To kick this column off, I thought it best to start with a stock everyone knows. Fevertree Drinks (FEVR) shows what is possible if one can identify a capital-light business and quality compounder early doors. It isn’t an obscure company that nobody has heard of either – it’s likely many of us are regular consumers.
Fevertree listed at 180p in late 2014 and hit heights of over 4,000p (albeit just for one day) in October 2018 before gradually trending downwards. It currently trades below 1,350p – not far from 70 per cent off the high.
It’s a grim chart for investors. But this is not an investing column. Fevertree is one of many stocks traders use as an instrument of volatility in order to generate profits. There can be no room for sentiment here.
Supply is in abundance at Fevertree. Investors and even short-term traders who didn’t cut their losses are looking to sell the rallies. Those who wished they’d sold higher will use rallies to provide a steady stream of stock to the market. There is a reason why the old trading cliché ‘the trend is your friend’ is an oft-repeated mantra. When you go against the trend, you’d better have a good reason. Otherwise, you’re gambling that you’re printing the bottom.
We can see in Chart 1 the price action of Fevertree over the course of 2018 before the sell-off. Two key points are worth noting here. Firstly, the price never once traded below either of the 200 moving averages. Secondly, price tested and bounced off the black line in the chart – the 50 EMA (exponential moving average) – multiple times over the course of several years. Why is this important?
It's important because when price does something it hasn’t done before in a long time or ever before, it’s telling us that something is up and the trend may be changing.
Fevertree gapped up and sold off heavily on high volume in July 2018 – a sign that perhaps the trend was coming to an end (we looked at gaps in my Mind the Gap article a few weeks ago). The price then came back to test the 50 EMA and snapped right back, showing the price wasn’t ready to break lower just yet.
A few months later in September, the price put in a shooting star candle on heavy volume again. This was to be the highest price paid ever in Fevertree, as the stock ran up from just below 3,900p to over 4,100p, only to close red on the day below 3,850p. The shooting star shows willing sellers stepping in and taking control of the direction of the stock. The heavy volume showed that these sellers were out in force. The shooting star was also the second warning that the stock was getting ready for a lurch downwards.
Traders should always be on the lookout for signs because when the price does something the market is not expecting volatility increases. Being on the right side of the move can rack up sizeable jumps in profit and loss (P&L). I warned of this on Twitter on 4 October that Fevertree was a market leader and needed to rally otherwise it was going lower. The next day it fell through the significant 50 EMA price support level on heavy volume, dropping over 20 per cent in three trading sessions – high for a stock that would typically move a few per cent on any given day.
Markets always follow the leaders, and so Fevertree’s collapse gave other stocks permission to tank too. When popular stocks have unpopular falls, you can be sure there will be many others falling not long after like a domino effect. This can be seen acutely in last week’s coronavirus panic.
Looking ahead to 2020 and Fevertree had its first profit warning. It actually warned on revenue last November, but the price reacted strongly over the trading sessions after. This could’ve been the result of shorts closing, but since then the price is plumbing new 52-week lows, as we can see in chart 2.
Recently, Nick Train of Lindsell Train has decided to take an opening position in the stock. Mr Train is renowned for his love of stocks with global brands and reach, and so his first salvo has sparked interest. He believes that a brand of ‘global significance’ has been created. In fact, US growth is actually faster than expected. My belief was that The Coca-Cola Company would not allow a small upstart to come to its home turf and instead choke the brand at various points in the distribution and supply chain. Perhaps that could still happen. But Coke snapped up Costa Coffee from Whitbread in 2018 for £3.9bn, and with the Fevertree price falling lower any inroads into the US will surely see the drinks behemoth running the ruler. Whether any takeover bid emerges is a source of constant speculation in the City (my belief is that a seller wants out and so a piece is planted in the press) but we shouldn’t buy the stock in hope.
I would not trade Fevertree short here. The move has happened already and as traders we should be one step ahead by identifying key levels and trading from them. But it’s not time to go long yet either. Since last year’s high of just over 3,200p the price has hit the 150 EMA zone thrice and failed to break through. It’s a significant level, and it’s also much higher. I’d want to see volumes increase on up days to show signs up accumulation in the stock first. The trade in Fevertree could be a long trade should the price break through this level, with a stop placed underneath this zone should the price reverse so we cut our losses sharp.
It's not an immediate trade. However, as traders, sometimes we need to sit on our hands.
You can contact Michael and download his free trading handbook from www.shiftingshares.com
