Trading The Trend (long And Short) - Foxtons And Royal Mail

4th Feb '20 by Michael Taylor

12 comments 3368 reads

Shorting is a contentious issue in the investing community. Many view it as evil, and others view it as a necessary balance in the market. After all, if everyone was only allowed to go long – then who would keep rampant bulls in check? And that is exactly why China is taking steps to limit short selling today on February 3. Whether that continues after this is currently unknown.

But many investors use shorting to hedge risk, and I believe it allows a certain fairness in the market, with other people being allowed to take the opposite side of trades.

Whilst I certainly don’t agree with a broker’s market making desk shorting the stock and then having the same broker offering the company money in an attempt to close that same short position (value destruction), shorting is healthy (despite one prominent CEO on Twitter calling for it to be banned). It will certainly be interesting to see the outcome of China’s experiment.

Foxtons

Foxtons is an estate agent which has had a rough fall since initially rising from its IPO. The price almost reached 400p, and then steadily crumbed for a multi-year period, before appearing to put in a low just below 50p.

It’s a stock that – alongside Countrywide – has been the attraction of many shorters (myself included). Revenues were down 4% year-on-year in the recent trading statement, but the company no longer looks like it is going to be in extreme difficulty.

This may be the reason for the recent rise.

Or it may not be. It still looks like a low quality business to me, but looking at the chart we saw volumes in the stock increase in July as the stock put in its recent lowest low. The only reason volumes could’ve increased is if buying interest was sufficiently there to clear the sellers and push the stock upwards.

Since the start of September, volume has also been increasing and the stock took out its recent high, with a breakout on good volume. The stock is holding that level, and so I intend to start watching Level 2 closer here. Is the stock well bid? Are there consistent icebergs reloading any AT sells? Even without Level 2, the…

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IanMac

4th Feb '20

Hi Michael. Thanks for this analysis. Just to clarify - it looks like you are using a daily chart for RMG (so your 200 average is 200 days) but weekly charts for FOXT (therefore a 200-week moving average) right? Is there a reason you consider 200-days more important in once case and 200 weeks in the other? Thanks again.

Munday

I recently sold this on some of the reasons you described. But not as a short, as a holding.

Michael Taylor

5th Feb '20

Hi Ian - I was wondering why the chart looked a little different. I use daily and must've accidentally clicked something as Stockopedia saves the layout of my charts by default.

The chart should've been daily! My apologies.

Martin Verlaine

With RMG I traded this across the election and was happy to exit With a profit and the dividend . It is now back at the price I bought in but hard to see a bounce. We know the dividend will be chopped and there remains issues such as pensions and the archaic labour practices coupled with a declining market for mail to manage. I like the parcels growth and potential from the company’s initiatives. So it is cheap for many reasons. The chart indicates a bounce from here is expected but lots riding on the trading update ( tomorrow) so let’s see what comes out.

Thanks Martin - I didn't know there was a TU tomorrow. I certainly won't be taking a position today if the level breaks, as to me that seems like unnecessary earnings risk.

6th Feb '20

Hi Mike

I see the share price has reacted badly to the update so legged down into shorting territory.. Also prospect of industrial action. Dissecting the update says mail delivery expected to decline more sharply as comparatives will lack all the election mailing from 2019. The veiled threat to parcels investment is likely for the benefit of the unions. Parcels remains the star but it would not be good to get too carried away given the competitive environment. Hard to see any positives from this. The sidelines still look attractive

8th Feb '20

I agree with you Martin. In hindsight, shorting ahead of the update would've been a good trade, but the opposite could also have occurred leaving us with a nasty gap up.

I think this stock will provide a good opportunity to get short at some point - perhaps if it takes out the low that the stock put in yesterday.

I bet you're glad you did Munday after yesterday!

KevDewy

**Silly Newbie question** At nearly £2bn market cap the company would need to add £400m of value just to increase 20%

How did you work this out?

Thanks in advance.

9th Feb '20

Kev - if the company is worth £2bn and it increases 20%, then £2bn multiplied by 20% (1.2) is £2.4bn.

So the difference between the new market cap and the old in the event of such a rise would be £400m.

10th Feb '20

Mike

The latest broker update suggested a price target of 150p. My gut feeling is there is more bad news ( dividend to be slashed further than forecast?) to come so this figure maybe reached. The chart needs to establish a floor ...... the problem is it has never been this low in the listed history. Results not due until May....... gut feeling is to remain on the fence. Shorting joe means you feel strikes are coming

Thanks Michael. A grown man and I couldn't work that out:)

Trading the Trend (long and short) - Foxtons and Royal Mail

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Michael Taylor

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