Last week’s article pick, Phoenix Copper (PXC), irritatingly decided to break out only a few hours after I’d submitted the article. By the time it was released online, and certainly by the time the magazine landed on your doormats on Friday, the stock had risen by over 30 per cent. This is annoying, because I often try to pick stocks that have yet to make a move in the hope that you have the opportunity to take the trade (should you think it holds any merit of course – I get plenty wrong). But sometimes it can happen that the stock moves in the short time frame before the article has been published.
Research is of huge importance in the UK small-caps market. As I wrote on Twitter, the more well-known a strategy becomes, the closer its Sharpe ratio moves to zero. The higher up the food chain you go the more efficient markets become. But, in UK small-caps, the market is both illiquid and inefficient. Institutions are unable to take such sizeable positions in smaller companies because the companies themselves are not big enough. This means smarter and more effective money hunts in larger stocks and markets elsewhere. Much of the secondary trading on Aim is driven by private investors – people like you and me.
There are many well-drilled and knowledgeable private investors. But there are even more who are not. You only need to go onto any bulletin board to see proof. Almost every day, the most discussed stocks on bulletin boards on a daily basis are speculative and unprofitable. Why is it that so much interest is given to lossmaking businesses?
The answer is the same reason why so many play the lottery but don’t invest. The former has little chance of success, with a high payout if you are lucky. The latter has a high chance of success when done well and also a high payout, but over a longer time frame. But the issue is people don’t see the rewards straight away. Invest now, and (again, done well) you’ll have a larger sum in 10 years. But people want their rewards yesterday. Delayed gratification can be a tough skill to acquire, and it costs many their savings because they chase blue-sky ventures that have little hope of achieving much. These stocks are great to trade of course – but you should ensure you don’t get left holding the baby.
One stock I’m watching to re-enter is Science In Sport (SIS). This is a company that develops, manufactures and sells sports nutrition products. Sports nutrition is fitness supplements, such as protein powder, vitamins and tablets, and are generally designed to enhance performance. The company owns the SiS and PhD brands, which are now starting to see traction with a big shift in online sales and geographic expansion. This has led to double-digit revenue percentage growth and enhanced margin. The company is investing in a new warehouse that will deliver efficiencies and increase storage capacity – a project management wouldn’t undertake unless they were confident they’d have the sales to make it worthwhile.
But the stock has been an absolute dog in the years since it listed. The shares in issue have only ever increased, and the directors are not shy of paying themselves healthily. This has left a sour taste in the mouth of many investors, who have for much of the stock’s listed life only ever seen disappointment and losses. Looking at Chart 1, we can see that since August 2013 the stock struggled to maintain any traction from its IPO at 60p. It dropped to 45p in April 2014 and tested this range again in July 2016. From there, the stock gained momentum and hit 95p twice. I’ve marked the double top on the chart with a resistance line and arrow pointing to the first peak. We can then see from July 2017 the stock begins a three-year downtrend with all the classic hallmarks of a stage-four stock: declining moving averages, lower highs and a falling trend.
Moving down to Chart 2, we can see that the stock started to make a stage-one base from March 2020. There was a big volume day in December of that year which looked like a seller was cleared. We then saw the stock pop out of the base where I went long (first arrow). I then added to my position as the stock broke out of the base it formed in March 2021. However, I sold my position between 60p and 70p for a profit – clearly too early in the trend.
Looking at the chart we can see the stock has pulled back having hit a high of 84p. I’ve marked a resistance line here and would be tempted with a long position should the stock break out. This would be a big premium to my last sell – but my options are either not to take the trade because my ego is hurt or pay up and take what looks like a good risk/reward trade with growth drivers in place. Would I invest in this company? Absolutely not. Management have rewarded themselves with a huge slice of pie if they succeed. But will I continue to trade an uptrending stock so long as it offers good entry points? Absolutely. Let’s see what happens.
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