This article was written by John Snowden and published in The IRS Report in September 2011.

Trading through the August meltdown

During the last week in July the Footsie traded sideays in a crab-like manner with small plusses and minuses as though it was waiting for a directional lead. The first few days in August were down days, setting the scene for a dismal month. Between the first and the twenty first, the Footsie had rises or falls in excess of 100 points on eight trading days, only one of which was a plus.

By mid-month we had actually been on the cusp of a new bear market. On Tuesday 9th August the Footsie was in free fall hitting an intraday low of 4791, a fall in excess of 20% from the 8th February high of 6091. Historically, there is a widely used rule of thumb that a fall of 10%-20% is a correction while a 20% -plus fall indicates the start of a bear market. Although Wall Street suffered from daily falls in this short period of 400, 500 and 600 points, markets pulled back from the abyss by the end of the week with the Footsie scoring treble figure plusses on the 18th and 19th.

What now must be in the minds of many investors? The general feeling is that we should see some index recovery, but I am wary because there is more bad news to come this autumn. My fund is currently 57% liquid and it is my intention to stay that way until mid-September at the earliest, I am looking for a Japanese fund to add to my watchlist which also includes the UK M&G Recovery Fund.

These huge market gyrations in the UK do throw up trading opportunities and I have been paying close attention to some of my previous share features by listing the daily closing prices.

So far, I have made several short-term trades in IMI and the resistance level seems to be between 710p and 735p. The main problem is putting on a sensible stop level as prices are so volatile.

I have also been successfully active in Vodafone and have made my buying area between 154p and 159p. Since my recent article, there has been news on Vodafone's 45% stake in the US telecoms firm Verizon Wireless where the latter has approved a $10bn maiden dividend for payment on 12th January next year. Vodafone will pass on a special £2bn dividend, equivalent to 4p a share, to be paid in February. The remaining $2.5bn will go to pay down debt and fund general expansion.

EnQuest, where we had a recent investment update on the website, looks extremely good value. In early August the shares crashed back to 99p before buyers moved in. I would put the buying range at 100p-106p. Oil exploration shares remain out of favour but stand out at these lower levels as a medium term investment opportunity.

I have also been involved in H&T Group, which looks undervalued on fundamentals. I bought in at 349p and was on an immediate 20p paper loss due to the wide spread. The share price then fell like a stone with a huge spread (332p to 357p) so I put in a cheeky limit order to buy at 317p - and it was activated two days later. The shares went up against the market downtrend and I was tempted to close out both positions at 347p bid. I missed it, but a couple of days later I sold half at 346p and put a limit on to sell the rest at 364p which was activated on Monday 22nd after a 21 point rise in the share price. On the 23rd the results were announced and the shares briefly reached 412p on the news. That's a trader's life in volatile markets - but a profit is a profit!

Another portfolio share worth monitoring is Cape which as been as high as 573p (22/7) and as low as 422p (8/8). The current buy range seems to be between 420p and 445p. Berendsen has also been quite active, trading around 545p towards the end of July and dipping to 447p on 10th August.

If you were to track a list such as the six companies above, you will be more likely to judge the tone of the market and having made a daily list of the closing prices, should be in a much better position to make a profitable trade.

Remember the more volatile the share the more careful you should be on setting a stop. I suggest you look at a chart of the share price over the last six months which should give you some idea of the downside limit. Also always look to see if there are price-sensitive announcements due such as imminent results or pre-close period trading statements.

Currently I am almost out of the market again and on the sidelines watching for the next big moves. From my list of featured stocks I currently have an interest in two companies:

• Iomart Group, bought in mid-August at 111p, which has an uncommercial five to seven point spread. With hindsight I would put the buying range at 90p-96p.
• Centamin Egypt was bought at 91p after the shock quarterly report. I hope to close this contract between 120p and 128p but I am worried that we may have some profit-taking by the end of September before the gold price mounts a renewed attack on $2,000 per ounce.

 "Financially very strong with good cash reserves, a strong balance sheet and no debt." This is a quote from John Morgan, chairman of Morgan Sindall, taken from the interim statement (half-year to 30th June) announced on 8th August. Morgan Sindall is a leading UK construction and regeneration group which operates through five divisions of construction and infrastructure, affordable housing, fit-out, urban regeneration and investments.

Through a network of local offices, the group works for both public and private sector customers on varied projects worth from £50,000 to over £500m. Last September the company was able to take advantage of the demise of rival Connaught that ran out of cash and had called in administrators. Morgan Sindall agreed to buy Connaught's social housing contracts and related assets at a discounted value of £28m.

This will increase the scope of its maintenance activities, specifically helping the Lovell Partnerships business which embraces the company's affordable housing business and is also responsible for regeneration and refurbishment. Morgan Sindall was able to cherry-pick the profitable contracts and leave the loss-makers with the administrators. Integration has proceeded as planned and in the recent figures affordable housing operating profit is up 20% to £8.3m (£6.9m) on revenues up to £228m from £173m. Margins however were squeezed from 4% down to 3.6% due to the changing mix of work under challenging market conditions. The order book remains steady at £1.5bn against £1.4bn in 2010.

Construction and infrastructure made an operating profit of £9.5m against £12.2m on revenues of £617m (£612m) as markets remain competitive with a downward pressure on margins which fell from 2% to 1.5%.

Fit-out has been very competitive but increasing its market share. Operating profits dipped to £6.1m (£6.9m) but revenues were up 24% to £222m. This division focuses on technology and retail banking and has done recent fit-outs for Macquarie Group and looks well placed for a general expansion in the sector expected sometime next year.

Urban regeneration improved operating profits to £1.0m from £0.8m on revenues rising to £19m from £15m. Expansion looks set to continue as this division has been short-listed for a number of development opportunities with little competition from other developers. Orders in the pipeline total £1.4bn with a further £0.4bn at the preferred bidder stage.

Directors value the urban regeneration investment portfolio at £43m (£38m), with additional equity investments of £14m and a further £12m committed carrying a June valuation of £19m.

The interim results to end June saw adjusted pre-tax profits fall to £19.5m from £23.1m with revenues growing to £1.09bn against £984m for the comparable period last year. Earnings per share were 35.1p (42.0p). Cash balances fell to £65m from £138m, partly due to the Connaught acquisition. The good news is that the dividend announced at the interim stage was held at 12p. The shares went ex-dividend in mid-August when the share price was 620p. At the current share price the yield is a smidgeon under 7%, and the PER ratio a little under 8, below the sector average.

The forward order book stands at £3.5bn, supplemented by a growing regeneration pipeline of £1.8bn with a further £0.80bn at preferred bidder stage. The board is confident of meeting expectations for the year and at 600p or below we will give the shares a positive rating. Analysts seem to agree as three suggest buying or adding with a fourth taking a neutral stance.

You can see all of John Snowden's articles at www.TheIRSReport.com

John Snowden is a regular contributor to The IRS Report.

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