$WAND.L – WANdisco – a follow-up

Six months ago , I called hosting company WAND (WANdisco) overbought at 384p (http://is.gd/hdgwdO), saying that it has yet to show that it can earn decent returns on capital. The valuation was too high, and the faltering price meant that momentum players were likely to lose interest. So, how did things work out?

I’m relieved to report that my prognosis was accurate. Its RS6m (6-month relative strength) is -40%, underperfoming the indices on a large scale. I could have been wrong, of course. With stocks where share prices detach from valuations completely, it is not unusual for the a stock to dive, only to find a second wind and resume their ascent. You can see this on charts for ASC (ASOS) for example. The shares had a massive run-up from 2010 to the end of 2013. In the first few months of 2014, momentum faltered, and over the next six months the shares went from a high of over 6000p to a low of around 2000p. The shares have since recovered to 4000p. You can observe similar patterns in shares like Facebook and Twitter. Buying and selling at the right time can make you a lot of money in these types of shares, but I think you really need an animal sense of the market.

Preliminary results were issued on the 17 March, to which the market reacted badly. Bookings and revenues were up, but their losses increased.

This is a typical story stock, where there is plenty of sizzle with this share, but we have yet to taste any beef. There was a proposed placing in January, representing nearly 20% of the then-existing share capital. It doesn’t help to see a lot of dilution.

Stockopedia gives WAN a rank of 13, having Value 0, Quality 36, and Momentum 37. Given that the company has never made a profit, I don’t see how the quality score could be so high. It’s one-year relative strength is -73%, so, again, I’m not sure how its Momentum score could be so high.

I still don’t like this share. Short term I can’t really say where it’s going to go next, as it’s one of those shares that is very sentiment-driven. In my opinion, though, its need for capital is not a good sign, and neither is the bad reaction to its prelims. It is vastly overvalued. If you believe that it has the potential to be a good long-term business then I’ll offer Lynch’s advice on the matter: it’s usually best to wait until the company turns a profit before investing.

It’s also worth noting, that if you were a momentum investor, you should have put stop-losses on this. I had said 6 months ago that the momentum looked like it was faltering, so that would have been a cue to exit. I see that the stock had a 52w high of 867.5p. So in retrospect, the correct way to have played this as a momentum game would be to set a 20% trailing loss. If you had done that, you would have sold at 694p. Maybe you would have made a profit, maybe not, but at least you wouldn’t have been riding this down all the way to 252p, where it is now.

252p