Time to buy Merlin entertainments?
Merlin Entertainments (LON:MERL) has just completed a small 1:1 AB=CD pattern at the end of last wave down. It is also testing support level established when floated onto the market (Red line). Down trend also intercepts equidistant parallel channel of previous trend lines
Weekly chart demonstrates visually
Possible long term Buy or short term Trade
Any thoughts?
Hi, have you looked at the amount of debt they hold ? I wouldn’t be interested Ina long term hold, until some moving averages started to rise on the weekly charts
if it breaks that support where you drawn the red line then hell no I wouldn't buy, as that would indicate more downside. you need to wait to see if it finds support there or not. personally when I see this I would avoid.
Is the debt that bad, annual operating profits circa £300K, debt £1,200 so roughly 4:1, which i'm ok with given operating margins in the 20% range and in effect building a longterm revenue generating product. Also, if i remember correctly, refocusing investment away from UK/Euro to america/asia.
No, but i am invested in them, cash is obviously better than debt, but for this type of industry, which requires large investments up front, is that sort of ratio bad?. If operating margins were much lower, i'd not be touching it.
I'll be honest I haven't a clue what a 1:1 AB=CD pattern is, and personally I'm not a fan of technical analysis that is based upon pure maths as it is invariably just hocus pocus, eg Fibonacci is pure fantasy, how can it be anything else. Apologies if the AB=CD pattern is based upon any fundamental logic that relates to the real world, I have just not come across it before.
The only TA worth taking note of in my opinion is moving averages, resistance and support and a bit of focus on volume; MACD often tries to seduce me but I try my best to resist that siren.
In respect to Merlin, I guess you can see where my perspective lies, at the moment its in a very clear downward trajectory I suspect below all meaningful MA's. Never fight the market when it is so clearly bearish on a stock, if you're keen on buying I guess patience is your best friend.
I don’t know anything about AB=CD either but to my eyes that’s a horrible chart that I wouldn’t go anywhere near. It will take some institutional buying to turn that round. Perhaps then there will be a rally worth joining.
It's a beautiful level but the only upside I can see is 10% max - otherwise the price would have to break above the 363 level which doesn't seem likely to me, although, I'm going to keep on eye on it.
Hi all
Thanks to all for your thoughts
I’m going o reply to all of you collectively covering all things mentioned in no particular order
Apologies for not replying to all of you individually
It would be useful for replies to be objective as opposed to subjective. Only DJLJ23 has contributed objectively pointing out that the debt ratio using operating profit and net debt is 4:1, going on to compare this with the industry group and giving a reason as to why this isn’t bad when operating margins are considered. Other than that comments have been based on opinion with no rationale as to why. (Subjective)
These are my considerations in no particular order from the replies listed below, topics covered and further analysis on Merlin Entertainments (LON:MERL)
Pippasfan/ debt, some moving averages
vik2001/ support
DJLJ23/operating profits circa £300K, debt £1,200 so roughly 4:1
Matylda/Are you Merlin
Mike888/ not a fan of technical analysis that is based upon pure maths as it is invariably just hocus pocus, eg Fibonacci is pure fantasy, how can it be anything else. The only TA worth taking note of in my opinion is moving averages, resistance and support and a bit of focus on volume; MACD often tries to seduce me but I try my best to resist that siren
JohnEustace/ institutional buying
Danpollard/ upside I can see is 10% max
Before looking at the replies my stance on analysis is that I don’t understand why anyone looks at shares using one form of analysis. Technical Analysis should be used in concurrence with Fundamental Analysis. Looking at one without the other is like looking at half the picture. So I only use charts to identify areas of interest that other investors/traders might be looking at
Looking at the replies
Debt.
Using net profit the current debt ratio is 5.86, which is a little high until compared to historical debt, we can see that the debt ratio was 18.01 in 2011 with net debt at 1207M only 29 million less than today’s debt of 1236M, we can also see that net debt was reduced to 929 million in 2014. Debt reduction of 23% in 4 years, before the current investment and expansion phase. Due to the current expansion phase debt has grown to 1236M; however this is only a debt ratio as a historical percentage of 64.3 for the period 2011-2016 + TTM.
See table below in respect of debt and earnings and revenue growth which we look at next.
So why is Merlin debt ratio only 64.3% of historical average?
To find the answer we need to look at Merlin’s Growth and Quality Rank
Growth
Quality
Revenue increasing from 946M to estimates of 1692M in 2018 a CAGR of 9%
Operating profit rising to 323M from 230M
EPS rising at CAGR of 25.7%
Here’s a great you tube video by William Ackman (Bill) on Everything You Need to Know About Finance and Investing in Under an Hour
Institutional Buying
https://www.stockopedia.com/sh...
As we can see from this Marathon Asset Management LLP established a substantial ( 5.02% ) initial position in £MERL on the 5th Dec 2017
Technical Analysis
A number of you mentioned Technical Analysis. Hocus pocus e.g Fibonacci, moving averages, MACD, support and resistance and volume
Regarding moving averages, what period moving averages, what moving averages and how are you using moving averages? E.g. stop loss, Determining trend direction, Support, Determining market strength or Market timing tool
Looking at £MERL I’ve made a few additions to the chart see below
I’ve added some very simple Fibonacci retracements to all the uptrend’s starting at the first prominent wave higher. The 78.6 Fibonacci retracement is highlighted in black for each wave with the exception of the last one (50 Fib retracement), with the commencement of the next uptrend highlighted in red. The sequence goes as follows
.786 retracement terminates @359.9, next uptrend commences @360.9
.786 retracement terminates @381.7, next uptrend commences @377.4
.786 retracement terminates @397.5, next uptrend commences @400.8
.786 retracement terminates @420.9, next uptrend commences @422.5
At this stage price only retraces to 465.4, almost exactly on the .50 (465.0) Fibonacci retracement. From there the last wave higher terminates in a 1:78.6 AB =CD pattern before the down trend commences. The 1:78.6 AB=CD pattern terminates @535.5 Merlin share price reached 537.5. Obviously one couldn’t be sure that Merlin Entertainments (LON:MERL) share price was going to retreat from there however it is evident that the .786 Fibonacci level was influencing price and price was above the supply trend line and resistance. In conclusion it was evident that the .786 fibonacci level was influencing the share price of Merlin Entertainments (LON:MERL), in the examples given the furthest price it got from the .786 level before it reversed direction was 4.3 pence or 1.13%. you may consider this coincidental, hocus pocus or otherwise, the evidence is undeniable.
