My Dilemma with Fundamentals and Share Price Technical Analysis

26th Jun by WarrantStar

29 comments 1251 reads

I am in a dilemma. My approach is to buy & hold quality growth companies. I have done a thorough analysis of a company & the pros & cons of investing in it at the current share price.
I have concluded that the shares are currently very good value. But the current share price technical analysis (ie graphs) is poor.
I am torn between buying now or waiting till the SPTA is better.
If I buy now I would do so at a good price. But the SPTA says it may go down further in the short term.
If I wait till the SPTA is better, then I would probably have to pay a higher price. But there would be less likelihood of a short term price drop.
I could put in a limit order to buy at below the current price. But the price may not be achievable, and the deal may never be executed.
So what would you do & why do you think it is the best approach?

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andrewdb

25th Jun

If you are talking about a smallcap:

I (imo only and ymmv) think short term sp movement only moves in a manner where it is open to TA when there is strong and clear positive or negative momentum over a long period of time (months)

Generally you see a lot of noise - viz Kape Technologies (LON:KAPE) etc.

Studies show momentum is 'real' and (imo only and ymmv) most - all TA based on share prices data is really searching - finding inflection points in momentum - others may have different views here.
TA based on volume or other data is different.

WarrantStar

Dear All,
The reason why I am not revealing the company is because it is a small one, whose share price could be influenced by a trade or two. I understand that this also makes it much harder for people to comment.
I was not looking for comments on the merits, or shortcomings, of the company, or its share price charts. I was asking for advice on what to do when the fundamentals say "Buy" and the chart says "Sell". The general idea that I am getting from the responses, is that I should wait until the charts improve. That is what I will do.
Thank you all for your contributions.

monions

Thanks for the clarification.

Your question about whether to 'buy' on fundamentals or wait until the chart confirms this will also get many and varied answers as it all depends on what you perceive your 'trading style' as. Some investors will only look at fundamentals (ignoring short-term price action) and buy when they feel there is value. Others will only enter when the chart says it is relatively safe to do so - giving yourself maximum safety on the downside.

Personally (IMO), I look at fundamentals to select possible candidates and then use TA to determine my entry point. For me, price is the defining criteria - there are no points for being right or wrong. Only for making money - and that comes from the price.

Others will have a different view, all are valid as it takes all sorts to make a market.

shipoffrogs

Perhaps if you disclosed the name of the share readers here would see the fundamentals, fill their boots, and push the price up. Et voila - the SPTA would now suit your needs.

Shipoffrogs,
Thanks for putting a smile on my face!
However, I think it would be more advantageous to me to wait till the price stabilises at a lower level than it is at present, and then let everyone else in on the secret!

HollandSmith

I think you have been reading the TA books upside down Warren. But collectively we are the ones that make the market - so who cares what my opinion is. If you make money that way, good for you :)

Gromley

(Most of this was written earlier on while travelling and before some of the comments on the particular case in question – so this is more of a generic answer).

This is a fairly common dilemma, especially for value investors, and I would say there is no generic right answer.

The most likely outcomes are that you will buy too soon and see the share price fall further before hopefully seeing a recovery or buy too late and see yourself lose out on a portion of the gains to be had.

If there was a magic formula for buying at the bottom, I would not be sharing it on a public message board!

From a personal perspective I have in the past bought much too soon, driven by the beliefs that (i) I needed to snap up the bargain price before “the market” cottoned on and (ii) that any potential bad news was already “in the price” (whilst there is often an element of truth in this, if the bad news does transpire, the market then prices in further potential bad news.

The biggest downside that I have personally experienced from buying too soon, is not the missed opportunity to buy at the very bottom, but rather the opportunity arising from the fact that it can take much longer than expected for the value to out. (Of course there is also the risk that you got the whole situation wrong.)

