Potential turnaround in the property market

It is beginning to feel like much of the easy money has been made. Ever since the rebound in global equities began in the middle of March 2020, you almost couldn’t help but make money if you bet on stocks. Of course, if you did something silly like piling into GameStop (NYSE:GME) at $400 when it was trading at $20 a few days earlier then you will have been relieved of some of your capital. But, generally, equities have been a good return. The beta has been high and so even if you underperformed the market a little then you would have still done very well compared with prior years.

It's easy to start taking it for granted and think that the market will only ever trade with overinflated valuations, bubbles, and manias. It won’t. Cash has been steadily rising in my account and, as I wrote on Twitter, cash is a position in itself. By holding cash, you’re making an active choice to sit on the sidelines. Many traders believe that you need to be constantly active in the market (as I once did), but the reality is you take opportunities when they present themselves rather than forcing trades. I’ve learned from experience that trying hard to make easy money is an easy way to lose hard-earned money. Another benefit of cash is that it reduces volatility – this means you can have high conviction in your better ideas but the volatility of the account is reduced by the cash cushion. Finally, one extra benefit of cash is that it provides optionality on future trades. Opportunity cost is a real cost of trading – the idea that if you take one trade it means you can’t take others because the funds are already committed is something all traders should be considering.

Being too tied up will be sure to leave you sore should there be an excellent deal or trade you want to take, but instead you’re lugging around a mediocre-at-best trade.

A viable estate agency business?

That said, there are always opportunities for those that spend the time looking. One stock I feel that might provide a great trade in the future is online estate agency OnTheMarket (OTMP). I’ve already traded this and ended up selling out for a small loss. But the fact the fundamentals are strengthening remains the case, as seen in the full-year results published on Tuesday. I’ve been critical of the business model in the past because it offered dilution to agents, and was heavily loss-making. Revenue rose by 22 percent, although in the frenzy that has swamped the housing market this should be expected. The business also moved to a profit after tax of £2.7m from a loss of £11.5m the year before which suggests OnTheMarket can now claim to be a viable business. It is also under new management, with current chief executive Jason Tebb taking the helm in December 2020. Tebb has launched, and scaled, an estate and letting agency before, and has been in senior management roles at Chestertons and Foxtons. The business has engaged and listened to agents, and so far the work appears to be paying off. It’s likely to be a while before management at the fantastically profitable Rightmove (RMV) start quaking in their boots, but the early green shoots are showing.

Chart 1 shows the stock from its listing through to June 2020. The stock is in these years was always one to avoid, because there was never enough cash on the balance sheet to cover the projected cash burn in the business. It’s always worth checking the cash in the bank (and also look at trade payables and receivables – if receivables are growing faster than payables then it means there may be a cash squeeze in the future) because with a quick calculation you can see if the company is likely to need a share placing in order to inject new capital. For example, a company with £5m on the balance sheet that is burning £10m a year is likely to need to raise within six months of the date listed in the income statement.

But even without these quick checks the chart usually tells the full story, as is the case here. Down trending moving averages and a struggle to ever press new highs were a constant theme in OnTheMarket’s early years.

The story is starting to change

The stock started to accelerate in June and continued to rally to as high as 140p in December. Since then, the stock has been consolidating. The issue here is that the stock is so illiquid that taking a large size holding means you are locked into the stock.

Tuesday’s rise on good volume is bullish. It signifies interest in the stock. I have drawn an arrow on the recent high in the stock, which is where I’d like to see the stock test before I’d be tempted to try another breakout entry. Many traders can be put off by stocks they have previously taken losses on, but this is an irrational fear. Outcome bias is the placing of too much emphasis on recent results. So long as the trade meets my criteria then I’ll continue trying to trade it.

The business generated just over £5m in operational cash flow which is a big difference from the £7m burn the prior year. It shows the versatility of a business that can scale marketing costs up and down depending on the cash position. I think the risk of a placing to keep the lights on is now much reduced and any equity placing would likely to be for growth to put the hurt on Rightmove.

One final note: the company’s PR agency Tulchan deserves a name and shame for an analyst only presentation delivered at 09:00 on Tuesday. Private investors deserve equal access to management and should not be shut out.

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