Anatomy of a trade – Games Workshop

This is a post about trading in shares, no financial advice is given or implied. I own shares in Games Workshop (LON GAW).

With Games Workshop Plc (GAW) seeming particularly volatile of late I thought I would have a look at my time as a shareholder of the company and see if I can map out any thoughts on the future.

Anyone who is familiar with GAW will know the companies propensity for releasing ‘brief’ or ‘strangely worded’ RNS releases, often at strange times of day, and sometimes even on a Friday!

So I also intend to try and see if there is anything that can be read into these releases, or if they simply use it as a mechanism to play with the Stock Market, almost giving a little insider edge to the gaming geeks that can read between the lines!

To the uninitiated GAW makes and sells plastic soldiers. In reality they have created a rich world full of IP developed over many years, they design table top wargames and sell the rules and figures to play these games through their own stores, their own website and through 3^rd parties in numerous territories worldwide. They also licence their IP, an area in which they seem keen to expand.

I used to collect and play GAW games so have some inside knowledge of the company, in fact if you scroll back through old blogs you’ll find wargaming rather than investing content! This fact that should have brought their shares to my attention earlier, but didn’t.

So lets begin by looking at the classic breakout of GAW shares that I didn’t get involved in!

Early Movement & Breakout

 

GAW was in the doldrums, the chart above shows a the end of a long period of sideways movement (which followed a fall in the share price). The first annotation shows what a lot of shares need to begin moving out of a base, a catalyst! The catalyst here was a change in CEO with Kevin Rountree being appointed in November 2014, taking charge in Jan 2015.

Then comes the point in 2016 when I should have begun taking notice of GAW (marked as industry knowledge on the chart). I had just started trading shares and was very green but I was still playing wargames at a local club. GAW had been a stale brand, still played by people, but almost begrudgingly. In early 2016 the buzz around GAW started to change, attitudes became more positive. Sometimes you don’t need to forensically analyse accounts to find shares to buy, you just need to look and listen. But I was more interested in resource stocks at the time!

If you missed the buzz, as most people would have done, you could have seen the trading updates. The shares didn’t react to the ‘slightly ahead’ update on 6/6/16, in fact they dropped 20% in tandem with most of the market on the Brexit leave vote. They then recovered as much of the market did.

If you were paying attention (and I know of some people who were paying attention) your interest should have been piqued by the 2^nd ‘trading ahead’ statement in October, quickly followed by a rise in volume and then a break through previous resistance on the chart at 600p when they issued a 3^rd consecutive ‘ahead’ statement.

This break on volume is an absolute classic sign of a share starting to move, it generally means that those with more influence that the likes of you and I are starting to buy.

We had a 2^nd break through weak resistance at just below 700p, this was your second bite of the cherry and a profit beat (something that becomes a pattern in the future) forcing a break through stronger resistance at 825p, again on good volume, then a back test of the 825p level giving you your 3^rd and 4^th bites of the cherry to get in early. We then had another good trading update, a brief pause before another update and we were off to the races with GAW.

In hindsight an absolute text book share price break out on good volume, with a catalyst from a new CEO and insider info from being in the hobby and hearing the buzz. And I missed the lot. By the time I started paying attention to GAW it had trebled from its lows of 400p and I presumed I has missed the boat.

However, I didn’t miss the boat completely, I just boarded late. GAW gave plenty of opportunities to get involved along the way. Partly, I believe, to do with the way it communicates with the market, which I will look at later.

2017 – 2020 Trading and Learning

The chart below shows GAW’s journey from the break out in early 2017 up to 2020, it is annotated with their trading updates and shows my entry and exit points.

 

Following the breakout in 2017 I sat on the side-lines as it delivered great trading update after great trading update, each leading to a jump in the price. GAW would announce a raised profit target based on their trading and then beat it when they released their results, ‘well above’ after ‘well above’ saw it race to around £24 a share from that low of £4.

Then they stuttered, releasing an ‘inline’ statement on 1/12/17 saying profit before tax (PBT) would be £38m. The shares pulled back slightly and I was familiar enough with the share now to know that they would probably beat that estimate, and £38m for half a year was what they made in the whole year the year before.

I bought at under £20, the shares raced off again until they released their results of £38.8m for half year, the shares pulled back again (did the market expect more?) and I added again twice on ‘slightly ahead’ updates. I believe that market thought they were running out of steam, but I didn't.

