The money transfer business is in a state of flux. New competition and technology changes have proven to be a formidable problem for the traditional players in the business like Western Union (WU) and Moneygram International (MGI). Traditionally these firms had large barriers to entry and were income generating cash-cows. Unfortunately changes in the global economy have turned these advantages into disadvantages as the entrenched companies have been too slow to adapt.
Among the potential stocks in the group that we could select, we like MGI for bearish entries because of its weak competitive position and abysmal financials. Forget the disruptions from bitcoin, money transfers through smart-phone apps are the wave of the future and MGI is unprepared to compete with this new model. Additionally, Wal-Mart (WMT) has gotten into the game through Xoom Corporation (XOOM) and its own store-to-store money transfer product.
The new Wal-Mart product was announced on April 17, 2014 and MGI dropped 17% in a single day. Those losses were compounded on April 29 when the company’s management slashed its forecast in light of the new Wal-Mart service. When a company like Wal-Mart moves into your business, you know things are likely to get tough. Adding insult to injury, Google (GOOG) is also stepping into the business with money-transfer ads that pop up in new Gmail messages.
Moneygram was never able to recover from the financial crash of 2008. The firm lost most of its value (from a split adjusted price of $300 per share) during the crisis when management was “surprised” to learn that most of its investments were in subprime loans and credit default swaps. Ironically, its losses were mostly due to non-operating activities. The financial difficulties over the last few years pushed management into a crisis mode that has sabotaged their ability to develop a stronger presence in mobile payments.
Following the company’s earnings report on the April 29, Moneygram stock stabilized and has bounced back up to the bottom of its gap. This pattern is actually fairly common and is referred to by traders as a “dead cat bounce”. Offensive name, but actually quite descriptive of the typical weak bounce and lifeless price action at the bottom of a gap to the downside.
We expect that traders will sell Moneygram stock at this level and are targeting the short-term bottom ($12.50 per share) as an initial target. A drop below that level could easily hit $11.25 based on the size of the bounce.
Even when a stock looks good for a bearish entry, it is best to wait for confirmation of a move to the downside before taking action. This is especially true in a bull market. Right now, traders are willing to take some risks on turnaround stocks like Moneygram. This is the “bounce” part of the pattern. We don’t recommend shorting the stock until the short-term rally looks dead.
We are looking for bearish candlestick patterns or just a break below $13.50 to identify the end of the bounce. Neither of those have happened at the time of this writing, so a conditional order or alert may be the most prudent short-term action to take. We expect the probability of the stock filling the gap to the upside to be very remote so a stop-and-reverse plan is not recommended.
Even in a bull market, there are ways to diversify with a few trades to the downside. Statistically speaking, low growth/high debt companies like Moneygram have been the best “bets” and a deteriorating competitive position in the industry ramps up the probability of a successful outcome. However, it’s still best to make sure that a contrarian trade is confirmed with a pattern or support level breakout before entry.
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