I sold my AIM-listed property and casualty insurance company GAH (Gable Holdings) 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 that I am trying to put in place. I think it more probable than not that GAH will produce a cracking set of results, with plenty more growth in the pipelines. If I have sold out ahead of disappointing results, then I can claim no credit for foresight, because I have no reason to expect that they will be poor. The only way I could claim a small victory would be if policy claims came out steeper than the market expected, as I had flagged that up as a potential sticking point.
Anyway, best of luck of current holders for the “soon to be published” results.