Restaurant Group: Prepare for Covid-cues

If other people know you are active in the stock market, you will no doubt get countless messages asking about various stocks. This often happens when there is a big spike in volatility, or a market bubble forming. For example, as a Teessider, everyone knows someone who had shares in Sirius Minerals, and amid the share price climb, subsequent shareholder rebellion and eventual takeover, I was frequently asked my opinion.

The problem here is that giving opinions on stocks is fraught with difficulty. If you are right, then it is their skill that made them the money, and if you are wrong then it was your fault. Therefore, it is best abstaining from giving an opinion. In the Sirius case, what I did do was point out the risks, and ultimately the fact that the company was reliant on external funding came to be its downfall.

One shareholder told me that “he wished he could just watch from the sidelines”. I told him that was easily solved – all he had to do was open his broker account and sell. That was the last I heard from him.

The problem with the stock market is that people tend to want to do what is cosy and comfortable. But cosy and comfortable means going with the crowd, and collectively the crowd does not make money. So far, those who were early to the trade in GameStop (US:GME) have made money – provided those profits are banked. But those who are buying the beleaguered bricks and mortar video game retailer at $400 per share are telling themselves they are doing the 'right thing'. Every ride must end, and the winners in this GameStop saga will be those who did the ‘wrong thing’ and nailed down profits into strength (and some politicians currying favour by claiming that Robinhood and other platforms are wrong to stop people buying). Personally, I agree with those politicians. People should be free to fritter away their money however they like – even if it does mean buying shares in stocks they have no idea about. But regulation exists for a reason (and it’s usually to protect the industry). Perhaps in six months those people who couldn’t buy will be glad they didn’t, because while some retail traders will be among the winners, there will be many more losing retail traders who held on.

There is a quote that I’m reminded of from Gerald Loeb, the author of The Battle for Stock Market Profits: “If you want to sleep and smile when the wonder shares return to reality, now is the time to break from the crowd”. No doubt there will be further twists in the tale, but I’ll stay a bystander. My edge is in UK equities and so I’ll continue to focus on London-listed businesses.

A window of opportunity

Restaurant Group (RTN) is a business I intensely dislike (mainly because I think the brands are fatigued and management was seduced by the devils of discounting), although I have to admit the stock has been kind in terms of volatility over the years. Looking across to Chart 1, we can see the intraday movement of the stock on ‘Vaccine Day’ – 9 November 2020, when US pharma giant Pfizer (US:PFE) announced that its coronavirus vaccine trial had been successful. At 11:45, the news was released into the market, sending markets on a rally.

But at Restaurant Group, the stock ticked up slightly at 11:45 and it was only two minutes later at 11:47 that the stock started moving in response to the vaccine news. This is evidence of the window of opportunity for traders of smaller companies – due to their size, high-beta stocks that are impacted by Covid-related news (such as companies in the retail, hospitality, and airlines space), can be slower to respond to news, but then move more relative to their market capitalisation.

The issue is liquidity in some of these companies, but if you’re in early enough you don’t need to worry. Speed is everything in trading. Against the algorithms you have no chance – but against humans you stand a chance of winning. The proof is right here – you had two minutes to get involved (and I did exactly that).

There will be other big macroeconomic events in the future. There’s always a reason to worry. And there will always be smaller, high-beta names to trade. I intend to create a basket of these stocks in a watchlist, so they are always at hand when I need them quickly.

Prepare for the surge

Moving to Chart 2, we can see Restaurant Group’s price action since October 2019. Markets crashed in February and March of 2020, and since then the stock has moved unimpressively sideways in what could be a stage 1 base. But Covid-19 vaccinations are ramping up and at some point the key metrics of the illness (hospitalisations and deaths) will start to fall sharply. If there is talk of opening the economy, then I would expect the Covid basket stocks and sectors to shift upwards.

I see resistance of 80p for Restaurant Group and have drawn this on with an arrow. The stock is now above all of its moving averages, and we can see since ‘Vaccine Day’ the volume has started increasing. I’ve marked this with an arrow in the volume section of the chart.

To me, these are bullish signals. Restaurant Group is not a stock I ever fancy myself holding for the long term, but it is now on my radar for an attractive risk/reward trade. I’ve got an alert set for 80p – if the stock can break that and we see good news on the lockdown then I believe there will be cash inflows into this stock pushing it up higher. For a trader, that’s all that we need.

• Michael has started his Buy the Breakout newsletter which contains trading ideas and tips he has learned whilst trading. You can subscribe for free at his website here: www.shiftingshares.com
• Twitter: @shiftingshares
• New subscribers to SharePad can claim a free month of data with the code: Michael