Weekend Rebel Review Feb 17th, 2024

Valentine returns a bit of love to the market.

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

Someone asked me to do a bit about bowls at Mello when I get a chance so this week I duly oblige with a bowly special.

I was very much a sceptic of charts when in my early investing days and still am to a great degree, I can’t be doing with Fibonnaci levels even if I am into painting, or Elliott Waves ( is it just me that thought an Elliott Wave was a perm from a camp hairdresser? ).  I do think charts show you direction and changes in direction though.  They also show sentiment and changes in sentiment too imo.

I stumbled across what I call a bowl in the financial crisis end in 2008-9.  A lot of people used to bang on about cup and handles but there seemed to be few mention much about a ‘bowl’ shape form on a chart.  I was watching lots of charts at the time, as the market was tanking faster and deeper than we had ever seen, in fact far deeper than the 87 Black Monday Crash, even though 87 was much faster and uncontrolled.  The first real bowl I paid attention to was Rightmove.

Just look at that chart above from March 06 through to May 09.  Perhaps it’s because I used to be a graphic designer and I also am reasonably good at art but I find visual images really quite telling, more telling than I often find the written word being a sufferer of dyslexia.  Look at the whole of the chart, it is just a series of spikes up and spikes down until you get to the far right and something changes.  A lot of the volatility in the spikes disappears and a pretty smooth curve forms unlike anything in the chart in the past 5 years or more. It is almost a perfect curve over several months.

Here is the longer term chart from that bowl, the circle is the same point on both charts:

The bowl now looks unidentifiable on the longer term char but they went on to 40 bag and luckily I bought that bowl and just held just for a few years, a very event-free journey to a multi-bagger.  I have watched for bowls ever since and there’s several things I have found.  Firstly, the longer time these bowls take to form, and the more perfectly round they are, then the more reliable they seem to be.  None of these bowls are guaranteed, if they were then investing would be a doddle, we’d all just look for bowls and just buy them.  But bowls are definitely the most reliable of charts in my opinion, they have the best success rate of all charts if you can buy them and catch the point at which they start turning up.  I have spotted lots of these charts. The longer term more perfect curves are the most reliable.  Short term bowls are best for short term movements and have less long term reliability, but good for short term trading.

So having ‘dissed’ Fibonacci and Elliott Waves as voodoo stuff then why isn’t a bowl just fluke or coincidence and why should it be an indicator of a reversal of a stock falling?  I have done a lot of thinking about this and I believe when you see a chart it is telling you a story. When you see a line of spikes or ‘saw-teeth’, traveling in one direction, you are basically witnessing trading mainly.  You are seeing investors and traders buying the dip and selling the spikes in one general direction.  If sentiment is positive the chart is moving up in a series of saw-teeth. When the chart is moving down it’s a series of trading on negative sentiment.  When you see a bowl form, there is a fundamental change in sentiment.  As traders are selling there seems to be more investors buying the stock to hold for whatever reason.  At first you notice the spikes down start to lose their size and volatility and across a period those buying to hold are increasing, and those trading or lightening their holdings are drying up to a large degree.  However, there is rarely news in the market to make you understand why this is happening so it is natural not to have faith in just a chart and no news.  But I honestly think there is news escaping or leaking. Something changes in a business, they may have a new board, they may have been approached in a bid and despite not wanting to reveal things to the public too soon, it is officially kept quite. This might be for good reason or bad but whatever, news also starts to leak. If it’s good news, humans are humans – directors may tell their closest buddies that things are good and it gradually leaks. While the stock doesn’t rally they don’t need to say much but as soon as it starts rising for a change then directors feel they need to often say something in my opinion. This is why you often get the good news after the bowl takes hold.  That’s my theory anyway, so why do some bowls not play out and disappoint?  I don’t know the answer for sure but I suspect sometimes big money decides to invest in a co in such a weight and way that they can cause a bowl perhaps, but their faith on their own might not be justified and no good news comes out. A deal could also fall through that the public doesn’t get to hear about but it may cause those in the know to sell if it does perhaps. Sometimes a bowl may just form randomly.   I don’t know the answer.  All I can say is if I’m looking at a share and the chat has a bowl, I have found it a great long term investment indicator if the chart is over several months and it’s very circular in form.  If it’s more short term or rather scruffy for a curve it will be less reliable but may be a good short term trade. 

