What is Happening to the McGrath Ltd Share Price?

What does McGrath Ltd do?

McGrath Ltd [ASX:MEA] is a real estate agency with a dominant position in the prestige market of Sydney’s Eastern suburbs. It has growth plans to move into the lucrative Melbourne market.

Real estate agencies make their money from sales commissions and rental rolls. Their rental/property management income is their bread and butter, while the sales commissions behave more cyclically.

What’s happening to the MEA share price?

McGrath only listed in December last year. The IPO price was $2.20, but ever since listing the MEA share price has declined. It last traded at $1.30 and today went into a trading halt while it prepares to update the market on new earnings expectations.

Given the performance of the stock and the slowdown in the Sydney housing market, it is likely that MEA will warn of lower than expected profits for the year to 30 June.

If this is the case, you’ll likely see the share price fall even further.

What now for McGrath Ltd?

Stocks that struggle from their initial listing usually take some time to recover, if at all. MEA took advantage of a strong real estate market to sell itself to the public at what now looks to be an inflated price.

With the market now cooling, the weakness of MEA’s business model is exposed. That is, it appears overly reliant on sales volumes. Therefore, a slowing market has a large impact on sales. The company’s forecasts as outlined in the prospectus appear in hindsight to be too rosy.

As you can see from the chart below, the McGrath share price has been in a constant downtrend. By following the simple rule of never buying into a stock trending down, you would’ve easily avoided MEA.

MEA stock price chart 15Apr16

 

Source: BigCharts.com

[click to enlarge]

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

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Greg Canavan
Editor, Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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