And that rule is: avoid investing in companies where the RS6m (6-month relative strength) is in the bottom decile.
According to some calcs I did in in November 2014 (http://pdf.markcarter.me.uk/momo2014-11-26.html), the bottom decile cut-off is at -15.6%, and the top decile is 25.4%. I discovered that companies that were in the top decile had nearly a 25% chance of being in the top decile over the next six months. The bottom decile had nearly a 28% chance of being in the bottom decile over the next six months.
Now, of course, that is only one set of data points, and it is worthwhile me repeating the experiment. But the message jumps out: you are placing the odds against you if you bet on falling knives. I bought shares in Lonmin, so trust me, I know!
Another case in point for today is SGI (Stanley Gibbons). According to Sharelock Holmes, its RS6m is -38% (as of yesterday). So the Market was giving you clues that things are not going great. SGI has a Stockopedia Momentum score of 35, which isn’t disastrous, but it’s not great, either. The company released a trading update today (http://is.gd/0MWrKD), sending the shares down 28.9% as at writing. Paul Scott comments on it in his report (http://is.gd/RkzVSL):
I’m not overly keen on this company, but the profit warning here looks to me like fairly transitory issues, which are already being fixed. That’s important, as the nature of the problems determines if, and how quickly, the share price will recover.
simonty noticed a number of red flags in his post on 28-Jun-2015, and concluded (http://is.gd/UxKSrT):
It sits on 20x historic eps even with the adjusted figure, far higher if you consider some of the extraordinaries to be not so extraordinary. The asset backing is far less robust than is claimed. The stock levels are extraordinary and need to be converted into profit. Yet in the last year they have failed to sell more stamps and philatelic revenue was down c10% and actually lower than 2012. The MarketPlace is as yet unproven and anyhow generates a far lower margin on GMV than traditional philatelic trading.
I think the potential for SG to capitalise on its reputation has always been there. At a market cap of £120m, a lot of the upside is already factored in.
Over the last decade, the share price is up a pathetic 2.3%, compared with the Footsie of 15.2%. Let’s be honest, SGI is the kind of company that just bumbles along going nowhere in particular. It is terrible as a buy-and-hold investment. I see from Stockopedia that it issued stock of nearly £39.5m for 15m/e Mar 2014, and invested £29m in the same year for acquisitions. The operating cashflows for the 6 years presented on Stockopedia are a net negative. Terrible.
This may work as a value investment *IF* you can get your timing and pricing right, but I wouldn’t want to own it over the long haul. I, personally, seem to have more luck with better quality companies. SGI has a Quality score of 41, which is actually pretty limp.
It also looks like analyst forecasts are going to be out by a longshot, and will require a sharp revision downwards. So much for analysts.
Update 06-oct-0215: GrindertraderUK wrote an excellent post earlier on: (SGI) Stanley Gibbons – The Red Flags Were There. Well worth a read.
Update 08-Oct-2015: A poster on ADVFN wrote this interesting note about Stanley Gibbons:
Having had a quick look at their website this evening, the 175 most expensive stamps on their site collectively retail at circa £20m. So approx 50% of the value of their stock (after debt) is tied up in just 175 items. This is the apparently illiquid end of their business.