TAKING STOCK - TRADE RECOMMENDATIONS AND UPDATE ON INVICTA (IVT)

Since the end of the month is upon us once again, the time has come to have a look at the Investment Cases that we have put forward and see how these cases are fairing.

First we will start with the most recent of the lot, being Invicta Holdings Ltd (IVT). We are still comfortable with a longer term investment in IVT, however we are waiting for confirmation that the symmetrical triangle formation is going to push the price higher before we commit to buying any stock. It must be said though that it does look attractive at its current price, but patience is of utmost importance. Right now we are waiting for confirmation that the immediate down trend will end and not break out the bottom of that triangle. If such a break lower does occur, then it will put us in a more favourable position as  it would mean that we can get IVT for much cheaper. For now though, we have to watch rather carefully for the opportune moment to present itself. 

We also had a few words to say about Imperial Holdings Ltd (IPL) during the last month. We bought some stock at R182.05 and some more at R185.00. For the purposes of this blog, we will record the entry as R185.00 as that is where the majority of the volume was bought. Since most times we buy rather sizable volumes of shares on behalf of our clients, the average price we pay for them is rather important. 

Take note that all the prices used in the table below are the closing prices from yesterday (30 October 2012):

Share	Bought	Current	% Move
Coronation (CML)	R29.50	R33.00	11.86%
MTN (MTN)	R155.00	R156.00	0.64%
Brait SE  (BAT)	R28.00	R34.85	24.46%
Cashbuild (CSB)	R150.00	R149.00 (+ R2.73 divi)	1.15%
Imperial (IPL)	R185.00	R196.85	6.40%

 

We will be keeping our eye on IVT and will post an update as soon as we have decided to buy.

Also take note that we will be posting the performance of the Solid Growth Investment Club in the coming days, so remember to come have a look at that. Further, we really like the feedback we are receiving on the poll that can be found at the right (upper) are of our blog.  We would like to thank you for the votes and want to encourage you to please keep those votes coming so that we may know how best aid you in your trading and investing journey.

INVESTMENT CASE - INVICTA HOLDINGS LTD (IVT)

There are many gems to be found listed on the Johannesburg Securities Exchange. One such gems is a holding company called Invicta Holdings Ltd (IVT) which owns a very interesting portfolio of companies. The major assets of IVT are companies like Bearing Man Group (BMG) and Capital Equipment Group, positioning IVT to benefit from the daily business activities and expansion of industries like mining and farming. Both industries, regardless of the short term headwinds, are going to be around for a very long time. People will continue to need; Gold, Platinum, Iron, Mielies and Wheat, and therefore, IVT will continue to be in a favourable position as a major supplier of capital equipment and spare parts to these industries.

In the last full year financial report released in March this year, IVT reported that it had a 24% increase in revenue and 21%, 38% and 40% increase in profit, earnings per share, and dividend distributions respectively. Make no mistake, these results are no less than absolutely stellar.

Since these results have been released, two interesting events have taken place. First, there is the 100% acquisition of Mandrik. A transaction that is actually not even big enough to require being reported, although the great management team of IVT insisted on making it public as the company feels that this acquisition will do well to compliment the business of BMG. It would seem that the management team on IVT is thinking of both economies of scale and scope. Second, the bid to buy Singapore based Kian Ann Engineering for R 1.32bln and forge a presence in Asia. IVT has stated that it expects this particular acquisition to boost revenue by up to 20%.

Taking the above into account, the investment case becomes clear. Our attention now turns to the price chart and technical analysis. Below is a weekly chart which indicates that a very strong longer term up-trend is in place. Also that the share is now trading in the region where one could start thinking about buying it and finally, there is a symmetrical triangle price formation, which is usually regarded as a trend continuation pattern.

IVT - Weekly Chart

Looking at a shorter time frame below, we look at the daily chart which once again points out that symmetrical triangle price formation. This gives us as investors two options; we can either wait for the break of that price formation and buy shares once the price has broken out at around R82.00 a share, or we can try and buy some at R78.50 in a attempt to maximise the potential profits. 

