Gable Holdings Sold: 38% Gain

20th Jun '13 by Mark Carter

9 comments 9513 reads

I sold my AIM-listed property and casualty insurance company Gable Holdings Inc (LON:GAH) today, for a 38% gain (inc all transaction costs) over about 2 months. Not bad!

The shares have had fantastic relative strength over the last 6 months (53%). Results are due “any day now” – although it’s difficult to tell, because shareholder communications are rather poor. One niggle in my mind is that GAH may be underproviding for losses. It is, perhaps, a worry in my mind that is lodged too deeply.

The company certainly seems to be expanding very well, and broker forecast are very robust growth. Valuations seems pretty much in-line with the rest of the sector on a PER and PBV basis, and given its growth curve, investors could still do very well out of it.

So why did I sell?

Well, I’m in the process of developing a momentum strategy, and looking for buy and sell rules. On the buy side, I’m looking for RS6m (6-month relative strength) in the top quintile – which is about 18% at the moment. I’m looking for positive fundamentals that will drive the share price forward. I’m also using the 50dSMA (50-day Simple Moving Average) as a buy/sell indicator. On the buy side, I’m looking for the share price to be close to the 50dSMA. That should give me good support. I’m also looking to concentrate more, holding fewer shares, but holding them in the main market rather than AIM.

On the sell side, I’ve noticed that when a share is trading at 25% higher than its 50dSMA, it tends to be “overbought”, and subject to pullbacks. This is the territory we are in for GAH. I don’t think it’s a perfect indicator – it’s not a rule that works 100% all of the time – but it seems to be a pretty good one.

It’s very tricky to strike a balance between locking in profits and letting your winners run. As a work-in-progress idea, selling when a share reaches above 25% of the 50dSMA seems a viable one.

We are having, admittedly, a rough time in the market at the moment, but GAH sold off quite a bit yesterday, and is selling off quite a bit today. So it looks like there’s some profit-taking going on.

I’m far from reaching a definite conclusion about a new trading strategy…

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Edward Croft

20th Jun '13

Mark - this is an interesting post - I thought I'd see if I could put a screen together to come up with some candidate stocks with this profile - have a look here & feel free to fork:

http://www.stockopedia.com/screens/mcturra-like-momentum-stock-screen-9645/

Some v. interesting names.

Mark Carter

Thanks. Interesting.

It's a bit impromptu, but I put together some companies that look interesting using the general approach. I haven't been looking at the quality or value rank, or indeed the piotroski score. Some shares can look pretty hairy if you look at quality or value, but I think they make good investments.

The way I'm increasingly operating is to follow investors who I believe are really good, checking that business fundamentals have a "momentum" of their own, and seeing how they fit in with the framework that I'm putting together.

One share I would highlight, which has partocular relevance today, would be Dixons Retail (LON:DXNS), for example. It has RS6m of 36%, and PV50 (price vs 50dMA) of 9.3%. PV50 might be towards a higher end of what I'd prefer to buy, but I think there are mitigating factors. The finals came out today, sending the share price 2% higher, compared with a horrendous performance of the ASXX (All-Share exc. Inv Trusts) of -2.9%. I think it's good to see a positive market reaction to the good news, and suggests to me that we've still got a way to go before the market has caught up with fundamentals. Like-for-like sales have been strong for Dixons Retail (LON:DXNS), and they are doing some restructuring in their poorly performing PIXmania division. there is speculation that it will be sold off, which should further enhance profitability. Underlying pre-tax profits came in over analyst estimates. Net debt is also down.

So a screen along the lines I'm thinking about is part of selecting shares, rather than a purely mechanical strategy. There's a certain "definiteness" to the fundamentals of Dixons Retail (LON:DXNS) which make it look attractive, and this is bolstered by techincal considerations. If I felt that the fundamentals had broken down, then I would have considered it a sell regardless of what a mechanical strategy told me.

So although Dixons Retail (LON:DXNS) has a definite "yuk" factor in terms of valuation (its on a PER of 33), I've discovered that share price movements have only a weak correlation with valuations, so I tend not to oversweat them when considering them a buy. In a recovery situation like Dixons Retail (LON:DXNS) you might well not like the valuation or quality factors.

I could probably carry on like this all day, but another one that just caught my attention right now was easyJet (LON:EZJ). It's in Joh Rosier's portfolio (http://www.johnsinvestmentchronicle.com/#/current-portfolio/4561253434), and I've noticed it mentioned by other investors. easyJet (LON:EZJ) has an RS6m of 55% (in the top quintile), and its "PV50" is 7.8%. That's pretty good to a support level. It passes a Stockopedia growth screen, and a momentum screen. Latest passengers statistics look fairly encouraging, I recall a tie-up with Thomas Cook, and it has just announced fleet plans to acquire 35 aircraft, which was well-received by the markets.

