Editor’s note: This article was first published in May 2013; all prices, resistance levels and the RSI reading are from 16 May 2013. Natraceutical no longer trades under that name, having reportedly merged into Laboratorios Reig Jofre around 2014.
Natraceutical has shot up roughly 100% since we last wrote about it. Many of you are asking me whether to sell or hold. Others, after watching the stock “heat up”, ask me whether it is a good idea to buy in. To the second group I will simply say that I am not in favour of buying a stock after such a vertical rise. Even so, let’s try to analyse Natraceutical, and I will give, or at least try to give, some advice.
To begin with, on fundamentals it is very hard to value this kind of company. On the positive side of the stock’s recent rise, it has not been a mere speculative bounce: the good results it reported, along with the reduction in its debt and the announcement of a dividend, have had a lot to do with these gains.
Turning to the technical side, after breaking through strong resistance in the €0.17–0.18 area, we can talk about a short-term change in trend, since it has broken out of its sideways channel to the upside. The next resistance would be at €0.30–0.32, and if it gets past that it could head to €0.40. We won’t rule out these bullish scenarios, although that would be very speculative.
The rise has been too vertical and aggressive, and big rallies like this are often followed by big corrections too. The RSI shows a high level of overbought conditions.
Our recommendation
For those not yet in the stock: Natraceutical is already a moving train. There may still be room to run, but the risk you take on because of possible corrections is too high. In situations like this I, at least, usually stay out and wait for a correction.
For those who bought when we recommended it: if you bought in the €0.13–0.15 range, I would venture to say that whatever happens you are not going to lose money now, so you can sleep easy. This is what Graham meant when he talked about knowing how to buy what others didn’t want. Now you already own, at a good price, what others want at a higher price.
That said, one strategy I sometimes follow with this kind of stock after big rallies is to sell a third or half of the shares if there are doubts near resistance levels, always with an eye on a possible correction, and always bearing in mind that the correction may or may not come. That way, if the correction does come, we buy back a larger number of shares at a lower price.
In this case, I would keep an eye on the €0.30 area, and if the stock struggles to break through it, I would sell part of my holding. Today, for example, after touching €0.28 the advance stalled, so watch how the stock behaves tomorrow.
Featured image: Jernej Furman from Slovenia, CC BY 2.0, via Wikimedia Commons.
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