IVT - Daily Chart

Since this is a longer term outlook, we believe that either one of these entry prices will do.

SGIC - FIRST TRADES MAKES IT MARKET NEUTRAL

We are happy to report that SGIC took its very first trade today. Well, it took a few actually. We implemented a Market Neutral Portfolio for the club. Basically what this means is that the club took a few long positions and a few short positions; 10 of each to be exact.

We made use of our valuation model to sift through the market and find the 10 strongest and 10 weakest shares on the JSE. The strongest shares were bought (long) and the weakest shares were sold (short). This puts SGIC in a position where the two opposing exposures, being long and short, offset one another and reduces the risk profile of the portfolio. Another added bonus is that the stronger shares should continue to climb while the weaker shares should continue to struggle, putting SGIC in a favourable position.

We will be posting some more info about the Market Neutral Portfolio a little later along with the odd graph or two. Keep an eye out for our next update.

SOLID GROWTH INVESTMENT CLUB (SGIC)

We here at Rock have started up another investment club and have found a number of investors, or clients if you will, to join the new investment club. The club is called Solid Growth Investment Club (SGIC). The basic idea is that investors pool their money together in an investment club, and Rock Capital then actively manages the investment club by investing in a variety of shares and financial products. Fees are reduced by the pooling of monies, meaning that transactions can be done for relatively cheaper as they are bigger. This leads to better returns for the individuals who are invested. In a sense, it is very much like a tiny little hedge fund.

We have undertaken to track SGIC very closely on our blog. In other words, every trade will be logged here, on this blog, for as long as SGIC remains active, which by all accounts, should be many years. Naturally, there are some trades or techniques that we wont give the exact details of as they can be considered trade secrets and we don't want to disclose all our methods to the public. Also, the names of the members will not be disclosed, the size of the club will not be disclosed and all reporting will be done in % terms. 

SGIC is almost ready to start trading, all the first group members have joined and we have started the process of opening a new futures account of the club. Once the new account is open, monies will be transferred from the club's bank account and into the futures margin account. 

Now comes the all important part, what are we going to buy once the account is open? We are going to implement a market neutral portfolio that we implemented on one of our hedge funds on Thursday last week. It has been performing really well and after all brokerage costs (both legs) are compensated for, the portfolio is around 5% up after just 5 trading days have passed. The success of this market neutral portfolio should be capitalised upon and therefore, we will be replicating it in SGIC (just on a much smaller scale as it is currently a small portion of one of our hedge fund's holdings).

We are going to be taking 10 long positions and 10 short positions, each position with the same amount of exposure. Working with futures, and therefore lots of 100, we will not be able to get it 100% equal, but as close to equal as we possibly can. Trading this portfolio into the market will bear a cost in terms of brokerage and SGIC will take this hit up front. Meaning that as soon as the portfolio is implemented, SGIC will be around 4% down as it must cover this brokerage fee. As mentioned earlier though, the tracking of this club's performance will  compensate for the leg out as well. The reason is that we want to be able to see what the profit or loss is if we closed all positions right now. Therefore, the initial draw-down upon implementation will be indicated as around 8%. Also note that the other fees that are levied on the club are a 1% annual  management fee (or 0.083% per month) and a 20% performance fee. All of these fee will be reported on as and when the investment club pays them. We feel that it is important that everyone who will be following the progress of this club understand exactly how it works.

Now, we did mention that there are certain things that can be considered trade secrets and we would like to keep them to ourselves. The shares that make up this market neutral portfolio is considered one such secret. We will however indicate what sectors the shares are in. So instead of saying we are long XYZ and ABC shares, we will say that we are long XYZ and ABC sector. All other trades that fall outside of the market neutral portfolio will be disclosed in detail and logged on our blog as promised.

We have the utmost confidence in our stock picking and valuation model and look forward to the Solid Growth Investment Club living up to its name.

