A potential turnaround play in healthcare

Day trader Michael Taylor looks forward to earnings season and has an eye on a healthcare play

August 25, 2021

Trading updates and earnings reports can cause unexpectedly sharp moves in stocks
Small caps have been out of favour of late

Summer may be coming to an end. But September is around the corner! Lots of trading updates and earnings reports will provide opportunities for traders in the next month. The final third of the year tends to be a good one and hopefully this year will be no exception. Of course, you only need one good trade to make money – even in a bad market. They’re just harder to spot. Sometimes that can also make the market sleepy. If nobody is looking out for a trade, then the risk/reward can be even better if everyone is eyeballing the same stock. We saw supermarket chain Sainsbury’s (SBRY) rally sharply on Monday as a result of The Sunday Times writing about potential private equity bidders. The Friday before, Genel Energy (GENL) fell in early morning trading with barely a gap down after a bad news RNS. Both of these trades offered high returns for traders with their finger on the pulse.

Small caps have taken a battering in recent weeks despite the indices hitting fresh highs. One problem for many traders and investors is that they don’t like to sell on dips. Once a stock pulls back, it’s tempting to think about waiting for the stock to reach the next high and then sell. It’s great to be selling down positions into strength, but if you want to ride trends you have to be comfortable with pullbacks. It’s likely that stocks can pull back 20-25 per cent in a trend, and 30 per cent pullbacks are also not uncommon. The decision we have to make is when to decide that the trend is over. Using moving averages is a good guide, as stocks are technically in an uptrend if the stock is above the 200 moving average. But it’s not nice watching a stock pull back 40 per cent to then bounce from the 200 moving average and continue the trend.

A cautionary tale

I believe selling on the way up is a good way to combat this. This is also the way of the ‘connoisseur’ – an investor group from The Art of Execution (you can read my summary of the book here). The problem with holding a stock and not selling is that paper profits are not profits until they are banked. It’s true that you should also hold your best stocks for longer but let’s consider a cautionary tale in Best of the Best (BOTB). I was a buyer between 400p-450p as I believed that the market hadn’t priced in the fact that the company was now going to be achieving much higher margins and scalability going forward. I was all out by 1,200p, and looked rather silly as the stock went on to hit highs of 3,500p. But at that price the stock was no longer a hidden gem, and Apple’s introduction of iOS 14.5 made it much harder for users to be tracked across the internet. This spiked the price of ads on Facebook and other social media platforms because the algorithms needed to adapt to less data. Best of the Best used these ads and so margins were clearly going to be hit. Unless you were on top of the investment case (and the sharp falls in the two profit warnings suggest many investors weren’t) you may have missed the opportunity to take profits. At the current price of 680p, this is nearly 50 percent down from my last sale price and over a whopping 75 per cent down from the high.

It's important to keep plenty of stocks on your radar just in case something changes. The problem with SETSqx illiquid stocks is that on profit warnings you may as well just turn your monitor off if you’re holding in size. I managed to get a short away on the uncrossing trade but closed too early. Closing shorts too early is a weakness of mine and something I need to actively improve.

A healthcare opportunity?

One stock that is on my radar and has been since 2017 is a company called OptiBiotix (OPTI). It’s one that whose RNS announcements I read and I keep track of the story. Recently, the fundamentals appear to be strengthening. In the company’s final results in June, revenue grew 104 percent to £1.5 million. It’s still loss making, but in a recent trading update the company mentioned it was ahead in its first half and expects to meet full-year expectations.

Chart 1 shows the clear sideways trend that persisted in OptiBiotix between 2016 and the summer of 2018. I’ve marked three arrows: the first being support, the middle being the chart breakout marked with an arrow, and the top arrow marking the breakout from multi-year highs. However, this rally was short lived, although the stock did double from the lows within 12 months.

Moving across to Chart 2, I’ve marked with arrows where the stock has tested and failed to break resistance.

This means that if the stock can break 70p then it’s a hugely bullish indicator. If the price has failed to break this level several times and then goes through it, the price is clearly telling us that the trend may be changing. Many people claim that support and resistance is for novices, but some of my best trades have come from being patient, waiting for the fundamentals to start getting stronger, and watching for the technical breakout in alignment. For this reason, I’ve set an alert for OptiBiotix at 70p. I also note that the company has a large shareholding in SkinBioTherapeutics (SBTX), which was spun out of the company. As of 30 June 2021, this was worth £22,948,048 on the company’s balance sheet, with the market cap of the company being £46.6 million at a share price of 53p. This should mean that no severely discounted placing will be on the way, as the company can just sell some shares for cash. However, I caveat this with what ‘should mean’ does not always mean it does happen!