Hostelworld (HSW) is a company that some younger readers may be familiar with. My first experience of Hostelworld was through a €9-a-night hostel in Prague, and boy did it look €9 a night. It resembled a prison. But, along with our £40 Ryanair return flights, a friend and I enjoyed a four-night trip away all for £200. Unfortunately, he blew 10 per cent of his total budget on gin and tonics near Orloj, the astronomical clock tower, but the trip showed the ease of booking hostels and I was hooked.
It’s not surprising then, that Hostelworld dominates this market, especially having acquired competitor Hostelbookers. And given the march of the pandemic this year, it also isn’t surprising that, despite what on paper looks like a decent business model – it’s a booking platform for the hostel owners it partners with - the stock has struggled, ultimately meaning that little value has been created for shareholders.
Chart 1 shows the stock’s downward struggle. It has fallen from the heights of 400p down to well below 100p this year. There’s a lot of recent overhead supply to churn through before the stock breaks out into all-time highs.
In 2018, the company launched its ‘Roadmap for growth’ after a strategic review. It’s fair to say the market hasn’t bought into this – the stock was downtrending before the name Covid-19 had even been coined. Hostelworld wants to broaden its technological offering to make it easier for hostels to manage and sell, and believes there are significant opportunities to build a “broader catalogue of experiential travel products beyond hostel accommodation”.
Management also believes that there are opportunities for more acquisitions in the future. I am sceptical about this because if the original business is struggling, why are acquisitions going to make it any better? Surely this is just sticking plasters on a gaping hole? Personally, I don’t see why anyone would invest in Hostelworld, but then this column is about finding and exploiting trading opportunities. There are many trades in the market based on companies that are of low quality and unloved by everyone.
If one works through regulator news announcements with a keen eye, you might be surprised at what you can find. A few weeks ago (5 November), I bought The Works (WRKS) as it announced its half-year trading update. The company said it was trading significantly ahead of expectations and that its cash resources were adequate to support the business in “this new period of increased restrictions”. I bought, and posted this on my Twitter, and four weeks later the stock is trading at 100 per cent above my entry. I’ve taken some off the table, but the trend may continue.
Hostelworld may also be an opportunity for a beaten-up and battered company to move further. Trading is about supply and demand, not fundamentals. Far too many traders concern themselves with fundamentals, and while good fundamentals are certainly no terrible thing, sometimes they can be a lead weight on the stock price’s volatility.
Think about it: if a solid market darling releases results that are excellent, what can happen to the share price? Sure, it is likely to go up (provided the market wasn’t expecting far better – think Boohoo (BOO)’s results in September 2017), but it is rare for a company that is already well-liked by the market to move stratospherically.
But if a clapped-out company tells the market that trading is now significantly ahead when everyone was expecting in-line or even a warning, then that is a piece of news that can move the needle (think De La Rue (DLAR) in June 2020). Always think about what can move the price, and what the market thinks. Because when there is a mismatch between expectations and reality, that is our opportunity.
Chart 2 shows the potential opportunity in Hostelworld’s shares. I’ve drawn a resistance line on the chart with the recent high at 85p. We can see the stock’s reaction on Vaccine Day in early November, moving the stock to above 80p from 50p in a few trading sessions.
Since then, the price has been trading in a sideways range. It shows that there is sufficient buying power to match any sellers at this level, although volumes are thin. But if the stock can break out of its previous high at 85p then I would want to take a long position. I’d put my stop outside of the stop-loss liquidity, which would be the recent low, and so I’d put this around 76/77p.
What I’d like to see here is extended consolidation, and a high momentum breakout on volume. These patterns are often nicely profitable as the stock surges and sees traders wanting to pick up stock on the breakout retest.
The company is also well financed, having raised £13.8m in gross proceeds in June, and closing the month out with €29.4m and a €3.5m short-term financing facility. There is a small amount of debt on the balance sheet, but not enough to worry about a placing. It’s always best to check the little things as nobody likes being surprised with a discounted placing.
One thing that did stand out in the placing is the fact that the directors weren’t keen, with the biggest purchase being 31,358 shares at 72p a share. Directors can’t go buying and selling like we can, but this isn’t exactly a conviction buy.
In my opinion, Hostelworld is unlikely to ever become a high-quality company that the market fawns over. But just because it may never be a stock market darling, doesn’t mean we can’t make any money from it. I’ll be buying the breakout at 85p.
- Michael has released his UK Online Stock Trading Course. Investors Chronicle readers can download Michael’s book and learn more about the course by visiting www.shiftingshares.com/online-stock-trading-course
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