I saw a headline in the New York Post this week: “Shake Shack will raise prices again in 2021 to fight inflation”. This is not fighting inflation, because inflation is doing what inflation does. It raises prices. If Shake Shack truly wanted to ‘fight inflation’ it would lower its costs, but it may not be able to do that because Shake Shack’s suppliers have likely increased their prices. The end result is usually the same: higher prices are passed onto the consumer.
As prices as go up and companies are forced to adjust (or ‘fight’ as the NYP would have us believe), we’re going to see which companies have high pricing power. There are some brands that can increase the price and consumers want it more. Luxury brands have seen a sales boom over the pandemic. Bernard Arnault of LVMH Moët Hennessy became the world’s richest man last week overtaking Jeff Bezos, and Lamborghini has seen strong income for its high profitable “limited special series” models.
Supermarkets will be tempted to raise prices. But they’ll also remember that not listening to the customer meant that the price increases after the Great Financial Crisis drove shoppers into Aldi’s welcoming arms. It’s going to be interesting over the coming months to see which companies emerge the winners. Ultimately, pricing power comes down to brand loyalty. The brands that command this loyalty will have the best chance of navigating this period.
It’s worth noting though that just because a business has strong pricing power doesn’t mean they should always sell more product. For example, the value in a Ferrari is owning it because of its scarcity value. It’s a luxury vehicle that not everyone can afford, and part of the appeal for owning one is to signal status to others. But if all of a sudden everyone had a Ferrari – that appeal would quickly fall. This issue is partly to blame for Aston Martin Lagonda’s (AML) collapse upon its IPO.
The company wanted to ramp up production of vehicles and sell more cars, when the whole point of owning an Aston Martin is because there aren’t many cars seen on the road. It would’ve been better to use the company’s brand to increase prices and therefore raise margins at the same production. It’s easy to say in hindsight, of course, but you don’t need a Harvard MBA to understand the laws of supply and demand.
One stock that has been on my watchlist for what seems an eternity is Capita (CPI). The company is an “international business process outsourcing and professional services company” as defined by Wikipedia. I also visited the company’s website, and still don’t know what it does. However, we don’t need to know this in order to trade the stock.
Looking across to Chart 1 we can see the stock begin to roll over in July 2015. In the spring of 2016, the stock was trending lower although not far from its highs. It then traded below all of its moving averages.
The big red flag to sell was when the stock failed to break the pink line twice – the 200-exponential moving average. This told holders of the stock that new buyers weren’t enough to overcome the sellers and that the stock was trending downwards. But it didn’t give holders a huge warning – a few sessions later the stock had gapped down and within a fortnight had shed nearly 50 percent of its value.
This is why it’s crucial to pay attention to all of your holdings and trades. Spending just 10 minutes by reviewing the charts nightly and asking yourself what the chart looks like, if you should buy or sell, or continue to hold, is 10 minutes well spent. It will give you a much better chance at reading the early warning signs that so often come with stocks. It’s not unusual for stocks to sell off on high volume a few days before a profit warning is released. I’m not suggesting you should always sell if there is ever any high volume – but look at the chart and identify key points on the chart that would suggest to you that the trend may be turning. It’s never a bad idea to sell some if you’re unsure – you can always buy back in.
If we look at the right of the chart, in July 2019, we can see the stock broke through all of its moving averages and looked to be starting an uptrend.
Let’s look at what happened in Chart 2. We can see the stock broke through the 200-exponential moving average again and within a few sessions had fallen another 50 per cent, at least. This coincides with the Covid-19 collapse and since then the stock has traded in a range with a low of 20p and a high of 52p. It’s a wide range, but when the company released its half-year results this week the stock has surged, following last week’s rally on high volume. This suggests the market knew yet the price has continued further.
I’m interested in a breakout trade if the stock can break 52p. With the recent rally, lots of short-term traders are in profit, so I’d expect a pullback before the stock comes close to breaking out. I confess to having no idea what this company does or if it offers any value for shareholders – but the price never lies. A multi-year high above 52p is bullish and suggests the trend could be changing.
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