On the other hand the downside of buying too late is to see the share-price soar away from the bargain price that was previously available. This can not just cause you to miss out on the initial portion of the rise, it can cause you to miss out on ALL of the upside – if you see the share price rise by say 20% on good news, there is a strong temptation to feel that you have missed out and to write off the opportunity all together.

These days I tend to look for signs of recovery before investing and have schooled myself to accept that 20% (for example) above a super bargain price can still be a bargain.

However, I don’t limit myself to looking solely at a recovery in the share price, I also look for recovery in the news flow, so I am reluctant to buy if the last news was bad. Whilst it is not true that profit warnings come in threes, my experience is that bad news can come in multiples and that oftentimes sentiment (and therefore share price trajectory) will not convincingly turn until some published good news has displaced the previous bad.

Of course, sometimes by taking this more patient approach I will miss out altogether and sometimes despite the patience I will buy into a “false rally”, but thus far I believe this approach has improved my performance overall. The main thing though is that I continue to live and learn and see if there is anything I can improve on from positions that haven’t worked out.

To keep a record of all your decisions (including those not to buy) and to review the results , would be the only useful advice I think I can really give.

26th Jun

Gromley
Thank you for your well considered reply. On reflection, I can see that my original post was caused by my impatience & frustration. I had done all my research & wanted to buy. However, my system was telling me to wait. But I was eager to get a move on! Somewhere I once read that the stock market was a mechanism for transferring wealth from the impatient to the patient! I don't want to be on the losing side of that.
Anyway, I am going to wait. My reasoning for that is:
1) From the charts, I expect that the price will fall in the short term.
2) From the fundamentals, I expect the share price to start rising in the longer term.
3) I wish to avoid the initial loss of value which would be caused by a short term share price fall
4) I expect to be able to buy at a lower price in the future

What I have actually done is to set up an alert to notify me when the share price has risen over 2% in a week. When that alert has been triggered, I will look again at buying.

timarr

If this is a small, illiquid stock then you'd be better off buying if you trust your analysis. If someone else figures this out then the price can easily gap up dramatically. TA simply doesn't work in such situations, so you'd be better off triggering the rise yourself.

But the quote you reference is more about buying and waiting rather than waiting to buy. It's Buffett of course, and his point was that short term price fluctuations are irrelevant in the longer term if you've got your analysis correct. But Buffett is frequently quoted out of context - I was reading a Bitcoin thread the other day where someone was using this particular quote to encourage everyone to stick with it :)

ambrosia

my advice Warranstar is; dont get emotionally involved in any stocks or opinions. it looks like you invested a lot of time in this stock, dont let that attachment cloud your decision

When i stopped setting alerts for individual stocks, my win/loss ratio went up. I didnt know it at the time, but when you do set alerts for individual stocks, you are pushing your emotional attachment to your future self, and make it harder for you to eventually sell for profit in the future. I know other people will disagree with this - but i believe daily screening is the best way to go.

Now - if you believe you have spotted something no one else has - why dont you calm the mind and try this.

Buy 1/3 today
Buy 1/3 when the chart looks right
Buy the final 1/3 when you 25% in profit

I know you think you have sorted your dilemma by sticking an alert on it - but i would disagree.

Timarr
You make a very interesting point that "If this is a small, illiquid stock then you'd be better off buying if you trust your analysis. If someone else figures this out then the price can easily gap up dramatically. TA simply doesn't work in such situations"
Should I make a rule about this such as
If market cap is less than £100m then do not use TA
OR
If normal market size x share price less than £10,000 then do not use TA
What does everyone else think about whether or not it is a bad idea to use TA on small illiqiid stocks?

HollandSmith
Well i'm still debating it on here. So I wouldn't really say that I have resolved my dilemma.
I had a similar idea. I could buy 50% now and buy the other 50% if & when the TA looks better. These kind of approaches seem to be a reasonable kind of compromise when dealing with a complicated situation.

Timar makes a good point, one which I should have put in my reply yesterday as you had highlighted this was a very small stock.

