- Agility in changing your mind when the facts change is vital to trading
- As ever, the market is wrongly pricing in bad news and this has left investors with an opportunity
One problem with writing is that there is a time delay between submission and publication. And even though that window is small, it has scuppered my plans to write about CMC Markets (CMCX). A few weeks ago, CMC Markets announced to the market that due to the improvement in market conditions, the group had raised its FY2024 net operating income estimate from £250mn- £280mn to £290mn-£310mn.
It gapped up, and I went long on this news for a swing trade. When I mentioned this to one of my private clients, he remarked that he’d mentioned this stock just before Christmas and was now questioning why I’d told him I’d avoid it and saw no reason to buy it.
When I told him that before Christmas, that was indeed my opinion at the time. The stock was stuck firmly in a stage four downtrend and, despite the relief rally, was still below all moving averages, with no reason for me to buy a technically downtrending stock.
The news that came out a few weeks ago changed things. The stock gapped up, and there was a trigger for the entry. If the stock went below the opening gap, I’d close for a loss, otherwise I'd look to run the swing.
Changing your opinion when the facts materially change is a great skill to have in the stock market. Those who are readily able to adapt are in a position to act decisively and exploit opportunities in the market as they become clear. Remember, markets climb a wall of worry, yet take the elevator of fear downwards. Being able to stay objective and spot when stocks have changed, yet the market has not fully appreciated this change, is a key driver of outperformance in trading.
It’s why the opening drive trade works so well by taking advantage of post earnings announcement drift (PEAD). If the market fully appreciated news, stocks would uncross and not move. The very fact that often these moves are played out over days and even weeks or months is proof that markets are not efficient.
As you can see in Chart 1, the stock gapped up, consolidated and offered another swing trade entry breaking out of the shallow base. This was what I intended to write about, but news this week of the company saving an estimated annually £21mn and trading in line has gapped the stock up through the breakout level.
My belief is that CMC Markets is now an early stage two stock. The next update will be in April. No doubt some traders will be hoping for another upgrade, but if the stock trades in line then the plan is working as it’s supposed to, and the stock will be a beneficiary of more volatile market conditions in an early-stage bull market.
One stock I hold that is one of my top picks for 2024 is Supreme (SUP). I’ve warned about the vaping consultation when speaking about this company before, and the results were finally out last week.
The consultation results were not unexpected – they were being discussed before the official announcement. Yet Supreme took a hit in early-hours trading, only to gradually recover throughout the day, then power to a close higher than the previous session when the company announced that it will significantly outperform FY24 expectations.
Moving to Chart 2, we can see Supreme’s price action since its IPO in January 2021. A profit warning took the price down lower and during H2 2022 the stock traded in what looks to be a stage one base.
However, despite the fundamentals significantly strengthening with the market, the stock has struggled to break out of the 2022 high at 132p.
In November, the company announced that it would be “significantly ahead” of the company-issued guidance, and last week it again announced that it would be significantly ahead of November’s updated guidance numbers. Before that announcement, the company expected revenue of £210mn-£225mn and adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) of £32mn-£35mn.
Supreme also said that it expects revenue of £75mn (33 per cent) and £9mn of adjusted Ebitda (23 per cent) to come from disposable vapes – set to be banned in the UK by 2025 in FY2024. This is a significant amount, however Supreme believes that more than half of disposable vape activity will permanently transition to alternative forms of vaping. I believe that this is conservative, as someone who wants to vape will vape, and so long as they can buy vapes then they will continue to do so. Someone who buys energy drinks will continue to buy them if they are sold in a bottle instead of a can.
That said, it’s clearly a risk. But with the stock expected to trade on a price/earnings ratio of 5.7 on 2024 numbers I feel this risk is more than priced in – especially now the vaping consultation results risk is removed.
I’m long the stock already and wish to increase my position should the stock break out of the 2022 132p high. Rather than see the stock spike up to this level, I want it to gently trend upwards and consolidate around the breakout zone. This means that no quick money has been made and the stock is primed for a breakout. Let’s see.
