Trading Diary

Trading Diary – 27 February 2020

We’ve sold two positions this week. Both stocks have exposure to the consumer sector. Increased fears relating to the spread of COVID-19 have caused a change of sentiment towards these companies.

Specialty retailers, in particular with suppliers predominantly based in China, are likely to face supply issues. Also, a subdued retail spending environment in the event of an outbreak of the virus in Australia could severely affect the operating environments for these companies.

In general, we prefer to give our holdings wide births for their ongoing uptrends to unfold. However, we also have strict protocols in place that dictate when we sell.

We now have a total of 15 stocks in the Model Portfolio and a 17% allocation to cash.


Flexigoup (FXL)

We’ve exited our position in FXL with a 13% loss.

We purchased the stock at what we thought was the beginning of a new uptrend. Management had articulated and began implementing a feasible pathway towards accelerated growth. Also, the stock had moved to the top of an 18-week trading range, having experienced multiple up weeks on above-average volume signalling accumulation.

Shortly after our purchase, the stock broke out above the range, on another high volume week. However, very soon after that, it ran into selling pressure and has been unable to maintain the upward momentum.

The new management team is one year into a 3-year transformation plan. While the strategy is gaining some traction, with 1H20 volume up 23% in the Buy Now Pay Later segment, profitability was stagnant for the period.

There appears to be substantial overhead supply still trapped in the stock. The fundamentals need to improve dramatically before these investors start believing again. However, with a weak retail environment and strong competitors operating in the space, this is becoming a steep mountain to climb. As a result, we’ve sold our position.

Baby Bunting (BBN)

We’ve exited our position in Baby Bunting with a 15% loss.

1H20 results released by the company showed positive same-store sales growth as well as improving gross and operating margins. The results were in line with our expectations of accelerating profitability and top-line sales growth. Despite this, the stock showed no signs of continuing its uptrend upon the release of the results.

The stock had been in a multi-month trading range since our purchase in late September 2019. This week it fell below the lower bounds of this trading range indicating a change of sentiment towards the stock. The fall has taken place on above-average volume. It is most likely related to the market’s expectation of supply disruptions and lower sales growth resulting from the spread of COVID-19.

By Danny Sandler

Founder of Ocean Asset Management.