Thomas Cook (LSE:TCG) is almost certainly going bust. But you wouldn’t think that reading the bulletin boards, with posts of “20p INCOMING!”. Only a cream-faced loon would listen to anonymous strangers on the internet, yet listening to anonymous strangers on the internet seems to be a popular pastime.
The shares took flight on 31 July when Turkish entrepreneur and owner of ANEX Travel Group, Neset Kockar, decided to buy 4.76% and increase his holdings with more RNSs becoming available. The price at the time was around 4.5p.
This has spiked the price to an intraday high of 14.5p as of 6 August.
There is an opportunity for anyone with the stomach for volatility to open a short trade on the stock. Whilst the optimum moment may seem to have passed, Chinese conglomerate Fosun currently holds all of the cards.
It is in talks with Thomas Cook group around a debt-for-equity refinancing package, which would take out a significant chunk of Thomas Cook’s debt, but wipe out existing shareholders into oblivion. It’s a refinancing package done at the Last Chance Saloon, and, currently, Fosun is not only the only player- it is also holding all of the cards.
To give an idea of the stock’s volatility – here is its intraday chart.
(All charts taken from ShareScope)
No doubt many shorters will be covering now, as it’s a fine profit when opened this morning, but it is my belief that there is much further to go. It’s unlikely Fosun will accept anything less than 5p given that it can pretty much set whatever price it wants. Fosun can, and will, do whatever is in its best interests.
Looking at the daily chart, we can see that the 50 EMA (the black line) has been previous resistance. I opened a short yesterday and closed for a small loss, as the stock broke out intraday. At an entry price of just above 11p I would’ve been nearly 25% in the hole this morning after the gap up – a drawdown I’m not willing to take.
With Neset appearing to have bought his shares well below 7p (his latest holdings RNS came out after the market closed) even at a price of 9p he is well up on his money. If I were him, I would be unloading with great gusto into any bid in an attempt to book some hefty profits. Wouldn’t you?
The clue is in the bonds
If you’re ever in doubt about the equity value of a share, then it’s always worth checking the bonds if there are any.
For Thomas Cook’s 2022 bond which yields 6.25%, this can currently be bought at just 27.2% of par value. Bond holders are generally very cautious and for good reason – they have very little upside compared to equity holders yet are the first to be paid out if something goes wrong. When a company gets put into administration, it’s always the bond holders who get first pick on any available assets.
If anyone believed in Thomas Cook’s turnaround, then anyone sensible would he hoovering up bonds. But nobody is, because nobody does.
With such a volatile share price, there will be long and short trading opportunities but when the music finally stops (and the bonds suggest that it most likely will) anyone left holding the baby will suffer a near 100% wipe-out in equity value.
In my view, trading the trend here and taking the short side is much more sensible, provided one doesn’t overleverage or short when there is likely to be a squeeze as people rush to cover.
You can hear more from Michael by downloading fantastic free book ‘How to Make Six Figures in Stocks’. This can be found on his website – https://www.shiftingshares.com/