On highs, these charts also work too, but in reverse.  Rolling tops as they get called (the reverse of a bowl or a bow upturned) are often very good indicators of a stock losing momentum and reversing, perhaps due to bad news leaking or some other factor. It’s amazing how often these play out too.

A bowl is definitely one of my ‘star’ factors in finding the best recovery plays and I’ve often bought them even when the public news was poor for the company. In fact if the news in the public domain is poor but the chart is making a bowl, I find that even more enticing.  I would trust the bowl on a chart above the news in the public domain.  The more you watch these bowls the more confident you become, the more you know which ones to chase and which to ignore.  You start to ‘get your eye in’. I’ve never managed to get this right completely, but I would say that a 3/1 win ratio seems to be what I get which is great odds imo. That’s my basic thinking behind bowls and I firmly believe they help reduce your risk having one on your side. I’ve included a couple on bowl charts in holdings news below but I expect to see more interesting ones forming as the market firms hopefully.

So onto the Macro stuff: it has all been a bit market moving.  US inflation data was stronger than expected, two disappointing months in a row.  This hit the S&P hard, falling nearly 100 points on Tues before bouncing 30 points at the close.  Rallies into the close are good signs, they show investors buying into a fall for the next day.  The S&P lost 1.3%. Bizarrely, the FTSE250 lost 1.4% in sentiment but on Weds the inflation data was better than expected here.  The 250 gained 0.85% so never even made up the fall over the US inflation number, never mind making no gains to price in our inflation beating numbers – this has been the story of the UK stockmarket.  When you get the grovelling apology from your fund manager when they tell you about their abysmal performance looking after your pension or savings, remember it’s them sitting on cash and not investing in the UK small to mid caps that meant they missed the likes of MKS.

The PPI numbers are interesting because these are leading numbers towards CPI going forward and if they are weak, CPI should become weaker. In contrast with much weaker numbers, the US PPI numbers on Friday were firmer than expected - little surprise with their steaming growth. My bet is a rate cut here before the US now, if the Bank of England have any sense at all.

Thursday was GDP data and with a miss on the numbers the UK officially hit a recession in late 2023.  As a bull, my take-away from that was that I’ve been holding some great stocks that performed well through a recession so a market improvement from here, which looks likely, can only be good news. Interest rates are even more likely to fall too. The positive stand out in the numbers was the manufacturing and industrial numbers coming in much better than the previous month and better than expected. The recent trend seems firmly up which I expect is in part, companies bringing production back to the UK from China. While the S&P has carried on it’s rally, even though it has had a bit of a pull back, here we have just drifted sideways to down. Friday saw Retail Sales data up 3.4% compared to the 1.5% rise expected.  This reversed the 3.4% fall for December.  That was pleasing to see and hopefully 2024 has started off in a much more positive note. What you have to keep in mind though is through this dreadful market, many stocks have still done extremely well, multi-bagging in fact.  In that sort of market you just have to be a good stock picker, those that aren’t, that just traded news or just followed an index and bought anything when sentiment was good, have probably taken a beating.  They have been selling anything because they just trade momentum, which means they sell literally anything, often great value.  I said a month or two back that there will be lots of stocks reporting and rallying 20-30% pretty immediately, I believe that even more.

And so onto stocks and as it’s February there’s few reporting at the moment, the big reporting starts in March.  To illustrate my point about big bounces coming on updates, Bloomsbury Publishing BMY posted a trading update on Wednesday and said revenues and profits would be significantly ahead of forecasts. I pointed them out on Twitter shortly after the results announcement so I hope a few caught the tweet. The shares spiked up near 15% immediately on the day. I’ve long watched BMY myself on Weds and added on Thursday.  It was the darling at the back end of the Millenium on the back of having J.K Rowling as a signed up author and writer of the Harry Potter series. The demand was so high from the fact that not were they just selling the books but every new film that was made stimulated more book sales an d back-catalogues sales often 8-10 book boxed sets, giving it a double whammy. The company said that -

“The Consumer division has delivered exceptional growth driven in part by the publication on 30th January of Sarah J. Maas novel House of Flame and Shadow which reached Number 1 in the US, UK, Australia and many markets around the world.”

