This is a stock that used to show great potential back in 2007. However, years of state corporate mismanagement have made it an utterly horrible investment. Although a significant (for Croatian terms) activist investor bought the stake in the company, it seems that he hasn’t been capable of creating a turnaround, which is not surprising as the state still controls more than 50% of what’s left of the company.
The reason why I’m writing about this stock is twofold, but it is most certainly not going to be a buying recommendation. This is the stock that has been trumpeted for years as a magnificent investment, especially by the aforementioned activist, and I must admit that even I bought the story for a short period of time. The first reason is basically an illustrative example of how TA helped me identify the growth phase as well as avoid the crash in the midst of a flurry of optimism. My old readers know that they were not post hoc conclusions, but things I managed to identify in advance. The second is a nice pattern that formed afterwards which suggests some pretty gruesome targets.
There are quite a few things we can see on this chart. First of all, we can see a rising wedge (blue) from 2009 to 2012 which had a significant breakout with almost doubling in price. What we can also see, however, is that the peak resistance of 360 showed to be a strong barrier that wasn’t breached (except for one or two intraday trades). Now, remember, this was a time when the activist investor (I’m intentionally avoiding his name because I don’t want personal conflict, but everyone knows who he is) constantly implied the value of around 900kn between the lines, based on several year old market data. I believe it wasn’t an unintentional mistake, because when I warned of the drastic price fall in the fertilizer price and the resulting price mismatch, he erased my comments and banned me from commenting on his blog. Whether that was wishful thinking or price manipulation, I don’t really know or care, but in retrospect it was actually good thing, as it was one of the reasons that caused me to think more with my own head and focus on a blog of my own.
Anyway, what happened afterwards was something I warned of, and something not many people in the optimist crowd realized. Basically, the stock broke two supporting trendlines (the wedge trendline and another one colored green) and stared a dramatic downfall. Fundamentally, the fall was more than justified, as it turned out the company earnings were horrible without any realistic chance of improvement.
What’s nice about this whole situation is that we can see two totally different mechanisms (media hype and fundamental weakness) appearing in the charts one after another. The company wasn’t really that much better in 2011 than it was in 2012, but the hype made it seem so. If an investor went by fundamentals only, he’d never be able to gain on the initial price growth. If he based his actions on media hype and activist writing, he’d lose a pretty significant sum of money. TA is a great tool that helps us pinpoint when the change between the two trends might occur.
That being said, what’s the future of the stock in mention? Not too good I’m afraid. What we can see is a huge double top, starting its way all the way back in 2004 and lasting whole 10 years. This year it briefly stuck at the 60kn mark, which was the formation resistance line. After the resistance was breached, there was really no other way to go but down. Now, even though the target price of such a top looks to be somewhere between zero and a number too small to measure, I believe the line at the 15kn mark could be an interesting support point.
I do not believe the company has any serious chance of making it if it were left to market devices only, but since the state holds a significant share, I think it is likely that it may step in at one point and make yet another bailout (I believe it would be the third in the last few years). Now, if it manages to pack that with a company sale, I believe the investors who buy at slightly above 15 may stand to gain a significant profit, depending on the terms of the sales agreement. On the other hand, if the terms are unfavorable or if no buyers show up, it may as well go down to 0.
The fundamentals can be seen here http://www.mojedionice.com/fund/IzvFundOsn.aspx?sifSim=ptkm-R-A , and they’re downright horrible. I won’t even bother with translation, because numbers speak for themselves. Just one hint – red is bad.