Diary: RSI, BEG, TPT, SDR, SQS

RSI - Relative Strength Index

RSI is a techinical indicator used in technical analysis (oh noes!). It measures "velocity and magnitude" of directional movements (Wikipedia source). The basic idea is that if the RSI is below 30%, it indicates that the stock is oversold, whereas if it's above 70% then it is overbought.

Sharecrazy gives you graphs of this indicator for any share that you care to tap in. The interesting thing is, you can actually look at a graph for a year, and determine if, in hindsight, the indicator was predicting highs or lows. Unfortunately, the RSI doesn't seem a particularly useful tool. For example, looking at PIC, it showed an overbought at 230p. The share price subsequently fell to about 155p, into oversold  territory. So far so good. But then share subsequently broke out of being oversold, went to about 160p, but then plummeted to 95p. Oops! There are numerous other instances where RSI doesn't predict that much in other companies.

It might be useful to use it in conjunction with value-based approaches, although I'd take it with a pinch of salt. With that huge caveat in mind, I thought I'd take a quick look at some shares which are currently oversold according to RSI. I shall brazenly steal (ahem, I mean "copy") the ideas from EV's (ExpectingValue's) Stockopedia article, and add a couple of my own. I'd like to thank EV for his article, as it gives a nice little summary for each company. Here goes ...


BEG - Begbies Traynor
This one was suggested by EV. BEG is a counter-cyclical play - it deals in insolvency, restructuring, liquidation and risk management. The founder sits on the board and has a substantial shareholding. BEG has a beta of 0.23 - confirming that it has little correlation with the market - which is what I'd hope to see for a claim of counter-cyclicity. It's on a PER of 3.3 and a PBV of 0.3. It has a market cap of 18m. Seeing PERs of 3 should raise alarm bells, as it usually indicates some kind of distress. In 2011, the EPS was down 26%, which might explain the collapse in share price. I'm quite concerned about the fact that it has net debt of 22m, which seems very high in relation to cash flows and market cap. My own feeling is to be very very careful with this one. Over one year, share price is down 74% against FTSE down 8%. It's at times like this that I am reminded of the immortal words of Admiral Ackbar: "It's a trap!".

TPT - Topps Tiles
This one was also suggested by EV. It has a beta of 0.52 (enough of your sorcerer ways, I hear you say). It is a nationwide tile retailer. They issued a profit warning earlier this year. It is on a PER of 5.5. Its PBV is negative. Its EPS has been declining for 3 years, and a further decline is forecast. High risk play.

SDRC - Schroders
This is a home-brewed idea of mine. Schroders are asset managers. No doubt investors wont need me to tell them that. Beta 1.15. market cap 2.7bn. What I like about it is that they are large, and offer a diverse range of products. I view them as safe, and a bet on market recovery, due to their high beta. So, the question is: do you think the market is going to go up?

SQS - SQS Software Quality Systems AG
I can't remember how this one came onto my radar. I think I saw it in an article on Motley Fool about cheapo growth shares. It has a market cap of 47m, and a beta of 0.05. It is trading on a  PER of 7.8, and PBV of 0.8. This puts it in the "smell a rat" category. Net debt is 12m. Its description on Google Finance seems a bit muddled. I can't work out whether it sells shrink-wrapped software, or is a general IT consultants. I think maybe the latter; like Logica. They expect profits for the second half to be at the lower end of expectations. It beats me what to make of this one. I think that IT consultancy can be such a fickle business. I can't help thinking that this is a trappy business, and heavily cyclical. Admittedly, I'm just talking off the top of my head.