Obviously the stage 1 breakout discussed earlier is only an indication of price movement. Any purchase of shares for a longer term investment should be based on company fundamentals and metrics, and GAW had these in droves, good margins, growing sales and good return on capital, it was these metrics that drew me to the share.

We then had an ‘in line’ trading update as opposed to the normal 'ahead'. This coincided with the price hitting the top of an upward channel (if you draw a line through the tops of the peaks on the charts you will see the channel) and I sold 75% of my holding. The price then declined when they released one of their bizarrely worded statements stating ‘Profits were similar’ but there were ‘Uncertain trading periods’

The share price dropped 25% in short order back to £30 and I slapped myself on the back having banked a large profit. GAW had run its course, they were losing momentum, I had missed the initial break but otherwise had performed a text book trade, something I didn’t think I would be able to do being so inexperienced.

I kept 25% of my holding, just in case I was wrong.

The chart looked like a classic ‘stage 3’ where a share price will begin to break down after a strong run up. The price was swinging quite wildly and would more than likely move to a ‘stage 4’ where it declines sharply or back to a ‘stage 1’ where it moves sideways and builds another base. There was even an update where they just missed their expected profits.

I then added a little on another positive update and quickly sold these as the issued an in-line statement and the shares fell back.

After this I switched off from GAW a little, still holding 25% of my initial purchase and keeping an eye on their trading updates to make sure nothing was going drastically wrong. The company began again on their march forward with positive updates and the share price had a slingshot with an ‘ahead of expectations, Profit Before Tax £80m’ update followed quickly by a ‘Growth across all channels, profit before tax +£80m’ which catapulted the share price through £40.

This break of £40, the point where I earlier sold, accompanied again by large volume of trading and marked on the above chart with the last yellow circle is another buy point, and would have been a great time for new buyers to take a position. Sure, you could have bought at £28 a few weeks earlier, but there was a lot more risk then, a couple of ‘poor’ updates (by GAW standards) and the price drifting sideways. This update, the share price rise and the volume involved was another great indicator, and barring the ‘Covid’ dip this was the last time GAW share price saw £40 (to date). I didn't take advantage.

So, I’ve looked at what I missed in the first instance and what I got right and wrong in my buying, but this is all easy looking backwards. Back in 2016 I didn’t really know about breakouts and stage analysis, and even when I bought I was using more fundamental analysis of the company than technical analysis.

But, I have bought again recently and perhaps was fueled by my experiences with the company and my belief in their long term prospects in isolation rather than combining this with looking at what the chart is telling me. In short I may have made a mistake adding to GAW, at least in the short term!

Recent Times

 

The above chart shows more recent price movement for GAW shares. Things were progressing at pace and they were beating forecasts. Expected profit before tax (half year) of £55m became £58.6m and then Covid 19 hit. I’m not going to go into how I acted in dealing with my shares during this time as that is a whole other story! But you can see from the chart that GAW lost half its value in a couple of weeks, following the wider market.

At this point I was waiting for an earlier gap up on the chart to be filled by the downward movement in the share price. If this gap had of filled I would have bought, but it didn’t fill, and I didn’t buy. Hard to say this was a mistake as I bought other things that did well, but if there is a lesson not to always look at technical analysis then this is it. This was an opportunity to buy a top quality company at a bargain price.

The market settled and began to look for companies that were not going to be affected by Covid 19. GAW was one of these companies, in fact it seemed to be benefitting from it.

Detailed updates from Covid and forecasts with estimates of sales and profits were the order of the day for GAW's news releases now, and these estimates were again being beaten time after time.

After what I considered to be a fantastic update in November 2020 I decided I wanted to buy some more. It was a Friday update (I will look at the timing of their updates later) and gave me the weekend to run some numbers and get up to speed. This weekend happened to coincide with some Covid lockdown related news (I can’t remember what it was exactly) but when the markets opened on Monday there was what was widely considered to be a rotation from ‘Covid beneficiary’ shares into more value offerings.

I had expected the shares to open up following the update and they began losing value, I bought during the next few days. Another good update shot the shares back up before their half year results showing profit before tax on £91.6m saw the shares retreat again.

There was an opportunity for the shares to gain back when they issued their latest trading update on 17/3/20 but this saw GAW management revert back to their old (seemingly) pre pandemic update style issuing an ‘in line with expectations’ at half past three on a Wednesday afternoon. The market participants did not seem impressed. So before I look at what we should read from this RNS, if anything, I will look at my recent buys and how they may have been mistimed.

