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I've always been more of a fundamental investor, not a technical trader. But, the truth is that chart patterns are not random, they are the footprints left by smart money.
There are those doing the hard work, running the analysis, pounding the pavement and speaking to management before they dare to take a position and these are the people
making the footprints. Then there are those
observing those footprints (technical traders) by looking at price action.
Regardless of whether you choose to use technical analysis or fundamental analysis in your investing decisions, it pays to know what the market is thinking. It pays to look for these footprints.
Below, we have a
MA Exp Ribbon chart and what I believe is a pothole setup: we've had a long downtrend, from 2019 through to June 2021. At this point, the bears want to see the stock continue to drop, but bottom fishers like me see deep value.
At this point, buying demand keeps the stock from dropping much further. A stalemate emerges with neither the bulls nor the bears winning so the stock just lines sideways (June 2021 to Jan 2022).
Just before moving higher, there is a final piece of capitulation selling (the pothole: it was at 10.5c) and the setup is then complete, allowing the stock to climb and climb and climb.
Moving average ribbons are a series of moving averages (MA) of different lengths that are plotted on the same chart to create a ribbon-like indicator.
Traders can determine the strength of a trend by looking at the distance between the moving averages, as well as identify key areas of support or resistance by looking at the price in relation to the ribbon. The ribbons can also be used to signal potential trend changes when the price moves through the ribbons, or the ribbons cross each other.
In this case, after an extended period of sideways movement (consolidation), HLF appears to be breaking out from the pothole setup. When the price is above the MA ribbon, and the MAs are angled upwards, it helps confirm a rising price. This indicates an impending breakout.
This is confirmed with FA action (clearance of the overhang from James Gong and Vivienne Cheung and a record quarter on all metrics, which highlighted the crossover into profitability).
I've been quietly building a position across the past 6 months anticipating this breakout and a rerate back to a fair valuation. My average is circa 16c currently (16c equates to a MC of A$44M) (Note: The IPO in 2018 was at a $30M valuation and at that point they were only doing A$2M revenue p.a. versus A$17.5M in the most recent quarter alone!).
I believe the share price should run quickly back to 22.5c (purple line) as a
starting point on fundamentals, now that the overhang is cleared and the pivot point in profitability has been hit. With 274M SOI, 22.5c is a market cap of A$61M. That's a 12x multiple of estimated FY23 EBITDA of A$5M (the ASX F&B sector trades on 15-20x EBITDA on average) and 0.87x Q3-FY22 run-rate revenue (A$17.5M x 4 = A$70M).
Additional catalysts include an update on the A$54M 2-year Theland China deal (most likely Feb) and another quarter of profitability & rising EBITDA in the 4th and final quarter of FY22 (HLF operate to a March 31st financial year-end) (end of April).
Let's see how we go this week. A fair short term target might be a A$100M market cap (36c).
I'll be looking to take some profit off the table at that point.
