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Cash in on De La Rue’s reversal

Michael Taylor explains how he plans to add to exposure to the banknote maker’s turnaround plans
August 20, 2020

Despite there being so many examples of share prices collapsing to almost nothing, I am still surprised at the amount of times I hear crazy things from the mouths of others. We’ve all been naïve at points and I certainly didn’t grow up teething on ticker tape, but one question I was asked this week was: “How can I lose trading CFDs if I just don’t sell and wait for it to go back up again?”

I tried to explain that you can lose on any stock and not just CFDs regardless of whether you sell or not. If the market is showing you a loss, then it is – plain and simple – a loss that you have not crystallised yet. And just because the loss isn’t realised, does not mean any less that it is not a real loss. If it affects your net worth, then it’s real. If you’ve just given back £10,000 needlessly because it was ‘house money’, then you’ve just waved goodbye to an all-inclusive five-star holiday (although one suspects those may be going cheap now).

The ‘house money’ fallacy continues to trip up traders across all markets. The litmus test is this: if you closed the position and banked the gain by mistake, would you be so willing to immediately open the trade up again? Of course not, because the risk/reward would have moved significantly against you. Many traders believe that risk is constant. It isn’t. If we’ve set stops and set targets, then the further the price moves towards the target and away from the stop then the risk is moving against us (although we are profiting from this move). Think about it: the best entry is the one where the odds are in our favour. For example, a breakout trade as it breaks out of resistance – and not chasing it a few points higher. By thinking about your trades in this way, hopefully you will avoid the house money fallacy which sees millions of pounds of traders’ cash go up in smoke every year.

Shareholders in De La Rue (DLAR) have seen the value of their shares go up in smoke too. It’s been a serial gapper of what I like to call a staircase stock, where the share price gaps down repeatedly to form stairs. If you ever see a chart like in Chart 1 (I’ve highlighted the gap downs with arrows) then it’s possibly best to get out until there is a reason to go long. It rarely pays to fight the price, and in this case, you can preserve your powder and live to fight another day. Shares can and do go to zero, and De La Rue was not far off that considering it once traded around 1,100p. At its low this year of 40p that marked a 96 percent drawdown.

Notice how in Chart 1 the price tests and fails to break the black line in the chart, the 50-day exponential moving average (EMA) from June 2019. This marks the moving average as resistance, and it was only recently that the stock broke through that resistance in stunning fashion in June 2020.

On 1 June 2020, the company announced a trading update, which reported to the market that the guidance given to the market in 31 March 2020 remained unchanged and that the company had won some significant contracts. I read this update and assumed that, because expectations were unchanged, then the stock had no reason to move. That is, after all, usually the case. Not so here. The stock gapped up, and rocketed several hundred per cent on the day. Any shorters were well and truly cremated in what has been my favourite short squeeze of 2020 so far.

After such a meteoric rise, which can be seen in Chart 2, it’s only reasonable to expect a reversion to the mean, and while there was significant pullback, if we look in the weeks after the trading update the stock has put in a higher low and is heading towards the resistance at 160p.

The company has also taken advantage of the price strength to go to the market and boost its coffers. This brought in gross proceeds of £100m – half through a placing and half through an open offer. This was completed at 110p, and the price currently trades at a nice premium to this.

The net proceeds of this are to be used for the company’s turnaround plan, and in the recent annual meeting statement the company said it is now trading at “100% of its available full-year banknote printing capacity for Financial Year 2020/21”.

The stock is now trading above all its moving averages, and the 200-day EMA (pink line) is now looking relatively flat. I currently hold a position in De La Rue and I have a stop limit order set at 160p to buy on the break of the resistance. The limit part of my order is at 162p, and so by using this type of order I am able to automate the trade. Once the price hits 160p, the stop order kicks in and activates the buy order, and the limit part of the order means that I won’t pay higher than 162p. Hopefully, I can pick up stock at 160p or close to it if the stock gets there.

These types of orders are very helpful for traders who can’t sit at the screens all day, or traders who want to automate some decisions. I use IG Index’s L2 Dealer to do this, and it is available on all SETS traded stocks.

This is the advantage of trading SETS traded stocks; we have greater order versatility and liquidity to play with. It’s never any fun trying to take a position in a market maker stock, and, as I’m sure you’re aware, market makers like to move prices around at their discretion. With SETS, we are the market maker.