SigmaRoc (SRC) is perhaps one of the more boring businesses I have written about. It is operating a buy-and-build strategy in construction materials (although its website says it invests in businesses and this is not the same as acquiring them). It doesn’t have any fancy technology or the latest gadgets, and it isn’t a blue-sky story or a Covid-19 testing play. Naturally, many punters will be put off by the sheer tedium of this business.
But I’m reminded of the great Peter Lynch who was a staunch advocate that boring businesses are the best businesses. I doubt that is always the case, but you can see his point – the fact that businesses are boring puts a lot of people off from further research. In an illiquid and inefficient market, such as Aim, this can mean gems are left on the shelf, waiting for those who are willing to dust them off to discover them.
The company released its half-year results on 7 September with underlying revenue coming it at 83 per cent growth. Note that “underlying” comes with a long list of exclusions including acquisition related expenses and restructuring expenses, and so when we look at underlying profit after tax and actual profit after tax there is a glaring difference: £5.01m against £3.21m. However, this is double the previous year’s actual profit after tax of £1.42m. With underlying revenue growing at 83 per cent and strong cash generation I decided to add it to my watch list.
I believe that we are entering a roaring bull market and therefore I want to buy companies that are both fundamentally and technically strong. It is often said that traders shouldn’t care about the actual business – and with many of my trades I really don’t care what the underlying business actually does or even whether it makes any money. But my own goal remains to make money and strong fundamentals backed by a chart often provide a fertile hunting ground for uptrending stocks.
Many of the London Stock Exchange’s big winners have been businesses that have driven revenue and earnings at accelerating rates; indeed, this is something Mark Minervini looks for across the pond in the US. Fevertree (FEVR), Boohoo (BOO), Gear4Music (G4M) are all examples of stocks that have seen staggering jumps in their share prices in their trading history when they were growing quickly.
I’m not suggesting SigmaRoc is going to be in the leagues of those stocks. But Chart 1 shows the listed history of SigmaRoc. So far, in the years that it’s been listed, it has achieved little in terms of share price performance.
This chart is a perfect reason why I believe fundamentals aren’t enough for the private investor. In just over four years the price has moved from 40p to 51p – a gain of 27.5 per cent.
It’s certainly better than capital being sat in the bank or in Premium Bonds, but it still leaves a lot to be desired. This is why breakouts are such powerful indicators – the pattern looks at a stock that is breaking out of a predefined range. The price moving out of this range shows that something is changing.
I’ve drawn an arrow on the chart where the price made a new all-time high in December 2019. But this rally was short lived, as Covid-19 struck and wiped off half the market capitalisation in value. Since then, we have seen a gradual recovery in the share price and at these levels the stock is 100 percent above its previous low.I’ve found SigmaRoc using a new filter I have created on SharePad. I want to find stocks that have doubled from their 52-week closing lows, because this tells me that any supply in the market at such low levels has been dealt with by new buyers of the stock. I also want to find stocks that are within a certain amount of their recent high, because this will show me the stock before it breaks out – rather than using my old filter of finding stocks that had broken new highs. Many people like the idea of buying the lows, but the problem with buying lows is that the stock can fall further. Gambling on the bottom is not my idea of fun, nor is it a good way for a trader to make money.
Looking at Chart 2, we can see a deep cup and handle pattern that has formed.
I’m a buyer of the stock if it can break out of that 52p level. This would take the stock into all-time highs backed by strong fundamental earnings growth. I’ve marked support at the 200-day exponential moving average (EMA) with three arrows. This zone appears to be proving support for the stock and so I’d want to see this moving average continue to rise upwards as the stock rises in a trend.
SigmaRoc may not be the most exciting business on the stock exchange, but it currently trades at just under 14x earnings for profits that have more than doubled, putting its PEG ratio attractively below 1. If it can break 52p and go on a run, that would be exciting enough for me.
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