It seems the stock has finished its H&S pattern, and is likely to resume an uptrend. There’s really not that much new info to share, but three things stand out. First of all, there’s the technical picture:
There are several things we can see here. The H&S pattern is complete, and although it went further than the first resistance zone at 5.50, it was stopped at 5.00 and quickly rebounded back. This is most likely the final phase of the 5-3 growth wave, which means a continuation of the uptrend is most likely.
Second thing that stands out is the last month’s financial report, which is quite good. Revenues are up slightly, and profits are up significantly. This is exactly what I’ve been talking about, a firm with a very low P/S ratio needs only a tiny increase in profitability for a drastic increase in P/E.
Finally, there’s the Russian crisis. I think it’s overblown. Yes, Russia is an important market for Gorenje, and this will likely decrease the profits and the revenues in the near future. However, I don’t think it will be nearly as significant an event as most people seemed to think when they were selling rubles for 70$. At worst, we’ll be back in the high sales / low profit zone for a few quarters. Considering how the stock is priced, it’s really not a singificant cause for concern.
However, if the situation seriously deteriorates and the stock bottoms out below 5.0 (which is possible however unlikely), the next downward target is the super heavy 4.0 to 4.5 resistance zone.
Although I consider this stock to be a great long term investment, I believe there may be a short term cause for concern. The whole idea is best summarized in the following picture.
Basically, we’re dancing on the supportive trendline, and may have even breached it already. The next few days will likely be crucial in deciding whether that breach is real or just random white noise on the trendline verge. Should that breach happen, what we have in front of us is a pretty nice example of a head & shoulders pattern. The target of that pattern is approximately 0.7 euros below the trendline, which amounts to approximately 5.8 euros. Furthermore, it is also a support level formed by the preceding two tops (and perhaps one bottom which forms another close resistance at 5.5 euros).
In the long run, this drop would be the completion of a wave 4 of a standard 5 wave growth pattern. I believe such a drop might correspond to a long awaited correction of US indexes. But even though such a breach may bring the stock down somewhat, I consider this a short term event, which is actually a good trading or late entrance opportunity in the 5.5 to 5.8 range.
I’m not sure whether this analysis is influenced by my writings, or whether it’s a case of “great minds think alike” scenario. Whichever the case, the authors of a renowned investment firm seem to share the same sentiment about Gorenje as I do. This is highly relevant, as it indicates that the stock in question seems to be coming into investor focus. Such events are important for stocks and markets with low liquidity, as they can generate strong buying pressure and push the price high. Or in other words, they generate price discovery by “unlocking underlying value” (I hate to use such a trashy term but I believe it really does happen on occasion, such as this one). After bouncing off the 6.00 line (the second resistance level, after the 6.50 I mentioned was breached), it looks like it may well be on the uptrend. Anyway, without further ado, I’ll post a screenshot of the first two pages of the review. The rest is pretty much what I already said, although I have to give credit to the author as it is explained in more detail than I ever bothered (though he is getting paid for it 🙂 ). Should anyone require the complete analysis, I suggest contacting the company to see whether it’s public data or available for purchase. Whatever the case, the expected P/E ratio of 4, supported by positive cash flow, is something that should most certainly be taken into consideration.
Just remember, you saw it here first!
Although I’m primarily focused on Zagreb Stock Exchange, I do follow some other markets as well. One of the markets I also follow is Ljubljana Stock Exchange, and the primary reason for that is Gorenje (GRVG). The reason why I consider this stock to be interesting is primarily because of its low P/B and P/S ratings. Although cash flow and earnings have been negative and close to zero, the company assets are priced very cheaply. This company is basically like ZVZD with bad earnings.
However, I consider the earnings are likely to increase for several reasons. The primary reason is that their investment cycle has been completed, and they’re in the process of optimizing expenses. Concretely, they have bought the Swedish company ASKO, known for its high-end appliances, transferred production from Sweden to Slovenia, while transfering production of Gorenje appliances from Slovenia to Serbia. They also made several acquisitions of low end appliance manufacturers. That means we should expect the production costs to decrease, while income should remain fairly stable. The second important factor is the alliance with Panasonic, which has decided to buy a significant stake in the company, which offers the possibility of a long-term merger. Should that ever happen, Panasonic will likely be forced to pay a significantly higher amount per stock than the current market price.
What must be considered, however, is the fact that this stock is still losing money, and that its debt is somewhat high. On the other hand, its primary product line is one of the first type of products that gets hit during a recession (home appliances), and considering the average lifespan of those units, it is likely that demand will have to pick up fairly soon.
Overall, what’s attractive about this stock from a fundamental point of view is a pretty limited downside, with a fairly significant upside. They’re basically a very cheap factory which offers zero gains. But should they be able to increase their margins in the near future, the low stock price makes extreme P/E ratios quite possible.
This is the stock I have already written about when it was somewhere around 4 euros, so my faithful readers may know that it’s already made me some 70% or so profit. However, what’s even more interesting about this stock is its technical situation, which I’ll now describe.
This year, we have seen a 3-wave rising pattern (wave 3 being a complex wave), which makes it very likely that a fifth and final wave is about to arrive. Although we cannot claim that the fourth wave is a part of the rising pattern (it may be the beginning of a 5-wave falling pattern leading to 0), I think it is much more likely than the alternative. The flag I mentioned earlier seems to have broken downward, and I expect it to stay at or near the 6.5 resistance zone. If that resistance doesn’t hold up, however, any investor should be prepared to sell and suffer the losses.
But the reason why I believe the 6.5 resistance is significant is also because of the 5 year chart shown below:
Although my drawing isn’t the best (the green line should be somewhere around 6.45), it is obvious that the pattern we have ahead of us is magnificent. We’re talking about a big W, which is something like a double bottom on steroids. The difference between a double bottom and a big W are the smooth sides of the later, which means that there is no significant resistance points until the very top of the formation. In this particular case, the resistance is somewhere in the 12-14 region, which still leaves enough space for something like a 100% profit over the next year or two. Considering the formation has broken through, we’re likely to experience growth to at least 12 euros, which would be my recommended sale price. Being a modest person that I am, a profit of 300% is something I’ll be quite satisfied with. The current pullback does hurt the performance somewhat, but it also offers a great entry opportunity for any latecomer.