Pursuant to the write-up on Broadway on 2 Nov 10, Broadway has slid to $0.985 in line with the weak market. I have mentioned that $1.01 and $0.935 are major support regions.
This write-up is purely on an opportunistic play (long position) on Broadway with a horizon of 1-3 months, given the oversold position elaborated below.
Extremely oversold
With reference to Chart 1, it is apparent that RSI has declined to levels not seen since Jan 2009. In fact, throughout Broadway’s listed history since 1994 (excluding the dire period from Dec 08 – Jan 09), there has been approximately 20 occasions when RSI is lower than the current reading of 21.4. I.e. this indicates that at current levels, RSI is already relatively low. It is unlikely that Broadway’s RSI will trend towards the all time low of 3.4. A caveat here is that RSI can remain depressed for some time, thus clients should not do contra but to consider initiating trades (via tranches) with a horizon of 1-3 months.
Chart 1: Broadway’s share price since 2009
Source: Shareinvestor.com
Cheap valuations even after factoring tepid growth next year
As of 30 Sep 10, Broadway’s net asset value (“NAV”) per share is around $1.04. i.e. at $0.985, it is trading below NAV per share. Furthermore, at $0.985, according to consensus analysts’ estimates, Broadway trades at a PE of around 4.6x FY10F PE with a dividend yield of around 3.8%.
Assuming that Broadway’s earnings per share grow at 5% next year, price earnings to growth ratio (“PEG”) will be less than one which is still attractive. (As a rule of thumb, PEG < 1 is attractive priced) In other words, markets have already priced in a low earnings growth situation for Broadway which leaves room for upside surprises.
Opportunistic risks
Bearish divergence and potential chart breakdown are noteworthy risks
Chart reading is a notoriously subjective field. Some would argue that the bearish divergences depicted by both RSI and MACD indicate that the downtrend is likely to continue. Furthermore, Broadway’s chart seems to be undergoing a breakdown in the chart consolidation since June 10.
Nevertheless, it is noteworthy that the breakdown at the support region of $1.00 is not accompanied with volume expansion yet. Thus, I believe the slide should be arrested at around $0.935.
Upside should commensurate with holding period
If clients enter Broadway based on an opportunistic play, the upside potential should be realistic. My personal opinion is that I will exit if there is a 5-10% upside.
Conclusion – Opportunistic play but not for the faint hearted
I have outlined the potential factors underpinning this opportunistic play and the potential risks. It is noteworthy that opportunistic plays carry a substantial amount of risks and clients should evaluate this carefully.
This write-up is an amended version. The original has been complied and sent out to my clients on 21 Nov.
Disclaimer
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