McMillan Shakespeare Limited – more technical then fundamental

McMillan Shakespeare Limited (ASX:MMS) provide salary packaging and vehicle leasing administration to major employers across Australia and New Zealand.  This includes the packaging and administration of Fringe Benefit Tax (FBT) for those eligible to claim FBT tax deductions.

The share price cliff dive
McMillan Shakespeare ‘s share price undertook a massive cliff dive in the second half of July upon news that the Federal Government was making changes to FBT deductions for people with motor vehicle leases. The decision by government seemingly overnight to make sudden changes to FBT have far reaching consequences for companies and their employees involved in salary packaging; those that are able to claim FBT exemptions; the motor vehicle industry and shareholders alike. This decision created numerous discussions and opinions about McMillan Shakespeare within investing circles on both the bullish and bearish side of the equation.

I thought I would take a different approach to my usual and look at the timeline of events and document my thought process during this time.

To start, let’s have a look at the weekly chart (below). It is easy to see that the share price decline that begun on the week of July 22 wiped out all of the gains made since September 2010 (34 months).  It’s little wonder that there were lots of people who had been sitting on very good price gains ‘emoting’ negativity as a result.

And below we can see the detail of the daily chart.

Technical Analysis Timeline
15 July – The share price action gives a standard sell signal and closes at $18.00 (no big deal at this point)

16 July – The share price falls instantly at the open of trade at 10am and continues to falls upon news of Kevin Rudd and Chris Bowen giving a press conference saying they are ‘closing the loophole’ on how people can claim Fringe Benefits Tax.  This press conference has a significant impact on McMillan Shakespeare’s business.

The share price falls to $15.36 at 11:01 am at which time the company’s shares are placed in a trading halt.  That is, a decline of more than 14% in an hour.

Those holding shares essentially had one hour to act upon the confirmation of yesterday’s sell signal after what was about a four year up trend.

25 July – McMillan Shakespeare’s shares come out of a trading halt after more than a week.  Knowing that one of the basic premises of the market is that it discounts all information – past, current and future into the price of stocks.  I knew that the market was not going to miss and it didn’t.  The share price fell in the opening minutes of trade to $6.75 with as it turned out lots of buyers in that $7 range.

With such an emotion filled event, the difficulty in this situation is to know if this point is the low or if the share price will continue lower in the coming days.  This outcome has the same odds as a coin toss.

As it turned out, the share price rallied all day and by the time the share price was at $8.50 intraday, it was clear it was not coming back for a little while.  But, at the same time, I was not willing to chase it higher.

26 July – The share price rallied higher

27 July – The share price opened higher again at $9.97 and drifted lower all day. This was the first sign that the energy of the initial rally had temporarily ended and would likely provide the opportunity to the buy the stock at a decent price in the coming days.

At this point, I determined a buy price between $8.74 to $7.98 area (38.2% to 61.8% retracement) of the initial rally from $6.75 to $9.97 would provide a low risk long term buy area.

31 July – The share price closed at $8.13 right at the bottom end of my buy zone but I needed a buy signal in order to act.

1 August – Again, Mr Rudd and Mr Bowen provided the trigger for action. However, this time it was interestingly the announcement of the ‘bank tax’ which provided the catalyst for a buy signal in McMillan Shakespeare.

I observed that at the same time that the bank tax was announced and our banks began their 2% intraday sell-off on the initial reaction of the bank tax news, McMillan Shakespeare shares began to rally.

The coincidental timing of the fall in bank shares with the rally in McMillan Shakespeare tells me that the market does not believe the FBT policy will go ahead as the current government will not be in power after the Federal election to enact the policy.

This trigger prompted me to buy McMillan shares for The Edge Fund at $8.30 (green arrow on chart).

1. I estimate the value of McMillan Shakespeare to be significantly higher than $8.30 even if the proposed FBT policy is enacted.

2. I consider that the discounting machine that is the market priced in the worst case scenario on 25 July around the $7.00 area assuming this labor policy comes to pass.

3.  If the Liberal party win the election and the proposed FBT changes are not legislated, then there is no reason why the share price cannot move much higher very quickly back towards the previous highs.

Risk vs Reward
So, essentially, the risk of buying shares at $8.30 is a loss of $1.30 per share (ie a share price falling back to $7.00).   However, the potential reward for buying shares at $8.30 is in the vicinity of a $7.00 to $10.00 per share gain over perhaps a couple of years time (ie a share price back to the $15.00 to $18.00 area).

There are no guarantees in the share market as all past and present McMillan shareholders certainly now know if they didn’t already.  All we have as investors is probabilities and I am confident that buying at the moment put the probability of a good outcome in favour of investors based on what the market is telling me since the large price fall on 25 July.

A Unique Situation
These types of sudden situations in quality stocks only seem to happen once or twice a year.  The difficulty is that they never follow the same script.  So they require unique attention in order to think clearly about what is unfolding and have a plan of action.

It is very easy to understand the emotion and resulting noise emanate from a situation like this.  Shareholders happily holding in an uptrend see their share price fall from over $18 to under $7 essentially in the space of an hour as the nine calendar days in a trading halt works against them.

Situations like this require investors to maintain a clear head especially when many others have understandably lost theirs.

On this occasion, I have acted on my plan to the best of my ability.  My process has been executed thus far and the result from here will take care of itself.  So, whether it turns out to be a winning or losing outcome, I am happy as I could not have executed my process any better.  And, I will look to learn from the result either way for future situations like this.

In summary
In summary, this is an example of how technical analysis of the price action combined with fundamental analysis of the company and thinking clearly about the environment can work together.  This combination of technical and fundamental analysis is exactly how we operate at Edge7.  Again, there is no guarantee of a favourable outcome however I consider the probability of good outcome is higher than not.

This article is published by Dean Mico.

Disclosure: The Edge Fund (Dean Mico) now owns shares in McMillan Shakespeare.  Please do your own research.  Any one buying shares from this point in time forward will be helping our cause.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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