I don’t know why people like shopping. I imagine they do so because it’s a leisurely activity and one can stroll around at ease, browsing from shop to shop. But if many of those shops are closed, and you must now wear a mask, where is the fun in that? Crowded supermarkets and a run on food back in March have encouraged people who would never ever shop online to now do so effortlessly – and they wonder why they didn’t do it years ago. But with change comes opportunity. Just as the Black Death spurred on economic change due to a decrease in available workforce, so too has Covid-19 switched up the playing field for many industries, not least retail.
Take AO World (AO.), for example. Many people were quick to point out that the online electricals retailer did not mention profit in its recent trading update. They are right – it didn’t – but much smarter people than I am continue to fall into the trap of believing the market is efficient. That’s the thing with profits. They only matter to those who care about them. If you don’t care about profit, then you are free to see what truly matters: the share price. I suspect AO’s share price (and for disclosure purposes I am long) is rising not because it is now profitable, but because there has been a tectonic shift in the retail environment.
One company that has fallen out of favour with investors is luxury clothing retail company Ted Baker (TED). For years the company enjoyed stock market success, achieving highs of over 3,600p in 2014. It’s unlikely that it will be seeing those highs again any time soon. It now trades below 100p, and has seen significant dilution. Like many companies strapped for cash, Ted Baker announced a placing and also included an open offer. This came alongside the company’s financial results and detailed strategy and transformation plan.
This was done at 75p per share, and, to surely nobody’s surprise, this was fully subscribed, given the stock price at the open was 130p. The price actually rose, and I managed to get several short scalps away, and a swing trade scalp. Naturally, I did my best to get in on the placing at 75p so I could close out my short position for a healthy profit, but (sadly) there was no room at the inn. I imagine that those with a much bigger bankroll and institutions grabbed this lucrative trade. Given that nobody has ever gone down for insider trading during my trading career, I would not be surprised if people traded on this information. People tell friends and slip them backhanders, or they can even set up companies in other countries where the identities of directors and shareholders are not publicly available. It is a sad but true part of the market, and one has to accept it.
In Chart 1, we can see the intraday chart of Ted Baker.
The stock came out of auction and dropped 10p, only to rebound and rally through the opening price. I opened a short here, with the expectation that we would see selling pressure due to those who were in the placing forward selling and banking profit. Forward selling, as I’ve explained before, is the act of selling stock one doesn’t own before settling. It’s important to understand this because although it is not illegal, it can have potentially disastrous consequences for the forward seller. If the stock never settles – as in the placing is voted down at the general meeting – then all of a sudden those who sold stock in the hopes of a quick profit have sold stock they don’t own and now have to buy back. They are net short, and are not able to net off that short position with the settled stock they expected to receive. This can cause spikes in share prices if many are caught offside. However, the chances of this placing being voted down was (at least in my opinion) very slim. Referring back to Chart 1, the stock offered short traders another bite at the cherry as it rose to around the 145p level, which was the intraday high. Notice also that the 200-day exponential moving average (EMA, pink line) provided resistance here, too. The stock remained well above the placing price, before falling over the next few days. My buy orders on the book were filled above the 100p area (I had thought this big round number would provide resistance), only for the stock to carry on falling to as low as 61p.
Moving onto Chart 2, and we can see the stock price has changed dramatically.
Looking towards the middle of August, we can see an increase of volume on an up day. This suggested that we would see a breakout of the resistance zone, which we saw the following day. However, there was little volume behind the move, and so the price retraced and consolidated. I made a note of this breakout area, and took a long position at 93p. The price quickly ran up to 113p. As the price had made a significant move, I opted to bank half of my position and use a stop loss. This has taken me out of the position for now, but the trend appears to be upwards. I intend to go long again on a break of the recent closing high at 101p.
Ted Baker may or may not be embarking on a turnaround. But for as long as there is short-term volatility in the stock, traders should keep it on their radars.
- Michael has released his UK Online Stock Trading Course sharing his knowledge and how he trades the stock market. Investors Chronicle readers can take advantage of an introductory offer by visiting www.shiftingshares.com/online-stock-trading-course
- Twitter: @shiftingshares
- New subscribers to SharePad can claim a free month of data with the code: Michael