 A Mistake?

My average cost of buying these recent shares is around £96 per share, and if you cast your mind back I was hesitant to first buy GAW at under £30. The most I paid was around £106 and the least was around £93, as I write the share price is £94, so I’m losing money.

So, what were my mistakes?

First, I bought the first lot of shares as they were falling in price, they continued to fall. I bought more as they started rising which brought my average down, but my first buy should have been as they were rising.

Second, and largest mistake on this from a trading basis, the shares failed to break through their recent high at around £117. They hit this level and started to retrace quite sharply on reasonable volume of trades, which I believe to be certain funds selling down as they reach the limits they can hold in a share. This is an obvious ‘double top’ on the chart. When they failed at this level I should have sold at least some of the shares and looked to buy them back when they settled.

Third, I presumed my knowledge of GAW and their RNS reporting style would trump the market’s reaction to their latest update. It didn’t, I was trying to second guess the market and should have sold some, but probably not all, of my shares at the time of the afternoon news release, the shares dropped from around £102 to £92 on this release.

All in all if I has followed these steps I would have bought at an average price of around £94, sold some at around £112-£115 and sold some more at around £102. If I wanted I could now buy these shares back at £94.

But, again, some hindsight bias here, and lets not forget if I would have held my original purchase and not sold at £40 then I would be in a much better position, and moves like this could look like a slight blip in years to come.

So, I didn’t trade this recent movement, I bought the shares on a belief that the market is misunderstanding and underestimating the prospects for GAW’s future growth, just like it has done in the past. And I think there could be a lot of people who own GAW shares now might not have held them in the past, they might have bought them at £40 early last year and been treated to 7am news releases with lots of words and numbers whereas I think I know better. But do I?

Jive Talking

So how do GAW communicate with the stock market?

Stock market news is generally released at 7am in the morning so people can read it and plan what to do and its generally released on Monday – Thursday, because who likes thinking too much on a Friday.

The general consensus is that if news is released after 7am then its bad news, its released then because some market participants might not be paying attention. The same goes for Fridays, and it its 2:30 on a Friday afternoon then it’s not going to be great news.

GAW’s most recent RNS was released at 3:21 on a Wednesday afternoon. It stated trading was ‘in-line’, was brief and contained no indications of financials. The last 7 RNS updates released within the last year all contained numbers and generally a bit more detail (some very detailed during the start of the first lockdown), 6 of them were released at 7am and the one they threw in at 2pm on a Friday (!!!) contained great estimates.

However I’ve seen RNS’s from GAW like this before and I’ve seen the share price and company performance go from strength to strength, so do I know something that others have missed, or have I just convinced myself of this? Did GAW get a bit more serious during the lockdowns and are they more confident now and beginning to play with the market a little bit?

I decided to look back through their statements and see how, or indeed if, they affect the share price.

The statement on 17/3/21 stated

‘The Company also announces that trading in the three months to the end of February 2021 has been in line with expectations, notwithstanding the majority of our UK and European retail stores were subject to Covid-19 closures and distribution disruption during the period’

Shares dropped from £102.50 to as low as £92.50.

But what does it tell us? ‘In line with expectations’, who’s expectations? Broker forecasts for the full year still look low despite being upgraded, in fact I think the board deliberately mess with their brokers to consistently beat forecasts. But it doesn’t state broker forecasts, maybe it’s the board forecasts? But we don’t know what their expectations actually are as we’ve just ruled out that they will match the broker forecasts.

So all we can say is that this RNS does not tell us any numbers, where as other have, and it was an afternoon release.

Now, out of 23 trading updates issued since mid-2016 9 have been issued intra-day, that’s over a third! In fact there was a period during 2017 where you would be lucky to find a 7am trading update and profits have marched on.

There was no financial update. Of the 23 updates since 2016 16 have not contained any numbers, that’s over two thirds. Admittedly the numbers have been more frequent recently but back in 2017-18 it was very rare.

It was ‘In line’. Of the 23 updates since mid-2016 7 have been ‘in line’, that’s just under a third.

None of these items in the trading update is sufficiently divergent from GAW’s history in updating the market, so there should be nothing to suggest that things are about to self-destruct.

GAW’s share price has stuttered in the past, and indeed I have been a beneficiary of this, but have these pullbacks been related to the way GAW has communicated?

