Could Saga shake off that sinking feeling?

It’s a beautiful time to be in the business of stocks. Investors have seen stocks continue to rally and suddenly investing – and I use that word loosely - seems to be the planet’s go-to hobby. Euphoria seems to have well and truly set in.  

That can, of course, be very dangerous. As Mary McDougall wrote this week in ‘Think twice before dealing on your smartphone’, the gamification of stock trading is a real danger to many people. Indeed, there have been instances of people losing everything on the recent GameStop squeeze. We knew this would happen but, sadly, emotions often overrule logic.

Nevertheless, trading speculative shares can be lucrative if you ‘re careful. In the last two weeks, two cannabis stocks have come to the market, MGC Pharmaceuticals (MXC) and Kanabo (KNB), and both have multibagged within days – the later listing at 6.5p and closing its debut day at 18.25p.

I’m going to make a confession – I am getting into IPOs in companies where I haven’t opened the admission document. My thinking is that, why spend time looking for red flags if nobody else is going to care? This highly sophisticated strategy of taking IPOs in companies I know nothing about and stagging them to another buyer in the first few days of the listing won’t work forever – but it’s working now. And that’s what matters - ultimately, trading is about making money, and so long as it’s legal that is all that counts.

Such is the froth on the market that there is currently a company that has almost nothing on the balance sheet aside from some intangibles, and an illusory business model that doesn’t work. Yet the stock is worth around £200 million. I believe it’s a fraud. Although no laws have been broken, your friend down the pub would call it a fraud. Put it this way, if you were to buy a second-hand car and when you were driving home the engine fell out and splattered itself in pieces all over the road, then you might consider yourself the victim of fraud.

However, it’s a good story, if you don’t consider it too deeply. Just like the Emperor’s new clothes, if everyone believes in something – even if it’s a lie – then that lie can seem very true indeed.

Never-ending Saga

Saga (SAGA) is a company that was already in trouble before last year’s stock market collapse.

Chart 1 shows all the classic warning signs. The stock was flat for several years with no uptrend. In a world of uptrending stocks, the one with the flatlining stock holds the wooden spoon. Regardless of how exciting the stock’s prospects seemed at the time, why not wait for the market to validate those prospects with an increasing price?

Saga was, and still is, highly liquid, and the more liquid the stock the more efficient the market generally becomes. Therefore, the fact that Saga was not rallying was a tell-tale sign that the market was not so convinced of the stock’s future potential.

Still, if you missed this warning, the next warning came in December 2017 in what was clearly bad news. The stock gapped down and carried on falling. And if you missed that warning, the stock carried on falling throughout 2018, and then gapped down again to new lows in April 2019. It then fell even more, until Coronavirus gave the stock a good old left-right goodnight with the stock hitting lows of 120p. A big fall from 3,000p, and a big reminder that no matter how big a company is, a company is never so big that the share price can continue to fall.

The best way to avoid big losses is to take small losses. The first cut is always the cheapest, and small losses snowball into bigger losses. Someone remarked recently that they were so far down in a stock they were better off holding the stock and not selling. I hope you can see the absurdness of this comment, but it shows how easily big losses can seduce us into taking on even more risk.

However, the stock’s prospects may be changing. Moving across to Chart 2 I have highlighted the volume change in the stock with an arrow – this was Vaccine Day. Since then, volumes have remained elevated and the stock has been gently rising. It’s well up from the previous low of 120p so it’s clear that any panic or depressed sellers are getting taken out by the growing volume and demand in the stock.

Unlike other cruise businesses, Saga has a profitable and cash generative insurance business. With a recent placing it’s well capitalised too. In my view, there are no immediate red flags that would prevent me from taking a trade here. When trading stocks and especially speculative trash then it’s always worth checking the balance sheet to make sure there aren’t going to be any nasty surprises if you intend on holding longer than a few days. We can also see the 200-day exponential moving average (EMA, the pink line) getting tested several times and starting to flatline. This could be the sign of a new trend beginning in the stock.

With the ending of lockdown surely imminent and vaccines being rolled out sharply, I feel that it is likely that we are through the worst of this pandemic. That doesn’t mean everything is currently rosy. We are still locked down unable to do anything. But we are winning. The big question is: will the market be forward looking or will equities resemble the potential negative economic effects that may?

If I could tell you that, then I’d know exactly what to buy and sell and when. As I don’t, I feel the best we can do is continue to trade and continue to monitor our positions and risk. I intend to take a long position in Saga at 311p if it can break out. We can see the 50-day EMA (black line) has acted as support recently, and so I would place my stop underneath that outside of the stop loss liquidity. Remember to adjust your position size for risk.

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