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Buy the breakout at Boohoo

Michael Taylor explains why betting against one of Aim’s biggest success stories looks like a fool’s errand, and why there could in fact be more upside to come
June 25, 2020

As the London Stock Exchange celebrates 25 years of Aim, it is naturally keen to push the party line that Aim has been a success. And Boohoo (BOO) is one of its biggest success stories. 

If we look at its purest key performance indicator (KPI) of raising capital, then no-one can argue that Aim hasn't indeed been a success. But nothing is ever so simple as one metric. More than 3,800 companies have joined the junior market since its inception, raising £118bn of capital. But how many of those companies have delivered shareholder value since their initial public offerings (IPOs)? Rather tellingly, the London Stock Exchange fails to mention these facts.

However, we do know from an article in the Financial Times – ‘20 years of a few winners and many losers’ (18 June 2015) – that 72 per cent of all companies ever to have listed declined in value, and that in over a third of those cases, shareholders lost 90 per cent.

Part of that is due to the lax regulation, resulting in some of the examples that I highlighted in my cover feature ‘Avoid Aim’s traps’ (IC, 12 December 2019). Part of it is down to private investors blindly chasing a quick profit. If private investors did not fund what I will politely describe as the market’s ‘dross’, then that dross would die out. It is survival of the fittest as Darwin imagined it.

I confess to being part of the problem, as I have invested in some very poor Aim companies in my time in equity placings on speculation that the secondary market would bid it higher. They have been the sort of businesses that would give the big Phil Oakley nightmares – it is often said that Aim is a stockpickers' market, but perhaps it is mainly a trader’s market too, especially when it comes to companies like this. 

Boohoo is one of the companies that certainly isn’t in this category. It came to the market at 70p a share in March 2014, and sank as low as 21p. Over the next few months, the stock gradually began to curve upwards and entered a stage-two earnings upgrade cycle, hitting 210p and becoming an elusive ‘10-bagger’ stock in May 2017. 

However, if we look at Chart 1 we can see what happens when expectations reach a crescendo. Stock prices move only for two reasons: anticipation and expectation. As the price rose in anticipation of earnings upgrades, the stock continued to rise as those earnings were better than analyst forecasts and were better than what the market was expecting. But eventually those expectations became too high. When the company released a trading update in October 2017, it saw its share price gap up followed by a huge sell-off on large volume. 

The results were stellar – but they no longer matched the market’s expectations of the stock. Investors may have been puzzled as to why the prize horse in their portfolios was selling off, but the large volume clearly shows institutional selling. When you see such institutional selling, it is foolish to trade against it. The smart money is not always the smartest, but it is the biggest. Fighting someone bigger than you is generally not wise.

The stock then drifted for over two years, showing why it pays to take note of the trend. For a trader, being locked into a stock for so long is not only a physical cost on capital, but a psychological cost. Seeing a red stock on your book that is not moving and tying you up is not good for the psyche – especially when one considers the opportunity cost of that capital. This is the real cost – as traders we generate our returns on active money management. We’re also only as good as the stocks we trade, and if we’re holding duds then our performance will show itself in the truest mirror of all: our profit-and-loss account. 

The stock did give some clues that it would eventually test its previous high. Fundamentally, the business continued its trajectory, and although the share price traded at a deflated rating, it put in a low in April 2018 (almost 50 per cent from its peak), and again looked to test this in December the same year. 

We then saw the stock break above the moving averages and fail to break the 240p resistance area of a previous high. The stock tested the 200-day moving averages and held, which was another suggestion that the stock was ready to move higher. Charting is often self-fulfilling, and those who saw this important support zone held, and the price bounce off it knew that there was a strong chance the stock would begin an uptrend. Finally, over two years later, the stock breached its previous high from the sell-off in May 2017.

Chart 2 shows us the destruction of Covid-19 and the bounce-back and rally to all-time highs. Last week, the company released a trading update showing revenue growth of 45 per cent. Despite a short attack from Shadowfall, the stock has remained strong and saw the market gap up. 

Supply came into the market, as we see a shooting star candle, followed the next day by a hammer. I expect to see this stock trade in a range until we have a clear direction of a trend. Shorting Boohoo is not something I would be interested in – shorting stocks just because they are expensive is for mugs, especially when they are trending upwards. Rather, I’d like to buy the stock should it break out of its recent high of 433p. That would give me a signal that the trend is set to continue. 

 

You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com

Twitter: @shiftingshares

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