How to avoid the next Steinhoff | Fin24
 
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How to avoid the next Steinhoff

May 23 2019 09:54
Lucas de Lange

When Steinhoff International’s shocking revised results for 2017 were published earlier this month, its formerly highly regarded board of directors as well as stockbrokers and asset managers were once again widely reproached because they were oblivious of the danger signals.

The results are far worse than expected, and speculation is rife about whether this company can survive.

After the results were released, the share price dropped immediately for the umpteenth time. 

At the time of writing, it was 98.6% lower than its high in March 2016, when it traded at 9 700c. 

The damage it caused in South Africa is widely felt. 

Each time investors suffer such enormous losses when big, complex companies collapse owing to fraud, there’s talk of new measures being introduced to protect investors. 

It has, however, been proven time and again that this is only partially successful.

Financial fraudsters are often highly intelligent people who succeed in circumventing rules and regulations. 

Of course there were people such as Jean Pierre Verster of Fairtree Capital who saw through the false good fortune of the share price and probably made large profits by selling short. 

Magda Wierzycka, CEO of Sygnia Asset Management, also decided that something major was amiss after analysing Steinhoff. 

Unfortunately, as is often the case, there are always people with better information than the average investor. 

Despite the very strict rules forbidding them from using this information, it’s impossible to stop it completely. 

Smaller investors do, however, have a resource that will not mislead them: the careful study of the graph of a specific share’s price. 

Of one thing you can be sure and that is that a diagrammatic representation of a share’s price always tells the truth regarding the relation between demand (bulls) and supply (bears), which forms the foundation of deals in any market. 

If the bulls reign supreme, then the price will usually rise, and if the bears are in control, then the price will drop.

In the process, certain price patterns emerge which are not only an indication of the state of the demand and supply, but often also send out danger signals that something is wrong.

For example, look at the highs A, B and C in 2016 on the graph. 

Lucas Graph

B and C both retreated before they could equal or beat A. 

This indicates that there were large sellers who were getting out at those levels. 

The bears therefore beat the bulls’ attempt to reach a new high, as was also evident in the area below D and E.

Then there were other indicators, such as Steinhoff’s long-term moving average that gave up the ghost in October and started declining owing to sustained selling pressure. 

When such a long-term average reverses downward after a considerable period of strong growth, then it’s always a major, flashing warning sign. 

In Steinhoff’s case, as well as with disappointing stocks such as Mediclinic and Aspen, the long-term average moved sharply down. 

It is very dangerous to try and buck its trend. 

Anybody who sold Steinhoff when the average reversed downward could have pocketed R75 to R80 per share.

There are also more technical signs that could have warned investors. 

Such as the head-and-shoulders formation that played out. It is regarded as one of the most reliable technical formations: To warn you at the top-end of a price graph that the risk is high for further declines; or at the bottom-end where an inverted head-and-shoulders can indicate that a share is on the point of recovery. 

The formation has a so-called neckline (XY). 

Should the price drop through that, then it is, as one experienced analyst puts it, like a gunshot that’s gone off.

These price patterns are constantly repeated in the market. 

Technical analysis is not the be-all and end-all of investment. 

It is simply another aid (and somebody like Jean Pierre Verster does not hesitate to admit that he uses it). If Christo Wiese, the former Steinhoff chairman, had someone to warn him that many warning signals were flashing, he might have avoided having to admit that the whole swindle and Steinhoff’s collapse “came like a bolt from the blue”.

Lucas de Lange is a former editor of finweek and an author of two books on investment.

This article originally appeared in the 23 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

steinhoff  |  trading  |  collapse
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