Speculate to Appreciate

I’ve been doing some thinking recently. What happens if the market suddenly reverses course and everyone goes into panic mode? At the end of every boom there is a bust, and so it is worth having a contingency plan for when it does. Having contingency plans for every eventuality is a process worth spending time doing. It can seem relatively boring but should you ever find yourself calling on it you’ll be glad you did. It is a little like house insurance. One hopes you never have to use it – but should an unfortunate circumstance arrive you can be relieved it will not cost you the earth.

If you’re using a desktop and your mouse runs out of batteries – do you have spare batteries? Or another mouse? I’ve been mocked for my wired mouse and keyboard in the past but I’ve never had an issue of running out of batteries (I learned how frustrating this was in my youth when engaged in online PC games).

If your internet breaks – what next? For many investors, this would not be such a huge issue – but think back a year ago, when global equity markets were in freefall and this would’ve been a serious problem. The reality is that simple failures can cost serious pounds. Sticky situations can be mitigated by preparing in advance.

This is exactly what I have been thinking about. As I write this, I have a long tail of smaller positions and just under 30 different stocks overall. This is far too many and I have adopted a ‘buy more or sell’ policy. Therefore, I am moving my capital into my best ideas and reducing the positions that are not. If we do see a market fall, I want to be in a position to add on weakness to my best ideas.

I also intend to focus on trading SETS stocks for the advantage of increased liquidity. At least if no market makers are willing to offer prices online then there is the option of buying and selling stock with other market participants.

That said, some SETS traded stocks can still be relatively illiquid despite having a market cap of several hundred million. The UK market is illiquid compared to its US counterpart. That offers both great opportunity but also downside. So long as we manage the latter we can hopefully benefit from the former.

A valuable gift?

Appreciate Group (APP) is the old Park Group which had the annoying TV adverts about saving up for Christmas. It offers gift voucher and prepaid gift cards, as well as reward and prepaid products to both UK consumers and corporations.

The stock came onto my radar in recent weeks after a 12 January trading update. The company mentioned strong December trading and also a four-fold rise in digital sales. Granted, some of this will certainly be due to the lockdown conditions which are exceptional. However, free cash was at the time well in excess of over half the market capitalisation having risen to £33.5 million at 31 December 2020 from £24.9 million in 31 September 2020. That is an increase of over £2.5 million per month.

Despite this apparent good news, I didn’t trade the stock. It didn’t gap up much at the open and so I neglected it.

Chart 1 shows the intraday price chart for Appreciate. We can see at the open the price ran up sharply to 36p within the first half an hour but only to come right back down to its opening price. This was potentially stale bulls taking advantage of strength and liquidity to exit their positions. In every rise, there are eager sellers, who have held on for long enough either at a loss or through boredom and are relieved to get a better price for their shares.

I have marked an arrow on the chart where there was a second wind which mostly helped. I suspect this was due to a prominent figure in the market writing positively about the stock. 

Moving across to Chart 2, I’ve switched back to the daily candles. This covers the stock’s price action from December 2019 to the current day, and we can see that the stock is looking like it is forming a potential cup and handle. From April 2020, where I have marked the left arrow, we can see the beginning on the cup, and the trough hitting the bottom around October 2020 (with a large volume spike). The stock has since run up to tag 46p again another two times (marked by the right arrow) but failed to break.

This resistance line at 46p has been hit four times – therefore if the stock can break out here it would be telling me that the trend is changing.

This stock trades thinly although the spread is relatively light. Currently, there is a Level 2 spread of 38p-39p and RSP quotes within the spread to buy and sell. However, due to the low volume this would not be a stock to take a large position in. Getting in is easy – but getting out is far more important.

The chart of Appreciate resembles one of a typical turnaround story, where the stock has bottomed and is now starting to turn up. I don’t know if the fundamentals stack up in this example but I intend to take a long trade at 46.5p in the stock. Keep the stop relatively tight as we have seen how far the stock can pullback if we’re wrong.

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