that volume in 2019 has been bullish to say the least. Shares topped out in Lancaster in December of 2019 and have been making lower lows every since. The daily trend is most definitely down. However, buying volume has been trending in the opposite direction to price. We use volume as a predictor of where price will go which is why we cannot see these diverging trends continue. We believe that sooner rather than later, that robust buying volume has to change the trend of how shares are trading.
Obviously, many investors are invested in this stock for the dividend. Lancaster has now grown its dividend consecutively by 56 years which is an impressive feat. Currently, the yield is just under 2% and management continues to grow the payout by high single digit percentages. We see no issue at present with respect to the viability of the dividend as the payout ratio from a free cash flow perspective currently comes in at 55%. Moreover, it is good to see that the dividend is not being financed by debt as shareholder equity continues to increase on the balance sheet. Many times, the market can sniff out a dividend freeze or cut which would obviously have ramifications for the share price. Lancaster's numbers and trends though say nothing of the sort here.
Although Lancaster is trading under $135 at present, we would have no interest in trading the stock to the upside until we can get a clean break above that down-cycle trend-line (close to the $150 per share mark). As mentioned earlier, the daily trend is most definitely down as we can see from the direction of the 50- and 200-day moving averages. Followers of our work will know that we like to place the odds in our favor as much as possible even if this means we have to give up some profit potential. A clean breach of that trend-line to the upside would mean a change of the daily trend which is what we would be looking for.
To sum up, there is nothing to suggest that any technical damage has been done to Lancaster. Yes, the daily trend is down, but the long-term trend is most definitely up. We believe the long-term trend will win out here which is why we intend to trade Lancaster to the upside when we get our buying signal.
Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setup's through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification which is key. We started with $100k. The portfolio will not stop until it reaches $1 million
This article was written by
My name is Jack Foley and I primarily write and research investment commentary as well as trade the markets. I'm Irish but live in Madrid, Spain with my beautiful wife and 2 children. I believe to be successful at this game, one has to have real passion for the markets and be constantly reading and researching material. From fundamentals analysis to technical analysis, options or futures, income or capital gain, long term trading or day trading, there is something for everyone in the markets depending on one's respective goals. "Starting with the end in mind" is a great mindset to start your investment career with respect to ascertaining exactly what you want to get out of the markets. Write down what you want and how quickly you want it. Therefore depending on the capital you are starting out with, you will then know what levels of risk you need to take. Whatever doubt or query you may have, I'm here to help. Shoot me an email in the contact tab and I'll come back to you as soon as possible
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.