PULLED THE TRIGGER ON IMPERIAL

Just this Wednesday I spoke about being happy to sit on the sidelines and wait for the market to give me a clear indication before taking any more trades. I also spoke about the possibility of buying Imperial Holdings Ltd (IPL) as I believe that it will react positively when the transportation sector strike comes to an end. 

This strike has now come to an end and I have now bought IPL. The news broke early this morning (click here for the article on Fin24.co.za) which prompted me to buy IPL in the opening auction at R182.05.

So, lets have a look at why I want to be in IPL. First of all, the valuation calculated in the Rock Capital office for the stock is around the R230.00 level thus, even with it currently trading close to R185.00, it is still trading at an approximate discount of 24%. 

IPL - Weekly Chart

Above is a weekly chart of IPL that indicates a very strong historic level that has now been tested. You might notice that there is a volume spike in the last week. This becomes more clear in the daily chart below.

IPL - Daily Chart

As you can see from the daily chart, when the price dipped below the R176.00 historic level, the volume traded per day increased significantly. This indicates to me that there was accumulation that has taken at this level, which is a bullish signal for me. Further, there is bullish divergence present between the Stochastic Oscillator and the Price. In other words, the price is making lower lows, yet the stochastic has not done the same. This is also a bullish signal to me. 

HAPPY TO SIT AND WAIT

I keep finding myself looking at other medium to long term trade opportunities, or Investment Case's as they I've been calling them, and taking them into serious consideration. The fact is though that the 4 trades that are currently on the table are quite enough. MTN is at present slightly down, however I am not too worried. CSB is also slightly down, but after the R2.73 dividend is factored in, the trade floating around the break-even point. CML and BAT are both doing really well and I closed the MTN/AGL pair trade while it was ever so slightly profitable (a more detailed report will follow at month end).

So instead of recommending another trade, or investment, I think I should explain the philosophy with which I am approaching these trades, or investments. Admittedly, I do not want to give away too much of the trading model, but I will share with you some of the money management principles that are applied.

As always, making use of examples are best; so let's say that I have a Futures account with a margin of R100k. In all technicality, I have about R 1 mil to trade with, however I will not gear myself more than 5 times. Meaning that I will limit myself to 5 trades of R100k each, or, I can do 10 trades of R50k each, and no more. So with 4 trades open, that leaves space for one. 

I have been watching Imperial (IPL) for a while now and feel that it has space to come down to about the R165.00 level. Also worth noting that if the transportation industry strike comes to an end, IPL should recover rather quickly. So this is a share that you could add to your watch list so long. 

IPL 1 hour chart

But for now, I sit and wait patiently until either something dramatically changes, or a trade reaches its target and I take profit, or IPL shows me what I want to see and I take a long position. Remember, you must always be in a position, and there are three types of positions  that you can be in; Long, Short, or Cash.

TAKING STOCK OF RECENT TRADE RECOMMENDATIONS (1ST OCTOBER 2012)

Once again, the time has come for us to have a look back and see how we have fared over the last month. Many, in fact, all of the trades that have been entered into over the last 2 months are still open. So let's have a look at how we did.

Firstly, I'm going to start with Gold Fields (GFI). The opportunity here was to try buy some stock at or around the R98.00 level. Since the 13th of September, when the trade was suggested, GFI never came low enough for me to get an entry into the trade. Normally I would be scolding myself for missing the opportunity, although it must be said that given all the risks in the mining sector at present, I am not entirely unhappy that this trade never gave an opportunity for entry. I will continue to watch GFI, however for now I am happy to watch from the sidelines.

Please note that I am using the closing prices on Friday the 28th of September 2012 for the following:

Share	Bought	Current	% Move
Coronation (CML)	R29.50	R31.00	5.08%
MTN (MTN)	R155.00	R160.21	3.36%
Brait SE (BAT)	R28.00	R29.40	5%
Cashbuild (CSB)	R150.00	R155.00	3.33%

Then lastly, there is the pair trade that was taken on MTN (MTN) and Anglo (AGL). That pair being, long MTN and short AGL. Making use of the prices as at the close of the market on Friday, that pair is up 0.77% inclusive of brokerage.