It’s September. That means lots of trading announcements and updates, results, and generally a good month for traders. Earnings season is great because stocks move a lot, and this provides opportunity.
Many market commentators have said this market has the feel of the dotcom era. When one looks at stocks such as Tesla US:TSLA) it can be difficult to disagree, but here in the UK we aren’t seeing the stratospheric rises that back in the day a mere mention of the internet could cause.
Yes, price/earnings (PE) ratios are higher. But so what? Even as a trader it is obvious that comparing PEs of yesteryear with PEs of today is apples and oranges. We have zero interest rates and they’re here to stay – for now at least. Therefore, it’s only normal that PEs are higher as the market factors in the low cost of capital.
That said, there is certainly a lot of hot money around. Furlough Freddy and Fiona have had ample time and ample cash with which they can play the markets. Cash inflows into certain markets and asset classes usually have buoyant effects, and so the small-caps and Aim have seen some big risers on what appears to be little more than hot air.
This is because of something known as positive feedback loops. One buys into a share because he or she believes the stock to be good. When the stock rises, this is seen as a validation of the opinion and so the owner further entrenches themselves into the mindset that they are right. And because the stock is rising, others assume that it must be a good stock and so they buy as well, and the same happens when the stock rises after they buy too.
The result is a self-fulfilling prophecy and is exactly how bubbles form. We don’t need to think back too long ago to the days of cryptocurrency, when people who had never shown an interest in trading or investment in their lives previously were now investing significant sums of their own cash into ‘initial coin offerings’, or ICOs.
The problem with bubbles is that they can take a while to pop. I believed Bitcoin to be a speculative mania when the price was at $4,000 in 2017. But that didn’t stop it achieving a high of $20,000. The lesson here, and what this means for traders right now, is that we should make hay while the going is good. And while the charts indicate to me that the bull is starting to stir and readying itself to charge again, be on guard if you’re in speculative and hyped-up junk for when that pop comes.
Cake Box (CBOX) is a company that, if you’d asked me if it would be a success on listing, I would have said absolutely not. And I would have been wrong, so far.
The company sells egg-free cakes, and it’s a sector that I would never invest in due to its high inventory turnover (if cakes don’t sell, what happens to them? Straight in the bin you’d think). And with nearly 2,000 stocks listed on the exchange there are surely better businesses to invest in. But as a trader the price action comes first, and I think it may be possible that Cake Box’s price could go on a run.
Looking at Chart 1, we can see the price action of Cake Box since its IPO. It came storming out of the blocks, and one could’ve thought that this was setting up to be a stage 2 uptrending stock. Unfortunately, the stock then trended sideways for around two years. This is why it is important to buy the point of the breakout and not pre-empt it. There is, first of all, no guarantee of a stock breaking out. Secondly, your capital could be tied up doing nothing for an extended period. It is best for traders to stay nimble and react to price events, rather than try to predict them.
We can see that due to coronavirus the stock dropped savagely, more than halving in March. Cake Box followed many a stock in doing so, but unlike many of its London-listed counterparts rallied strongly thereafter. Signs of strength should never be ignored, indicating clear demand for the stock despite it having a strong high-street presence which has seen business decimated.
Moving to Chart 2, and we can see this strength in greater detail. I’ve marked an arrow where the price gapped down, only to be met with significant buying demand. This continued for three days and marked the bottom of the stock during the coronavirus crash.
In recent months, the stock has been stable and built a base. Both volume and volatility fell, which indicates to me that any distressed sellers are now out of the stock and all shareholders now are comfortable with their holdings. This has the benefit that the stock may even be supported in any dips, because when supply is limited demand can increase.
I currently have a small long position in Cake Box which I took after the trading update, which showed strong underlying sales growth of 14.1 per cent in franchise stores, and a 74 per cent increase in online sales. The company also mentioned that it was seeing benefits from tying up with Uber Eats, Deliveroo, and Just Eat. As I mentioned in last week’s column, we are transitioning from the old world into the new, and companies that, like Cake Box, can adapt will enjoy the changing landscape more so than others.
If Cake Box can break the multi-year high of 190p then I intend to scale up my position. The price action is bullish, and the company has put out a good update. Just because I would never eat one of its products, doesn’t mean that I shouldn’t buy its shares.
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