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.
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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Editor, The Daily Reckoning
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