Trade Review - easyJet: When Fundamentals and Technicals Come Together

We talk a lot about technical analysis at FoundryStrat. Springs, breakouts, moving averages and risk management. But technicals are only one part of the process.

Sometimes the best opportunities appear when a fundamentally sound business is hit by short-term fear, the valuation becomes disconnected from reality and the chart eventually confirms that the selling pressure has exhausted itself.

easyJet has been a near-perfect example. You can see our initial research blog back in March.

Remember, this is not a recommendation or financial advice. We are simply reviewing a trade we took and explaining the thinking behind it. Always do your own research.

Buying while the market was worried

We first bought easyJet during a period of pronounced share-price weakness.

At the time, geopolitical tensions involving Iran were weighing heavily on the airline sector. Oil prices were a concern, disruption fears were rising and investors were understandably reluctant to own cyclical travel businesses.

The market saw an airline exposed to fuel prices, geopolitics and a potentially weaker consumer.

We saw a company that was:

• Consistently profitable again

• Rebuilding margins

• Generating strong earnings

• Built a strong fleet and discount prices during covid

• Trading on approximately five times normalised earnings

That did not mean the risks were imaginary. Airlines can be extremely difficult businesses and Warren Buffett’s warnings about the sector are well known.

But there is a price for everything. At around 361p, easyJet looked less like a permanently impaired business and more like a fundamentally improving company being priced for a considerable amount of bad news.

The fundamental case

Our original thesis was relatively simple.

easyJet’s revenues had recovered beyond their pre-pandemic levels, profitability had returned and the balance sheet had improved considerably.

Normalised earnings of around 65p–70p per share placed the stock on a multiple of roughly five times earnings.

Even a relatively undemanding valuation of eight to ten times earnings suggested a potential value of approximately 550p–700p.

The market did not need to decide that easyJet was a wonderful long-term compounder. It simply needed to stop treating the company like a distressed asset.

Value investing is not always about finding the greatest business in the world. Sometimes it is about finding a decent business where expectations have become far too pessimistic.

The chart eventually offered an even better entry

Although we initially bought based on the fundamental weakness, the chart subsequently produced an excellent technical setup.

During May, easyJet formed a double-bottom-style base. Price then briefly undercut the prior low before sharply recovering back into the range.

That was the spring and you know we love this technical pattern.

The move below support encouraged remaining holders to sell and tempted short sellers into the market. But instead of following through to the downside, price immediately recovered.

That failure was the signal and the spring triggered on 22 May at approximately 364p, with a clearly defined stop below the recent low.

This created exactly the type of asymmetric setup we look for:

• A fundamentally cheap company

• Negative sentiment already reflected in the price

• Evidence that sellers were becoming exhausted

• A tight and measurable level of risk

• Considerable upside if the recovery developed

The fundamentals gave us the confidence to investigate the opportunity. The technical setup gave us a precise entry and invalidation point. That is what putting it all together looks like.

An 85% move in seven weeks

From the spring entry near 364p, easyJet has since traded above 676p. That represents a gain of approximately 86% in only seven weeks.

The mathematically annualised return would be more than 8,000%, but that figure is clearly not a sensible representation of what an investor could repeatedly earn. It simply demonstrates how unusually fast the move has been.

Our own return is lower because we began building the position before the spring appeared, buying into the initial fundamental weakness rather than waiting for the technical confirmation. That is the trade-off.

Buying early can offer a lower valuation, but it can also involve sitting through further weakness. Waiting for the spring provides more confirmation, although it may mean paying a slightly higher price. Neither approach is automatically correct. The important point is understanding why you are entering and where your thesis would be invalidated.

Managing the position as price moved higher

Once the spring succeeded, the character of the chart changed quickly. Price moved away from the entry, reclaimed the short-term moving averages and began producing a sequence of higher highs and higher lows.

As the rally developed, we gradually reduced the position:

• One-third was sold into the first major area of resistance

• Another third was sold as price approached the previous high near 588p

• Some exposure was added back following news of increased takeover interest (the price was around 610p but the second bidder came in at 715p. So there was still upside).

  
  

This allowed us to bank profits while maintaining participation in the larger move. It also reflects an important lesson: you do not need to make one perfect decision. A position can be actively managed as the evidence changes.

The bidding war changes the story

The latest acceleration has been driven by takeover speculation and reports of competing interest in the company. That is not something we relied upon when entering the trade. The original thesis was based on improving profitability, a repaired balance sheet and an extremely depressed valuation.

The takeover interest is therefore an additional catalyst rather than the foundation of the investment case.

It also provides some validation of the original valuation argument. When strategic or financial buyers begin looking at a company after a major share-price decline, it can be a sign that public-market investors had become too pessimistic.

Of course, takeover situations introduce new risks. Bids can fail, interested parties can walk away and prices can fall sharply if expectations unwind. That is why position management becomes increasingly important after a rapid move.

The key lesson

The easyJet trade was not simply a lucky bet on a bidding war.

The opportunity began when fear surrounding airlines, fuel prices and geopolitical risk pushed the valuation to an extreme level. The later spring provided evidence that the market had run out of sellers.

The subsequent rally then demonstrated what can happen when a heavily discounted valuation meets improving sentiment and a powerful catalyst.

At FoundryStrat, we do not see fundamental and technical analysis as competing philosophies.

The fundamentals help us decide what we may want to own. The technicals help us decide when to own it.

Risk management determines whether we remain in the game long enough to benefit when both prove correct.