Discount to Cash Is King

I suppose it’s ironic that had I known more of the fundamental way of analysing stocks some 30 years ago when I first got into trading the stock market, it may have been that the subsequent charting mania which was acquired would not have happened.

This is partly because looking at balance sheets and profit & loss accounts seemed to be like too much hard work, and partly because the advent of personal computers made the idea of going for charting/technical analysis that much more glamorous. But the question is whether technicals can ever win over fundamentals? After all, the world’s most successful investor Warren Buffett is clearly a die-hard fundamental player. That said, George Soros, the hedge fund guru, is at least moderately technically based, as are many of his hedge fund contemporaries to a greater or lesser extent.

A happy medium between the two ways of looking at the financial markets may come in the form of stock screening, a pursuit which has become rather more popular since the time of the Dotcom Bubble, when both the internet and standalone platforms such as Sharescope (available at Sharescope.com) were becoming popular. It was actually an advertisement for the product which I read recently that reminded me how useful this program can be in terms of digging out those elusive shares which may be worth buying and holding on an extended basis.

An obvious idea to pursue, especially as the issue of cash backing appears to be so important, is to screen for companies that are trading with their share prices below the notional cash value. Presumably, even though there may be issues of cash burn or other problems with the company in question, money in the bank and in assets that are easily realised can cover a multitude of sins.

To see how this might pan out it is worth taking a look at the charting position of a couple of the stocks listed in the Sharescope data trawl below. For instance, Phoenix Group (PHNX) is trading at around a fifth of its cash value and has a recovery in place on the daily chart since June. All of this is unfolding within a rising trend channel in place since the summer. The floor of the channel currently runs at 825p, with the message being that at least while there is no end of day close back below the 50 day line, the notional near term upside here over the next month should be towards the 2014 resistance line projection as high as 930p. However, it is noticeable that this value is still massively below the cash per share value of 4,000p plus.

It is of course interesting to see how many financial firms make the list of being cash rich currently, something which of course goes a long way to explaining the Aviva (AV.)/Friends Life (FLG) deal. Elsewhere we have a couple of banks represented as well in the form of Standard Chartered (STAN) and Barclays (BARC). But whereas the former may be regarded as being something of a falling knife at the moment, for Barclays a look at the daily chart actually verges on the encouraging, even though there is always the chance of a sudden fine for some alleged backdated misdemeanour.

From a technical perspective it can be seen how it is possible to draw a rising trend channel on the daily timeframe from as long ago as the end of June. The view now is that, provided there is no end of day close back below the 2014 price channel floor/50 day moving average at 244p, we would give the benefit of the doubt to the upside argument. The favoured destination here over the next month is as high as the resistance line projection of last year to 300p. This would be around 9p higher than the notional cash per share value of 291p.