Sunday, 3 March 2019

TRADE OF THE WEEK #5 : V.S. INDUSTRY BHD


As we have demonstrated before in our past TradeOfTheWeek posts, a lot of the short term trading activity does not require substantive fundamental analysis. However, it is essential to know the basic facts about a company, the current investor and business sentiment towards the sector it operates in, its historical stock price, and its historical earnings performance.

For growth stage companies, their expected earnings growth means that the stock commands a market premium. But this trend reverses itself once it becomes clear that the previous expectations are far too rich.

Essentially, this is what happened to VS Industry Bhd, previously a high flier growth stock due to its leading status as a products assembler and manufacturer. Having a flashy client such as Dyson also helped.

But the growth angle hit a speed bump recently. The company warned that it expects slower client orders in the coming quarters. Since then, the stock has steeply declined but has shown volatile price activity - an invitation to traders like ourselves.

Note that we said you don't require 'substantive' fundamental analysis when analysing a potential stock to trade. But you do have to be familiar with the company's well-being from a business standpoint.

To overly simplify things, from a fundamental standpoint we always pay attention to the following in any company. Of course, these figures are readily available on the Bursa Malaysia website, for those who aren't too lazy to look for them:

1) Company's net asset value per share (a measure of intrinsic value relative to where the stock is trading now)
2) Its debt situation (is it normal for the sector?)
3) Its cash flow (constrained? Improving?)
4) Its available cash and reserves (a measure of prudency)

Fundamentally, VS is something we will continue to recommend (we have traded it many times) as it ticks all the right boxes.

THE TRADE

'The Spike'. Daily chart for VS back in January 2019. 

10 January price/volume data.

Let's contextualise this kind of movement. A price increase from 75 sen to RM1.03 in one day is highly unusual. But you don't need to know the reason behind such a move to trade the stock. We didn't and couldn't have figured it out, even if we had tried. 

Interestingly, the best trading opportunities tend to come when the rally cannot be explained. We have found that even market rumours tend to dilute the longevity of a stock price increase. And we do not trade when the news is out; neither should you.

Long story short, we managed to capture profits after identifying the stock's behaviour on 10 January as exceptional. For some reason, it is moving up, and far too fast for its own good. The strong volume was also a prominent sign that the buying interest is immense. Someone was buying - it could be fund managers, or bored uncles with retirement savings to burn. 

But more importantly, the price activity was aligned with our fundamental analysis of the company. It is a viable long term stock, and there is actual justification for it moving upwards.
Crappy companies tend to see their battered stock languish for years to come. But good companies tend to see their battered stock recover in fits and starts.

On this day, the movement was such that we knew there was a limited time frame for entering and exiting. The outcome:




Seven minutes ain't bad. The principles of short term trading are explained in painstaking detail on this blog; you don't have to look far to find them.

In a short period, we fortunately were able to contextualise the short term characteristics of VS. Think of the 'rubber band principle' : the longer the stretch, the faster it will contract. In other words, if a stock can move up by six sen (6.5%) in seven minutes, there's a good chance it can go down just as fast.

We got into the stock only because we identified the temporary market mania (at least seven minutes' worth); the large volumes, the quick breakout beyond 90 sen (a key resistance point), and the velocity of the price move, are all good indicators. When any of these start to recede, you will see a price pullback.

In fact, the price went beyond our exit point to RM1.03. But then it fell back hard.



And thus the trade window has closed for the day. Opportunities are finite in their potential and time frame; they are available in the market, but you always have to identify them.

TWO MONTHS LATER...

Contextualise a stock in a long term context and you will find different types of opportunities. If you're a smart buy-and-hold investor (we are not smart, and we are not long term oriented), you would have been able to capture VS stock at the 75-90 sen level. Value investing is such a crowded market that you will always find backers of truly valuable companies; they may arrive late, but there is no resisting a viable long term stock.

Just over two months later, as of 1 March VS has successfully broken past the RM1.03 mark. Enthusiasm has returned, and the smart long term investor would have realised a 30% gain in just under two months.

Slow but steady rise since 'The Spike'.

The lesson : find a strategy that works best for you and stick with it. 


Outcome

Gross profit : RM2,400
Return on Investment (ROI) : 6.5%
Duration : Intraday, 7 minutes










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