TA, to work, needs to have liquidity. Tiny stocks that have little liquidity don't behave in a way for TA to track the eb and flow of sentiment. Even a tiny buy can trigger the smallest stock to jump up 10% or more. This doesn't mean the tide has turned, simply someone bought what could appear a 'large' amount and the Market Makers may not have enough stock to supply that so have to spike up the price. In this case the price and spread could be artificial - but that's a long story in itself.

It's not quite simple, but you can look at the average volume for the share and the MCap. The volume is also important in tiny shares as you need to be careful buying a quantity that is a high proportion of the average daily volume. This could leave you high and dry if the price drops.

I think Holland has a good idea. If you buy 1/3 now, then you at least have a position. When it starts behaving how you feel it should then you can increase your position. This limits your down size and scales your position as the price develops. You do have an opportunity cost if it jumps up, but more importantly you limit your risk.

I have had a look around on Google and there is general agreement that TA does not work well for low liquidity shares. This supports what people have been saying above. So I will not apply TA in this case. So my dilemma with this share is now over. My fundamental analysis said I should buy it. So I have just bought it at 100% of my standard position size.
I will introduce a new rule into my process not to use TA for low liquidity shares.
Thanks to everybody for helping me to resolve my dilemma.
For any of you that still wish to know the name of the company, I can now reveal that it is Filta Group (LON:FLTA)

Gerard88

Your dilemma made me think. Up until today I have relied solely on financial and other detailed analysis, and don't look at charts at all. My approach has beaten the FTSE AIM AllShare index for a number of years, but should I now add this extra input? What has been your experience with SPTA to date?

Interesting. I like this company, but will only buy if it hits 150p.

Gerard88
I mostly rely on fundamental analysis. I am not a very great believer in SPTA because I think it can give unclear signals. Lots of people quote examples of when it has helped them, & fail to mention the times when it has let them down. However, like quite a lot of people, I find that it can help me time my trades. In future I will not use it at all for low liquidity shares.

andrea34l

I find myself very puzzled at the ridiculous secretiveness of this stock until now, because Filta Group (LON:FLTA) is not exactly under the radar to many people on Stocko and is isn't exactly a stock market tiddler either.

I'd suggest that the H2-skewed results statement has certainly put some people off. I feel a bit unnerved by the Watbio acquisition (and GMG) where in the last results they say "we anticipate an acceleration in revenue and profitability as it builds its client base and we begin to realise identified and significant synergy benefits" but in the latest update they say "during this period of integration, the combined Watbio and GMG revenues have been similar to what they achieved in the same period of the previous year" - so, clearly the acceleration in revenue and the building of the client base hasn't happened, as yet. The FY-2019 forecasts have gone down quite a bit since April, from eps 11.8 to 9.94, putting them on a not inconsiderable forecast PER of 19.

Perhaps you'd like to now indicate why you think everyone has missed something significant...? :-/

Aha , FLTA.

FWIW I had a bit of a "rant" about their AGM statement on the day - as it wasn't actually in the title of the SCVR article itself it won't show up on the search so in case you are interested here is a link

(I've obviously not done anywhere near the research you have done on it, so my thoughts were solely driven by the statement.)

Basically it looked to me like a potential profits warning, so in reference to the points I made above - I judge that there is bad(ish) news in the market that has yet to be 'countered' which will often tend to see the share-price continue to drift downwards and there is also the potential steep fall if the warning does actually play out. Hence why I personally would not be a buyer at this stage.

They will presumably give another update in August and for me I would want to read that statement before making any decisions - of course if it is a 'good' statement (or they come out with anything positive earlier) then chances are you would miss out on the first part of any rise. That's something I've learned to be more comfortable with.

When you reference above possibly being able to buy at a lower price later, I'd be comfortable to buy at a higher price later, with the uncertainty removed, but that's just my take on things.

My Dilemma with Fundamentals and Share Price Technical Analysis

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WarrantStar

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