Simon Brown believes we are in a post-lockdown space in which certain sectors will potentially have better results than expected. He shares his trading tip for getting in ahead of the action.
Recently, I found myself remembering an old trader’s trick from way back during the last commodity boom, which ran up to around the time of the global financial crisis of 2008/09.
At the time, Impala Platinum (Implats), Anglo American Platinum (Amplats) and even Lonmin would all release updates and results at different times – despite having the same year-end and interim period end dates. I can’t recall who would be first to market with their stellar trading updates and special dividends, but that miner’s trading update would see market participants rushing into that stock on the back of the good news. At the same time, the other platinum miners would largely be ignored; yet they were sure to have similarly good results, as the main driver was platinum group metal (PGM) prices.
The trick I refer to above was this: Rather than jumping into the stock that announced excellent results and went flying, we’d jump into the other platinum miners and wait for their updates, which would then send that stock surging. The plan was to get in ahead of the news, rather than on the news. This worked excellently for several years – before all the commodity prices came crashing down.
My sense is that we’re in a similar space right now, with a few sectors that will potentially have better-than-expected updates and results, and I want to get in ahead of the action.
Using Trellidor* as an example, here’s how I am playing this.
After the hard lockdowns here at home and globally, people went out and spent money on fixing up their homes. After months of staring at that cracked tile or tired old wall paint, and with many more months of working from home ahead of them, people wanted a better environment at home. In the US, the likes of Home Depot and Lowes had great results; locally, Cashbuild and other chains owned by larger retailers have also had solid sales as people fixed up their homes.
In South Africa we’re also seeing lower-priced houses selling like hot cakes thanks, in large part, to the prime interest rate of 7% – the lowest in generations.
Trellidor operates in this space, with security gates, window bars and their new blinds business. People are also upgrading or installing better security and improving the décor with new blinds – something that should benefit Trellidor. Yet, the stock trades at around a third of its 2017 highs, and is up only some 70% off its 2020 lows.
Its interim period ends December and, looking back at previous years, we can expect results in March and an update, if any, in February. If I am right, the update will be strong, and the stock should jump on the news – and that is why I am building a position. Importantly, I am building my position slowly and I am not chasing the price. Trellidor’s price has already run some 40% since I started writing this article. So, put bids in and let the sellers come to you.
There are, of course, risks. Maybe the company that you are considering under this strategy had supply chain issues and couldn’t meet the demand; or maybe a competitor seriously undercut them on price, and they were left high and dry. But there is also a reward, and I am happy with the current risk-reward relationship.
There are potentially several stocks and sectors you can try this approach with, reducing single-stock risk. Hotels, for instance, are under pressure. City Lodge’s latest trading update gives a glimmer of hope – and perhaps this is another sector one can dig into.
A last point: Trellidor is not in my long-term, ‘til-death-us-do-part’ portfolio. This is a trade, and I will look to exit shortly after the company releases its results.
* The writer own shares in Trellidor.