Ukraine: The word on everyone’s lips. Will Putin invade? And if so, when? Will he formally announce it before he invades and give away the advantage of surprise? Or will he continue to manoeuvre himself around and see what he can get?
The reality is: nobody knows. There has been a lot of ink spilled on the subject (and I realise I’m also contributing to it), and with the news changing daily, by the time this lands through your letterbox the story will have shifted again.
More importantly: what does this mean for traders? It’s the same as it ever was. Manage your risk and relentlessly focus on downside. Know your exits, and follow your plan. When the Covid-19 crisis struck, my stops took me out of the market. I then started shorting stocks and following the trend. Investors may have grimly held onto stocks, but for traders the pandemic was a time to sit down and go to work. Trading is just a video game (although with real money and real consequences) where we press buy buttons on stocks that go up. That may be a reductive view of a complex topic – but the truth is that stocks that make new highs often continue to make new highs. Trend following works because stocks trend and people follow trends.
My style of trading has changed over recent months. I still intraday trade stocks, but my best trades come from extended trends. I am now nicely long Petra Diamonds (PDL) as per my article from 15 September 2021 (A diamond prospect beginning to shine?) having bought the breakout highlighted in this piece. However, that article was almost six months ago. Instead of buying and waiting, I have kept that capital working in other opportunities rather than tying it up. Now that the stock is showing signs of strength (and especially in a market where stocks are falling) I am hoping that it can start to re-rate.
It goes to show the power of patience. Sometimes I will research a stock, learn the story, and set a point at which to buy. I’ve been waiting for over a year for Dekel Agri-Vision (DKL) to break out as highlighted in my article of 14 July 2021 (An agricultural commodity opportunity). In trading, you have to be prepared to do work that may take time or may never pay off. But a healthy pipeline of future trades is necessary to keep your account churning and growing.
One stock that I’ve added to my pipeline of potential future trades is Mulberry (MUL). I have experience of this brand first-hand as my wife has one in her collection. From what I understand, they’re in the affordable middle-class level and the brand is an aspirational one. Bags can typically cost between £500 to over £1,000. It’s not a commodity product, to say the least.
The stock saw revenue growth of 34 percent in its half-year report in November – although this was the lowest number in the previous 10 years and so it’s an easy comparator for the future. However, gross margins have increased, courtesy of a strategic focus on full-price sales, from 59 percent to 69 percent. Luxury brands that discount heavily often erode their brand image at the expense of quick and short-term revenue gains. This is what happened with Superdry (SDRY), and try as founder Julian Dunkerton might, that business is still fighting to turn itself around. If you feed out the discounting heroin, it’s hard to wean customers off the dopamine hit of saving and bagging a deal.
Looking at Chart 1, we can see the Mulberry share price slide into a stage 4 decline, with all of the moving averages pointing down and price collapsing.
I’ve marked an arrow for the trough the stock found itself in during the pandemic.
However, the price is now well off its lows and has come onto my radar as the trend no longer appears to be down. The lowest price paid was just above 110p, and at 300p this represents a near 200 percent gain.
Moving onto Chart 2, we can see the stock capitulate on the left of the chart in March 2020. From the end of 2020 we see the stock start to trend upwards and the moving averages once again point north. This is crucial when determining a trend – a stock can break out of the 200-day moving averages, but if these moving averages are still pointing down then it suggests that the trend is still heading down, too. In my view, it’s best to wait for the indicators to turn upwards. This will yield slower but more powerful signals – it’ll reduce false positives and the chances are higher the stock will be trending upwards.
To trade this stock from a technical basis, I’d like to see the stock drift slowly towards the 400p area and break out from this resistance zone. That’s a 33 percent gain from here, but I’d rather buy at the right price than buy at a cheaper price. Buying the right setup gives a greater possibility of the trade going my way, and so I don’t mind paying more so long as the pattern is right.
This is a key difference between traders and investors. I don’t think Mulberry is a high-quality stock, but it’s also not on a high valuation. If we double the half-year profit before tax, we get £20.4 million – however the latest results did include a one-off profit of £5.7 million booked from the disposal of the Paris lease. At a current market cap of £180 million, with a share price of 300p, that doesn’t seem eye-watering, but the price is still well below my buy point. That said, a trade is a trade at the end of the day. Keep it on your watchlist.
- You can trial some of Michael’s stock trading course at https://www.shiftingshares.com/online-stock-trading-course/
- Twitter: @shiftingshares
- New subscribers to SharePad can claim a free month of data with the code: Michael
