I’m sure you’ve had days like these. I’ve lost almost £500 in the last two days and I’m back to my original account deposit of £500. I’ve refined my trading rules and this afternoon I made my first trade in accordance with them. Did I make a good trade by opening a position on W.H Smith?
My interest in this position was triggered by recent newspaper reports telling the story of how the WH Smith shares had reached new highs. Now, I’ve read on many blogs that you should never ‘buy on the news’, and my instinct tells me this is probably true.
However, the interest in the shares did spark me to start my own research.
I’d been following other blogs online where great praise had been pushed in the direction of the newspaper companies. The general market consensus is that the newspaper is dead, but you can’t ignore the fact that 10m newspapers still get sold every day. This is a highly cash generative model and even if newspapers have fallen out of favour, it’ll be a few years before we all stop buying them altogether.
This view is substantiated by recent reports by John Menzies, the newspaper distribution company, who have had strong performances in recent years and look solid.
Upon digging deeper into WH Smith, I can see (using ADVFN) that for several months WHSmith have been purchasing their own shares, which displays remarkable confidence in their business. They have also paid record dividends this year on the back of increasing pre-tax profits of £93m.
I’d also read rumours in the papers of some large investors taking stakes in more defensively minded stocks, like the newspaper companies, the advertising companies and other non cyclical stocks.
In addition, several brokers have raised their price targets on this stock to over 600p.
On fundamentals, WH Smith looks rock solid good as a buy.
Now let’s look at the chart:
The last 2 months have been very strong for WH Smith, maybe on the back of he company transacting in its own shares. You can see there is a clear trend upward, with a reaction of 10 points today.
During my research over the last few weeks, I’ve been reading blogs and books and something that sticks in my head as being extremely relevant are these two things:
- Trends will continue until they have a reaction, then they will continue again in the direction they’ve been going
- If a trend exists, and a reaction occurs against a strong trend, then the ‘line of least resistance’ for the share price to travel in is back onto the trend
Looking at this chart and all the information available on this stock, WH Smith looks an excellent candidate for a long position.
Does it Fit My New Rules?
- Does trend exist: yes
- Is there room for upside: yes
- Am I trading in line of least resistance: yes
- Do the fundamentals stack up: yes
- Any bad news in the news: no
All looks good so I’ve opened a long position on this, risking no more than 10% (£50) of my £500 starting capital.
£10 p/point @ 565.4 with stop loss of 560.4.
My 100% return target is 575.4, but I am hopeful this could go beyond that to 595.4.
At the close of play today, I was sitting on a £17 paper profit.