On the chart are two weekly period moving averages. They are red 8 week EMA and Green 89 week EMA, both are Fibonacci numbers. If the Red 8 week EMA was used as a stop loss on a closing basis it would have enabled participation in all of the share price gains in both directions to be captured without the stop being executed until price reversed with only one exception. The Green 89 week EMA on a closing basis identifies areas of trend support, trend direction and areas of demand, if combined with the .786 Fibonacci retracement level and price close above the Red 8 week EMA. It would have enabled low risk entry and full participation in all of the uptrends/downtrend.
Using Moving averages to determine market strength and market timing tool
Timing
Over the last 5 years, there have been 32 observations where the % of UK 100 Stocks Above 10-Day Moving Average [10MA] crossed below the level of 37, including 4 incomplete observation(s).
After 120 days, the UK 100 returned an average of 2.29%, with the return being positive in 66% of the observations.
During the 120 days:
Positive returns occurred in 97% of the observations. The highest average return of 6.40% occurred after an average of 67.16 days.
Negative returns occurred in 88% of the observations. The lowest average return of -4.77% occurred after an average of 39.88 days.
Over 5 years, the total return was 73.29%, while the passive return for the UK 100 was 16.51%.
Total cumulative negative returns would have been (-152.49%) i.e. closing the trades at their greatest loss. Total cumulative positive returns would have been (204.94%) i.e. closing the trades at their greatest gain.
Strength
Currently we have 1172 shares above their 200d MA and 1471 below their 200d MA
With the advance decline line and new high/lows in negative territory
So market strength is currently very weak, the bears will be trying to push the FTSE below 6700. However the % of shares below their 10 day moving average currently stands at 26 and is in oversold territory and testing support @ the 7100 level. If the bulls can re-establish a foothold before the bears breech 6700 then expect the Bull Run to continue.
The MACD indicator
This just the way I use the MACD and not a recommendation to anyone. DYOR
Using the MACD as a trend indicator in conjunction with the 89 daily period EMA.
Analysis and evaluation is as follows.
The level line also acts as a trend indicator so a MACD reading above 0 is equivalent to a rising price trend (price above 89 day EMA) and MACD reading below 0 is equivalent to a falling trend (price below 89 day EMA) also expect the price to test the 89 period Daily EMA when the level line crosses or retraces and tests the level line at 0 from above or below.
Chart below demonstrates visually.
This analysis was done where the MACD indicator terminates and the green shaded area is what followed. Notice how the MACD went from below the level line to above with rising volume. The 89 period daily EMA is tested a number of times before price crosses, as price was testing the daily 89 period EMA MACD was retracing towards and testing 0. Once price changes trend MACD crosses level line and rises away from 0. Again after price commences uptrend trend each time the daily 89 period EMA is tested the MACD is testing the level line at 0 before next uptrend commences.
Volume analysis.
For me volume analysis is as important if not more so than any other analysis
Stockopedia and their proprietary volume analysis indicator
https://www.stockopedia.com/ra...
I also asked stockopedia if they could make daily volume screenabable, which I believe is to be considered? Ed suggested using this volume screen in the meantime
https://www.stockopedia.com/sc...
My own workaround is to include daily volume and 3 Month average volume in tables download to Microsoft Excel and divide daily volume by 3 month average volume to give a volume ratio. I'm then looking for volume ratios greater than 3 but preferably into double figures.
Here's a guide to which ratios are available and where on Stockopedia.
https://www.stockopedia.com/ra...
heres a link a to the daily chart of Merlin Entertainments (LON:MERL) on stocko
https://www.stockopedia.com/sh...
it is noticeable that volume has picked up considerably of late with MACD rising and diverging towards the level line
support.
we can also look at support in more ways than one, with Merlin the support is clearly established as a line in the sand. If current levels fail, one can only use projected levels as new territory will be explored. However our objective when investing is to outperform the benchmark of our choice so even if a share is falling in price, provided it is falling less than the benchmark a good investment decision has been made relatively speaking. In absolute terms then i guess its still a bad investment as one could be in cash. However all turnarounds start with shares/index loosing relative force (momentum). Time will tell
im not going to amuse Matylda othan than to say i hope some people find the reference made and reply entertaining
DJLJ23 for what its worth I also own Merlin Entertainments (LON:MERL), long @325.4.
all the best J
I saw yesterday that ValueAct, a US active shareholder, has taken a 5.4% stake in Merlin Entertainments (LON:MERL) saying that concerns about the company are overdone. They are reported to have met with management and to back their strategy.
So definitely some institutional support coming in.
Merlin Entertainments (LON:MERL) completes inverted head and shoulders pattern, breaks neck line. MACD supportive of trend change. However move higher is not confirmed by volume. Measured move higher @ 449. With a close above targeting 467, 491 & swing point high respectively.
