Reach (RCH) is the old Trinity Mirror, which was and still is a national and regional news publisher. It publishes its own content, as well as offering printing services to third parties. It also has a digital part of the business which offers job boards (one of these is called SecsintheCity) and digital marketing services (selling ads).
Many have compared it to Future (FUTR) but there are several key differences here. Firstly, Future has been able to grow and then monetise communities. The content that it produces has a much longer-term shelf life, with chief executive Zillah Byng-Thorne arguing that some of the best content is evergreen. The company is also operated in a way to monetise these brands and leverage the communities. Reach, on the other hand, sells ads, and produces a lot of clickbait – comparing the two businesses rather seems like comparing apples with oranges.
But before the pandemic struck Reach looked like it was turning itself around. The company had previously repeatedly missed expectations, has a large pension deficit, and a rather messy balance sheet stuffed with goodwill (cash that was cash but no longer is), but it seemed that the company had finally managed to eke out some growth and the price began to rise. However, the company was hit hard by Covid-19 as digital marketing spending fell off a cliff - the share price fell from over 180p to 50p.
In Chart 1, we can see what I call ‘the Grand Old Duke of York’ in play (all the way up to top of the hill and then marched back down again). This shows the importance of proper risk management and stop losses. There are no doubt people who have held all the way down and are waiting for the stock to rise before selling. That supply of stock will prevent the stock rising as quickly. This is why I believe it is better for a stock to have little resistance up ahead, or at least resistance that is several years old. This means that holders of the stock now will need to churn through this supply from stale bulls.
I have drawn an arrow where the stock retraced and tested the 200-day exponential moving average (pink line). This marked the pink line as support and therefore a breach of the price falling below this would’ve been bearish. In March 2020, the stock sliced through this zone like a hot knife through butter and continued to crater. This would’ve been a good entry for a short.
It is only recently that the stock has now broken through the pink line marking the stock as up trending. This came as the stock started to bottom and started to trend sideways 20 percent from its low. We can see this much closer if we look across to Chart 2.
I’ve drawn an arrow where we can see the stock gapped up. This was on good results and better than expected trading. The business generated £53.5 million in adjusted profit before tax. The adjustments seem reasonable (it’s always best to check as sometimes the adjustments are made repeatedly yet still claimed to be exceptional). Cash inflow from operations was were strong at £47.9 million – reducing fears that the business was overburdened with debt it couldn’t service.
I took a position in the opening auction and still hold. This is because volume was heavy. The stock put in a shooting star candle which could be considered bearish. However, I find that rather than focusing on single candles it’s better to look at a series of candles. Candles bunched together say a lot more than a single session of trading. Volumes continued to be higher than average, showing strong demand for the stock, and the price has continued to creep up in recent days.
There is one potentially large catalyst for the stock, as there is currently a sizeable short position at 1.91 percent of the company’s stock held by Luxor Capital Group. This is around 4 million shares, which, as we can see in Chart 2, compares with an average daily trading volume for the stock well below 1 million shares, before the latest results.
Were Luxor Capital Group to close its short position, this would inevitably influence the market price for two reasons. First, there is not enough supply to absorb the volume of stock, as we can see by the price volatility. Secondly, anyone sniffing that the company is trying to close the short will see people put pressure on Luxor by buying up the stock and trying to force a squeeze.
As we have seen in previous examples in this column, short squeezes are sharp rallies where shorters are looking to buy stock to close short positions and other traders are going long to try to force that price upwards too.
If the position was spread across several shorters then this would not have so much potential for a squeeze. But because it’s one shorter, each tick up in price will hurt them and traders will be watching to see when Luxor begins to close. The company began to short at the end of July which (looking at Chart 2) was when the price action was close to the bottom. If the price were to hit 90p, Luxor would be down 50 percent on their short if its average position was from 60p – however we can guess that it is lower than this.
I am long Reach plc and should Luxor begin to close its short I may even add to the position. As Daniel Drew is credited with saying: he who buys what isn’t his’n, must buy it back or go to prison.
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