It’s the end of lockdown and the beginning of freedom. By the time this column goes to print and you read this, you may have had a haircut, gone to the gym, hit the shops, or eaten at a restaurant outside.
I think there will be a wave of pent-up consumer spending. But how to profit from this? Restaurants and pubs have literally been shut the past four months, and unless they are somehow able to magically double their capacity and cater for that demand with absolutely no increase in costs for the next four months, the answer is (unsurprisingly) with great difficulty. Making up four months of lost business isn’t going to happen – people tend not to eat two lunches just because they missed out on one. While we had a good trade on Restaurant Group (RTN) (‘Restaurant Group: Prepare for Covid-cues’, 3 February 2021), I did say in the article that its brands are fatigued and I dislike the business.
However, retail is not the same as hospitality. Mrs Taylor has already been to Oxford Street telling me it was packed, and with summer on the way many retailers will be hoping for bumper demand. So, keep an eye out for retailer trading updates and results, and high volumes. I fully expect there to be several good trades in retail stocks in the coming weeks and months.
One of these companies could be TheWorks.co.uk (WRKS), which I will refer to as ‘The Works’ from now on – quite why this company has its website as its official company name is beyond me, especially given that most of its sales (aside from during lockdown) are from physical stores. Nevertheless, this is a company that has seen its share price rise strongly since I highlighted the trade on Twitter at 17.8p at the start of November. The company had a market cap of £10m with £8.4m in cash (although some of this was to be unwound in the second half of the year), which clearly marked it as a survivor. When the stores were reopened, trading had been significantly ahead of the board’s expectations. Could we see a repeat? I think it’s possible.
Looking at Chart 1, we can see that The Works had been a disastrous investment for everyone involved since its flotation. A clue to the success of an IPO can often be found by who is bringing it to market. The Works saw its private equity owners and management selling out to the tune of £36m and a further £28.5m being used to repay debt. I’m not sure I would have wanted to take the other side of that trade!
As I warned a few weeks ago with Deliveroo (ROO), if the deal was so good, then why was it so well-publicised and encouraged? Surely, if the deal was so good, then institutions would lap it all up and there would be scraps available for private investors? That’s usually what happens. With an IPO price of 390p and a current price of 250p, those that signed up will have a sour taste in the mouth having been suckered in, like those who took The Works’ IPO in 2018, which was an almost instant flop.
I have marked what appeared to be a respite from the downward onslaught at the turn of 2020. A huge volume spike – potentially the result of a seller’s stock being placed and reported to the market rather than an abundance in the number of trades – marked an upturn in the stock for a few sessions at least.However, like everything in the first few months of 2020 the stock fell – having rallied 50 percent from the lows it couldn’t hold onto its gains. With the rest of the marking powering higher The Works was left behind, a sign of weakness in the overall market.
It is worth paying attention to the FTSE 250 and the Aim All-Share as I find these much better barometers of the market that I trade than the FTSE 100. Many of the stocks we look at and are active with in this column are below £500m market cap – small-cap stocks. I tend not to look for strength against the market but I will pick up on stocks that aren’t lifted by the rising tide that is supposed to float all boats.
Moving to Chart 2, I’ve marked my initial entry into the stock with the bottom arrow. We can also see a volume spike on this day ,which gave me confidence to hold – as we know volume shows demand. I took most of this trade off the table around 30p as big round numbers tend to be psychological support and resistance points for private investors.
Since then, I’ve traded around the position (which I no longer hold), and I’ve marked the upper arrow and level as a point of resistance at 50p. With the easing of lockdown, I believe there is likely to be strong demand in stores, as was the case with the previous lockdown. In any case, the chart is strong and we’ve seen 50p tested several times now. Should the price break through this level I feel there is potential for a long trade. The 50-day exponential moving average (black line) has offered previous support, and is currently trailing around 44p. Naturally, we don’t want to put our stop directly on this line as it’s likely to be triggered, but rather place it underneath this zone so amateurs see their stops blown first.
