Circassia’s long convalescence may be near its end

It is annoying when a company launches an accelerated bookbuild once I’ve submitted an article. It happened in September when the chief executive at Cake Box (CBOX) decided to offload some of his shares. But I shouldn’t be surprised. Placings are an occupational hazard of investing, no matter how strong a company’s balance sheet.

But this risk can be mitigated by picking stocks with strong cash reserves, good operational cash flow and institutional support.

Cake Box recovered from its bookbuild and pushed on higher. I, however, opted out of the trade when the chief executive explained that the reason he'd sold shares was because he had been put under pressure to offload part of his stake by institutions. I thought if he didn’t want to sell, he didn’t have to do so. I would have had a lot more respect had he said he wanted to take some from the table and enjoy the fruits of his labours. Many were quick to criticise Best Of The Best’s (BOTB) management for similar behaviour in recent weeks. But this is a management team that has made shareholders a lot of money (although it did take many years) with the stock leaping from a Covid sell-off price of 400p to a high of 3,350p in March 2020. I shan’t begrudge any management team that sells stock – whether it’s for a divorce, a new kitchen, or a new motor – so long as they aren’t cashing out completely and still have skin in the game. Just be honest. Maybe the Cake Box chief executive was being truthful – but I wasn’t the only one who thought it was a tepid response.

Academic research has found that director sales aren’t a good indicator of future stock prices. This is because directors are no better at timing sells than private investors – despite the increased knowledge they have of the business.

Future Group’s (FUTR) management team sold large portions of their shareholdings – but even with those sales, the stock is printing new highs. Directors sell for many reasons. But they only ever buy for one.

 

Sticky money and long-term demand

One stock that I have a holding in is Circassia Group (CIR) – a former darling of Neil Woodford which, I believe, has been tarnished by his name. The company suffered a big setback in 2016 when a major drugs trial failed, but management has since got rid of poorly performing divisions and the company has become a turnaround story. Its sole focus is now its Niox business, which produces devices to diagnose and manage asthma.

Naturally, Circassia took a hit during the pandemic, like many businesses. But unlike other businesses, asthma doesn’t stand still during a pandemic. It continues, and will always require treating. Therefore, the Niox business that was growing pre-pandemic should (in theory) continue to grow and benefit from pent-up demand.

There was also a £5m placing that shores up the balance sheet nicely, and puts a floor in the stock price at 25p a share. The placees were Lombard Odier Asset Management, Richard Griffiths and North Atlantic Smaller Companies Investment Trust. All of this is likely to be sticky money, and so supply from the placing is likely to be minimal. Several directors were buyers early last month in the range of 28.5p to 29.42p.

Looking at Chart 1, we can see that a check of the share price in comparison to the exponential moving average (EMA) in both 2018 and 2019 would have told you to steer clear of the stock. Private investors love to play a game of 'guess the bottom' – but it’s expensive and if you like spending money on such thrills you may be better suited to the casino. The problem with trying to call the bottom is that the stock can still fall a lot further. I have marked arrows on the chart to show where the stock tried (and failed) to break the resistance of the 50 EMA (black line).

 

 

We can see that in July of 2019 there were several large volume days, and average volume gently started to creep up. In December 2019, we saw the price break out finally above the 50 EMA, retest this, then continue to press forward above the 200 EMA (pink line).

Since the end of 2019, the stock has traded in what appears to be a stage 1 base – or, the end of a downtrend – and moving down to Chart 2, we can see a scruffy trading range which shows the market is indecisive about the stock’s future potential.

 

 

Only recently have we sign a strong price movement as the stock broke through the 32p barrier – however it has come to retest that by tagging the 50 EMA at 29p.

How the stock reacts at this point is critical. The 50 EMA has historically provided significant resistance against momentum, although the price has not taken any notice while the stock has been trending sideways. For the breakout to hold here, the price needs to reverse.

For a lower-risk entry, targeting the breakout of the recent high at 37p means that the stock is clearly interested in pressing upwards given that it is hitting fresh highs.

 

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