I see that today directors purchased about 21k shares at around 1275p, which is about £268k.

So there's a good combination of factors working in your favour. Director purchases, good momentum pricewise without being way ahead of itself, owned by some astute investors, and some nice concrete fundamentals that should feed through into profits. You wouldn't go out and buy aircraft if you thought demand was poor now, would you? You could say that on a PE of 16 it is fully valued - and I don't think one should be oblivious to valuation metrics per se - but be aware that valuation and quality are not the final arbiter. What I like about it is the "concreteness" of the fundamentals. Like Dixons Retail (LON:DXNS), I can definitely what should be driving prices further.

I could ultimately be wrong of course; but then that's the trick to try to identify the mistake and sell. But I would rather invest in these kinds of situations than I would in say Chemring (LON:CHG), where its a bit unclear in my mind how the debt situation may pan out, and trying to make a lucky guess as to whether US Defence spending will or wont pick up.

Funnymoney

21st Jun '13

Mark,

If you look at each of the leaders for momentum you will see that you would have been kicked out of great stocks like Xaar and many, many others. I think this sell signal will have a detrimental effect on your results.

On the buy side, waiting for a breakout from a shallow base and previous high of >8 weeks ago is key.

Regards

fek47

22nd Jun '13

I also sold Gable Holdings Inc (LON:GAH) a couple of weeks ago - managed to sell at 72p having bought 2 months earlier at 49p, so very pleased with that outcome!

johnrosier

Mark, I have followed your lead, well sort of! Your posting prompted me to be a little more prudent so I have sold about 1/3 of my holding, reducing it to 4% and locking in a very healthy profit having bought last August. see www.JohnsInvestmentChronicle.com

mpat89

23rd Jun '13

See how your results change if you sell when prices closed below the 50 day average? This way you should be able to let them run higher far more, not sure about the quantifiable effect though as the 50 day average will not be immune from market noise.

seasons

26th Jun '13

Mark, thank you very much for this article -- I think it might explain why I managed to buy on the (local) top on three occasions..

Mpat89: can you elaborate on this? Are you saying if the 50 day average turns negative, the stock should be sold?

Ed, thanks for the screen, brilliant. Now I understand what these rankings are for! In fact, your screen inspired me to create my own:
http://www.stockopedia.com/screens/composite-momentum-screen-9714/

Using this I can follow the price momentum but using the highly praised Value Rank instead of the 'simple' P/S ratio on its own. The initial results are impressive but obviously too early to draw long-term conclusions from it. Nevertheless, this screen's results are in line with the Kirkpatrick's one and I hope that taking more value parameters into the decision will help on the long term.

I am trying to follow Kirkpatrick's advice on when to sell, so I created another screen, once the stock disappears from there, it should be sold. But, these parameters are still to be set.
http://www.stockopedia.com/screens/composite-momentum-screen-keep-9717/

At the same time I am thinking about learning more about reading technical signs...

I also wanted to add the criteria 'Screen #(Short) = 0' but for some reason some stocks were not shown (where the value was N/A). Although it's easy to see this on the stock's screen, the 'Keep' version would drop it immediately if one was set! I raised a support request on this.

28th Jun '13

Gable Holdings (65p and 2% of JIC). This is a situation where I am going to follow my instincts! The Company has left it to the last possible date to issue its 2012 results which were due out today. It is now 9.20am and no sign of them. I think it is incredibly unprofessional. I have big profits on this stock and have halved the holding this morning to 2.0% of the portfolio.

It is now 1.35pm and still no results. Very unprofessional and slightly worrying. I have big profits and have decided to bank them. (See transactions)

Gable holdings has at last issued its results for the year ended 31st December 2012. The earnings figure has come in below expectations of 5.6p at 4.32p. The important "financial highlight" is "Prior year results restated following review of accounting policies and practices" and I suspect that is why the results have taken so long to produce. The adjustment to prior year's figures are large and I guess were as a result of appointing Ernst & Young as auditors.

I guess the good news is that, as the Chief Executive says "this leaves us with a greater level of confidence in our financial policies and processes and our ability to continue to deliver significant profitable growth to our shareholders."

Conclusion; As readers will know, I sold the last of my holding early this afternoon as I was disappointed that it had not published its figures first thing this morning and smelt a rat. The shares should be hammered for these results and for the way it has communicated with shareholders. It will however, be worth keeping an eye on, as having improved its financial controls and accounting practices, as well as a strengthening its Board it could be a worthwhile investment in the future.

Gable Holdings sold: 38% gain

So why did I sell?

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Mark Carter

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