Gym Group: running into trouble?

Day trader Michael Taylor spots a potential shorting opportunity in the leisure sector

May 31, 2022

A lot has happened since my last article. Well done to those who took the trade I highlighted in Deliveroo (ROO). Once it broke that support, it cratered down to 80p. As well as looking at charts for ideas, it always pays to keep an eye out for scuttlebutt.

In one instance, the chair of Made.com (MADE) said at an industry event that “shoppers have ‘held back’ their spending recently due to concerns over inflation and the conflict in Ukraine”. She told everyone that a profit warning was coming without actually telling everyone explicitly a profit warning was coming. I shorted the stock, and unsurprisingly, or perhaps surprisingly given the stock gapped down heavily on the news, there was a profit warning announced.

Maybe you work for a company and you’ve noticed a slowdown in new business enquiries or sales. Maybe you’ve seen plenty of restaurants see a downturn in custom. This information we get from our everyday lives can be used as leads for potential trades.

Another example was my visit to Vin Murria’s talk at The UK Investor Show. In her slot, Vin sung Next Fifteen Communication’s (NFC) praises and how she was going to roll her equity into the company. She was highly supportive of the deal, yet on Monday an RNS appeared from AdvancedAdvT (ADVT) saying she was still considering her options. That differed hugely from what I heard her say two days earlier, so I arbitraged the trade between M&C Saatchi (SAA) and Next Fifteen Communications. It took at least a full session before the gap narrowed and the trade moved into profit (although this could’ve also been helped by Snapchat’s (NYSE: SNAP) heavy fall on results). I’m still in this trade, having taken some off the table and believe Vin Murria won’t risk blowing the deal. But anything can happen in a takeover situation.

The potential windfall tax came into play and oil stocks savagely sold off – Serica Energy (SQZ) and Igas Energy (IGAS) were two of the biggest hits. It was no secret that the windfall tax was a possibility and so I was flat on these stocks. However, I should’ve at least considered being short. Why? If the windfall tax came in, the price would fall. If it didn’t come in, then it was expected and so the price wouldn’t move. High risk/reward payout trades are everywhere if you keep looking.

We’ve also seen some devastating falls in the US, with the FTSE 100 outperforming still. Bids for UK companies are still coming through almost weekly. Clearly, despite the falls in share prices and negative investor sentiment, there is still plenty of money that believes UK stocks are cheap and undervalued. What does this mean for traders? Not much. We don’t care if a stock is undervalued or overvalued, so long as it moves in the direction we hope.

One stock I’ve got my eye on as a potential short is Gym Group (GYM). It’s no secret that inflation is rising and people are looking to save. This was the theme of my last trade in Deliveroo.

Gym Group is a low-cost operator in the gym sector. Low-cost operators tend to trade well in a recession, and I believe this stock will do well in the long term. It’s a great business model. People sign up and pay a monthly fee and get unlimited access to facilities and services they usually don’t have at home. The model is to buy up big space in a high footfall or easily accessible location and take advantage of the fact that not every member will go to the gym at the same time – and many will pay and not go at all. Once costs are covered the business benefits from operational gearing (although that does work both ways).

We last looked at this stock in my article ‘The Gym Group: time for a trading workout’, 6 January 2021, as the stock was setting up with a nice chart and people were rebounding to the gym.

We can see how it played out in Chart 1.

The stock broke out and struggled to rally – however it did hug the support without failing and eventually pressed on to 315p. I sadly didn’t capture this profit as I closed my trade when the stock was trending sideways. Time is an opportunity cost for traders, and if the stock doesn’t react as you think it should then sometimes it’s best to cut the position and move on.

Chart 2 shows the chart for the next trade. I’ve already shorted the stock and covered, but now I’m looking for a re-entry.

We can see the stock has broken out of the 50 EMA and could now be threatening to break into an uptrend.

If that’s the case – then I’ll find another target. However, if the stock breaks down through 185p I’d be tempted to open another short.

From the company’s annual report, 32.6 per cent of members made at least four visits in a month (calculated as a 12-month rolling average). That means 67.4 per cent of members are visiting their gyms three times a month or less. How many of those have an average of less than one? We don’t know, but I think any member visiting three times or less would be considering their gym membership when looking to cut costs.

This is a resilient business model, but it could easily see subscriptions decline and warn on profits if members decide they want to save money and cancel their memberships.

This stock is SETS traded which means you can be deal with direct market access but be careful. It’s not the most liquid of stocks and the spread can be wide. Make sure you’re not trading into earnings, either – there’s no need to take gap risk unless you have good reason to believe you’re right.