SELL ALERT: Abcam and 2U
11th October 2018 |
The immunity of the FANG stocks has been under selling pressure and cracked on 10 October with the volatility on China’s markets, combined with the hardware hacking scandal that broke last week leading to significant declines right across the boards. That has had a knock-on effect for a number of shares in the portfolio but the two most urgent are Abcam and 2U.
Abcam experienced some acute volatility on 10 September following a failure to meet expectations for growth despite pre-tax profits rising 33%. It then rebounded but needed the majority of the bounce to defray topping characteristics. The decline posted over the last five days has raised the spectre of an impending major decline and therefore now is the time to liquidate the position to preserve the remaining 33.55% profit.
2U has been the best performing position in the portfolio over the last year but it broke downwards today. Despite my enthusiasm for both the growth story represented by online learning and the dire need for new solutions to adult education, the market is turning against the share. It is time to sell in order to book out the remaining 100% profit in the share.
I am also watching a significant number of additional shares in the portfolio because they have now what I consider to be pivotal areas of potential support and I want to see evidence of demand returning to dominance soon if we are to continue to hold them.
Activision Blizzard, Autodesk and Becton Dickinson are all now trading in the region of their respective trend mean and this represents a pivotal area from where we can expect demand to be reasserted. Nevertheless, we need to see evidence of investor interest returning if the uptrends are to be confirmed.
Cisco Systems, Garmin, Illumina and Microsoft are also all in the process of reverting towards their respective trend means so they have some room in which to consolidate before they enter what I consider to be danger territory.
Intel is currently testing the $45 area, which represented a level from which it rallied in September. It needs to do so again in order to prove it is capable of renewed vigour.
10 October was extremely volatile and the broad-spectrum nature of selling pressure tells us this was more of a macro event than individual news stories affecting the fortunes of individual companies. Even then there is no single reason for why today was more volatile than others. It’s a confluence of events which have eventually combined to put pressure on stocks.
First off you have the fact that the Federal Reserve is both raising interest rates and reducing the size of its balance sheet. That’s draining money from the system. The European Central Bank is in the process of ending its purchase programme so that is also reducing the flow of liquidity into the market. At the same time China is leaning on the financial sector, particularly the shadow banks and regional lenders, and that has contributed to the stockmarket’s underperformance this year. The trade war between the US and China is taking a toll as tariffs are ratchetted up. That is starting to create stress among companies dependent on imports from China which are running thin margins because they will be forced to raise prices, which is inflationary.
If I had to think of one reason why the stockmarket pulled back on 10 October rather than any other, it is probably because the third quarter’s earnings season is about to begin. Considering the above points, perhaps investors are betting that it will be hard for companies to beat the performance they put in during the 2nd quarter and that started a wave of profit-taking among exchange-traded funds (ETFs).
That suggests the results we see from companies over the next couple of days will have a strong influence on sentiment and could well be the deciding factor in whether this is a short sharp reaction or the beginning of a deeper and lengthier correction.
Action to take: sell Abcam plc
Ticker: ABC-L
Price recommended at: 907.50p
Last close (as at 10/10/2018): 1,212.00p
Action to take: sell 2U
Ticker: TWOU
Price recommended at: 33.25p
Last close (as at 10/10/2018): 70.01p
All the best,
Eoin Treacy
Investment Director, Frontier Tech Investor
