SAPPI: THE LONG AND THE SHORT OF IT

THE LONG AND THE SHORT OF IT: SAPPI

Those who follow my research and ideas know by now know that my primary tool is technical analysis or price charts. The reason for this is threefold:

1. I realize that I possess limited fundamental expertise to arrive at an investment decision. The fact is, there are individuals out there who are much smarter, have better tools at their disposal and are closer to the industry and the companies than I will ever be.

2. The price chart allows me to ascertain the 'pure' supply and demand dynamics between buyers and sellers as well as identify key levels while using technical tools to gauge reversals as well as determine the potential for upside and downside momentum.

3. Using technical analysis allows me to cover an array of instruments across various asset classes both locally and globally to obtain an holistic view of potential opportunities (i.e. we can go anywhere with technical analysis). 

In a nutshell, technical analysis, helps identify opportunities but also more importantly manage risk. The way I view it is: technical analysis is a risk management tool, NOT a predictive tool.

If you follow some of my research/notes, you'll also know that my focus area has predominantly been medium to long term (just another way of saying I'm not very good at gauging short term moves).  

In the case of Sappi, a review of the monthly chart in February 2017 was key in managing downside risk. My research note at the time to my employer's private clients titled: "Sappi's Share Slowdown" on 09 February 2017 at 8475c, uncovered early warning signals which may have helped an investor avoid substantial downside in the subsequent years. For example, if you were a PM with tens or even hundreds of millions worth of Sappi shares in your portfolio, would an alternative technical perspective not have been helpful in managing risk?

As we can see on the original chart below, the share tested a multi-year overhead supply zone while signalling negative divergence on the RSI. These factors were also evident in 2002 and 2006 while also providing a short term warning in 2011. 

I also tweeted an update on the below chart on 26 May 2019: https://twitter.com/_Lester_Davids/status/1132671877057523712

SAPPI ORIGINAL CHART on 09 February 2017:

From the 8475c level we saw the price consolidate in a sideways range for the next 18 month before commencing a sharp decline that eventually saw the price reach a low of 1720c during March 2020. This equated to a 79% decline. 

SAPPI FOLLOW-UP CHART: 

On the long side, in selecting ideas for my Q4 technical review (published 08 October). Sappi made the cut as one of two 'Rand Hedges' - the other being Quilter Plc.

From a price of 2627c, we have seen the price advance strongly to reach a high of 4000c on 7 January 2021 (close to a 1-year high) - a 50% gain over a 3 months since publication.

Below is the original chart (at 2627c) from my Q4 report, followed by the updated chart:

Bottom Line: While technical analysis is often seen as a predictive tool, I have used it as a mechanism to help (1) manage risk and (2) find appropriate risk to reward opportunities. While Sappi, may be slightly extended in the short term (i.e. it can retrace), the weekly and the monthly charts suggests the share may have some room for further gains (this is not an recommendation, but simply my technical view). Please consult your own financial advisor.