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A change in fortune is not beyond the Realms

Michael Taylor explains how friends’ sentiments helped him unearth a bargain
A change in fortune is not beyond the Realms

It pays to have friends in the market. Trading is not a team game. But more eyes on the market certainly helps. Having access to a sounding board of people with similar strategies and also different methods of making money can help no end. You should never rely on anyone but yourself, but leads can come from many places

Some of London’s listed companies are the subject of much hype, some are left lying in the dirt, forgotten and unloved. Take Gaming Realms (GMR) – the result of a reverse takeover in August 2013. It opened at 21p and hit heights of 40p in 2014 before beginning a stage four downtrend. However, in autumn 2019 the stock’s fortunes began to recover.

I came across the stock not through my own work, but as the result of meeting with a friend for coffee. The company had exited a poor-performing business for a cash sale, with the goal of developing higher-margin business through licensing. The sale had allowed the company to streamline costs and reduce headcount and it believed that it had enough cash to get through to positive cash generation. Naturally, I’ve heard that one before. Management teams have been overly optimistic since the dawn of time. It pays to be optimistic (far more than being pessimistic!) but one should always temper it with a dose of realism. Unexpected circumstances happen (like this pandemic, for example) – but licensing carries high margins and with a relatively fixed cost base I could see the attraction.

If the market did believe the company was indeed turning itself around, it would be shown in the charts.

Chart 1 shows the stock continuing to fall in 2016 all the way to the autumn of 2018. There was a brief rally at the start of 2018, but this fizzled out, followed by another in the spring. Many traders would’ve been keen to jump on these breakouts as they appear to have been backed by some volume – but this could easily have been a stock pump, which is common across the small-cap space.

 

 

Notice how the moving averages were continuously pointing down. An easy indicator of a real change of trend is that the trend has actually changed. When the longer-term moving averages are beginning to point upwards then it’s because the price has been moving northwards for a sustained period of time. It can be easy to succumb to fear of missing out (FOMO) as a trader, but so long as you are quick to hit the bid and protect your capital it can also pay to be aggressive. For example, if you were in early in those two rallies, then you could’ve banked a multi-R trade and then it’s on to the next. As I have said in this column before (and it’s worth repeating): never underestimate the account growth power of repeated 20 per cent trades.

The right arrow in Chart 1 shows my first entry into the stock. We can see that the trend was changing with the price up 100 per cent from its lows. This shows that if people were desperately selling then bulls were overwhelminging them and taking the price higher – a change in supply and demand. The moving averages, and the 200-day moving averages more importantly, were now pointing upwards. The improving fundamentals were now backed by a positive change in the technical outlook. The stock quickly ran up and triggered a limit order to sell some of the position. Whenever there is a sharp rally, I always try to take some off the table with the goal of reloading it on the breakout retest. However, I was stopped out of the rest of the position.

This was annoying but would’ve been more so if I’d seen a healthy profit dissolve into a small loss with nothing to show for it. Traders should always be ensuring that any large wins never turn into a small loss. Psychologically, it’s damaging. But it’s also physically damaging as capital is depleted. If you have manoeuvred yourself into a position showing a large gain then the only two outcomes on that trade should be either a large win or a small win. 

Moving across to Chart 2, the middle arrow marks my re-entry into the stock with my first buy at 7.8p. Despite the Covid-19 crisis the business was performing modestly above expectations, showing the resilience of the model. I added further as everyone I spoke to had written the stock off. They had no interest or told me it was rubbish. It pays to have friends in the market – not just for ideas but as a barometer of sentiment. If sentiment is low then zero market hype is factored into the price. We saw this with Reach (RCH) which I highlighted at 80p (‘Trading Reach’s rebound’, IC, 8 October 2020) and now prints at 220p. 

 

 

If everyone hates a stock, and you have evidence to show that the market has not factored in the change, then back yourself and trade it with good risk management. Gaming Realms is nearly 400 per cent above my initial buy price but I intend to average up again if the stock can break 38p. 

Finding unloved gems will forever be great trades so long as the market is inefficient. Simon Thompson highlighted Xaar (XAR) in Bargain Shares 2020 at 42p. Fund manager Andy Brough backed up the truck taking nearly 30 per cent at the lows last year. As he wrote on Twitter: “[You] Just have to find the stock, get a position and call the herd over for grazing so you can exit and find the next one. It was ever thus.”