The key thing that happens when people like Sarah J Maas has a big hit like this (she has been a best seller for her recent book on Amazon across the world) is people read the book then by the back catalogue of boxed sets in many instances.  As all the work has been done on these and there are no new costs, so margins rise – operational gearing basically. Originally forecast to generate revenue of £291.4 million and a profit of £37.2 million, the updated figures are now at £331 million in revenue and £47.5 million in profit, reflecting an improved margin from 12.8% to 14.3%,  the eps for this year has jumped from  35.8p to 45.8p or around 28%

More exciting is they seem to be talking of a strong year ahead and with the higher cash generation they will be looking to make acquisitions and boost the divi, having already rebalanced the divi this year.  This is the past years earnings growth

+12.1% +6.74% +13.6% +18.0% +31.5% +14.2% +82.2%.

Uninterrupted earnings growth over 6 years of 25% p.a. compound.  On a current PE of 11.3 and a yield of around 2.5% and net cash of £45m that’s a genuine Slater 5 year+ PEG of around 0.44.

They have actually done 32p eps in H2.  If they could achieve that in H1 and H2 next year that would be 64p eps.  Should command a PE of 15 or more for this reliable earnings growth imo, that would  be 960p a share.  I’m not saying they will do that but it helps to see what the valuation could and should be in a slightly more positive atmosphere. The trading update came 2 weeks before year end and as Sarah J Maars made such a boost to the end of the year they may still be more juice in the last fortnight to add ro the numbers imo.

Way too cheap in my book so I bought a decent stake on Wednesday and added on Thursday.

The chart is the biggest, longest bowl I have ever come across.

Worth reading the FT and the Book Tok Comment – Investec saying the stock is fundamentally undervalued. The whole Book Tok thing is stimulating people to buy the latest great hit and then they buy the back catalogue.

https://www.ft.com/content/76801c06-0625-4d96-9f75-17709303c51f

Results in May.  I’m not an analyst so do your own research – I’ve already bought and I’m talking my own book and biased obviously.

That was the only long term buying I did this week. Aside from a small buy in DOCS and a few other little trades.  Most of the action was in stocks I hold that have had a pretty good week.  Rolls Royce (Roy’s Rolls for Corrie fans) tested the recent highs.  With Airbus having great sales and the usual rumours of stuff in the background, the results are due next week on Thurs 22^nd, it’s nice to see the shares in demand.  I’m still holding all of mine and with the shrinking debt, rising free cash-flow, a return to investment grade from the rating agencies and a return to paying a divi, all on the cards, they seem to be the cheapest in their sector for what is true class imo. They don’t look cheap on a PE basis but the future cash generation seems to be greatly undervalued.  If the EPS starts getting raised meaningfully too and debt keeps falling at a pace it could be another exciting year for RR. imo.  The real issue for me is these large co’s need far more research and understanding and it’s the brokers that get the analyst notes, not the private investors.  To a great extent you have to follow what the City says on that basis, unlike being ahead of them in the small caps where stocks are under researched. There’s a nice little recent curve up forming on the chart too.

Ashtead Technology hit new  highs on Friday on big buying, after it entered the MSCI United Kingdom Global Small Cap Index.  This Morgan Stanly Index can have some big influences on share prices. For a co growing earnings at 100% p.a. over 3 years they still look very cheap on a PEG imo  Interestingly it has made a lovely little curve up recently. This is a thing I like to see short term, it indicates strong short term buying momentum, in a miniature way to a big long term bowl, just like RR. above.

That has been most of the action this week for me.  Quite a few interesting moves for bowls this week with LIO breaking through resistance, KWS and CMC continuing their firmness too.  #LIO has been on heavy volume the past two days which has caught my eye. A geared recovery play.

As it’s February there isn’t a lot going on (apart from pancakes). There is always this sort of hiatus between the Jan trading updates and all the results that come out in March and April. I expect a fairly quiet week ahead (RR. excepted) then the real fun when all the results start coming out in March.

Have a good weekend and enjoy this early warmth - flowers bursting into bloom, butterflies making a show and birds starting to nest - we are a moth ahead of the norm imo. Two years ago we were behind the norm, it all evens out. Enjoy it, don’t let the global warming crowd make you fell guilty imo.

Rebel