Technically fundamental
Extremism is dangerous in all forms and the art of investing is no different. Completely ignoring the world of technical analysis is a narrow-minded view that doesn’t make sense to me. Likewise, ignoring the fundamentals means you may as well be investing in an asset class that has no bearing on the real world, like crypto.
Technical analysis works (to a point) because enough people believe that it works. If R100 is an important support level for a share, then traders are waiting to buy it at that level and hopefully to make profit from a bounce. If R120 is an important resistance level, then the sell orders will be ready there. The share could trade in that R100-R120 range for months.
Breaking out of that range needs some form of catalyst. This could be an earnings announcement, a corporate action or a macroeconomic event or data release that shifts the market in a particular direction.
Generate a one-year chart of Attacq and you’ll see what I mean. The property fund traded between R6.50 and R7 a share for months.
It was a safe buy at R6.50 every time, as the strong support level had been established. Traders could sell at R7 and bank a 7.7% profit (before costs) on each trade. It doesn’t sound like much until you can do it several times over a few months. Professional traders live off their profits, so they can’t afford to wait around for a year for a 13% return on a stock.
The fundamental view on Attacq was clearly in favour of a break upwards out of the range rather than downwards, as the property sector has put in a decent recovery after the pandemic. At the time of writing, Attacq is trading at
R7.86 and the fundamental thesis worked out beautifully.
If it establishes another trading range, it may become attractive to traders as well.
I’m a long-term holder in the company and will be very happy if it recovers all the way to pre-Covid levels.
My point is that a combination of technical and fundamental methods helped to create a case around Attacq. The long thesis was a combination of macro factors (general property recovery) and company specifics (I like the focus on the Waterfall area in Gauteng). Once that was established, some basic technical analysis indicated that the optimal entry point was around the R6.50 level.
If I had ignored the technicals and made no attempt to time the market, I might have bought at R7 instead of R6.50. Based on the R7.86 closing price at the time of writing, this would only be a return of 12.3% instead of 20.9%.
There’s nothing shabby about an 860 basis-point uplift, thanks to a bit of patience and knowing how to spot a share price trading in a range.
A basic understanding of technical analysis is a useful addition to any fundamental toolbox. I would argue that if you are an investor and you could choose just one skill to have, then fundamental analysis is the one to go for.
I’ll use EOH as a perfect example of why I say that.
When I originally bought the stock, the company was selling some of its assets to rectify the balance sheet and was putting in a turnaround strategy for 123RF/dashadima the rest of the business. With some reasonable assumptions around the valuations of the assets earmarked for sale, it seemed there was a decent amount of upside potential in the share price.
As time went on, the share price kept slipping and I even did the most popular thing of all in the markets: I bought the dip.
With each earnings update from the company, my concerns grew. The debt on the balance sheet was so vast that any efforts to improve the business were simply being eaten up by interest charges. Improvement in earnings before interest, tax, depreciation and amortisation is irrelevant when the company isn’t reducing its debt. To make it worse, the sales of assets were coming through at valuations well below what I hoped would be achieved.
The final nail in the coffin was the delay in getting the cash for those assets. In an announcement last week, EOH confirmed that it was still waiting for the R280m for Sybrin to be settled as regulatory approval is outstanding in one African jurisdiction. This is a disaster for the balance sheet.
I got out in the mid-R7s (a small loss for me), as I felt that the company wouldn’t get over this balance sheet hurdle without a rights offer. The latest announcement points to that probability and the price tanked to R5.27 as a result. Yet, at the time I sold, pure technical analysis was suggesting a move much higher.
When in doubt, just go with the fundamentals.
I would argue that if you are an investor and you could choose just one skill to have, then fundamental analysis is the one to go for