Going back to 2017 there were pullbacks from circa £23.50 to £18.50 (-21% Nov ’17), £28 to £20.50 (-26% Jan ’18), £40.50 to £28 (-30% Oct ’18) and £51 to £42 (-17% Jun ’19). The current pullback is from highs of £118 to £91.5 (-22%), In fact if you look at the chart pattern in Oct 2018 it looks very similar to now.

In more detail – In November 2017 GAW issued a very brief trading statement, positive but with no numbers. This was followed by the ‘in line’ half year update on 1/12/17 which had financials and seemed to rally the shares.

The fall in Jan 2018 began with a very marked down day on 9/1/18 coinciding with the half year results. I can find nothing sinister in the results, perhaps it was the fact that they only beat their in line expectations by £800k or people selling the news? A ‘slightly above expectations’ update in February seems to halt the slide.

The most severe 30% pull back in October 2018 is around where I sold my tranche of shares, so there must have been something in it. Was there? Or was I just part of the crowd who thought they had run out of steam?

There was an in line statement on 19/9/18, the shares rose but pulled back sharply around 24/9/18 on no news, it just seems that stalling momentum started the fall, and more than likely caused me to sell at the top of that upper trend line discussed earlier. We then had another inline statement coupled with one of GAW’s trademark ‘However the board remains aware that there are some uncertainties in the trading periods ahead’ statements on 18/10/18. This did little to settle the market and led to a very slight profit miss in early 2019. The shares were rallied and catapulted onward by a stellar trading update in April 2019.

The June 2019 pullback seems again to be a ‘sell the news’ event.

So looking at the above I would say we could summarise the following.

There is no correlation between the propensity of GAW to release intra-day, brief or financially lacking RNS’s to their long term growth prospects and we should no read too much into this. They also have a history of releasing in line statements that are then beaten.

However. This current RNS release and chart pattern looks very similar to late 2018 where there was a very slight miss on half year numbers. GAW then went on from strength to strength.

What a mistake to make

So, have I made a mistake with my buys, should I sell and if I didn’t hold should I buy now?

I like to think I know the company well and while I think it has benefitted from lockdown I certainly don’t think it will suffer when it ends, there are lots of long term growth catalysis going forward. I also know the danger of selling my shares too early.

However I may have made a mistake timing my recent buys. The market seems to be waiting to see the direction of travel but I’m happy to hold at the minute unless the share price breaks significantly to the downside, which I don’t think it will do without a further catalyst.

So would I buy now? The short answer is no, I would certainly wait for the next results and update, this, in my opinion will give a good indicator as to where the company is going next. It is not on a demanding forward earnings multiple for the growth prospects and the financial metrics are still excellent but there may be some short term pressure before the next move. From a technical point of view look for a move back towards that £117-£120 then a breakthrough of the recent high, preferably with good volume to back it up and it could be a great entry point similar to 2018’s break of £40 and GAW could be off the races again continuing its ‘stage 2’ upwards trend. But this could just as easily be the ‘stage 3’ choppiness before a ‘stage 4’ breakdown of the share price or a stagnating ‘stage 1’ sideways movement.

So if you are interested in Games Workshop it might be time to get researching it and familiarise yourself with not only the ‘plastic soldiers’ they sell but also the potential that the company has to grow in other areas and its history in capital allocation. This way you will be able to make an informed decision whether to take a position when the time is right for you.

Cut to the chase

If you got bored by the waffle and decided to skip to the end to see if there was a summary, then good news, here it is.

You can find potentially good shares to buy by using your eyes and ears, you dont have to be a financial genius.

Technical analysis of shares (in this case stage analysis) can identify something happening with a share and indicate good points to buy.

Strong fundamentals and growth will drive a share, this can keep gaining momentum (the fly wheel effect)

If you think you have missed the boat there may be more boarding points later along the line to either jump on or add.

As you can see I mix my styles to investment, my recent buys were on perceived knowledge rather than technical analysis, but my review of this trade has showed that stage analysis wouldn't have stopped me buying but might have helped me time my entries.

To learn more about stage analysis there are some great books by William O’Neill, Mark Minervini, Stan Weinstein and John Boik. Michael Taylor who writes for Investors Chronical is a proponent of this method of technical analysis and Phil Oakley of Investors Chronicle has written some great articles on the fundamentals of Games Workshop.