David Schwartz: A Treatt for Christmas

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Christmas is approaching and, finger crossed, so is the Father Christmas rally.

Some seasonal trends have great reputations but are of questionable usefulness if anyone attempts to play them in any single year. The Father Christmas rally is a welcome exception. This trend has been in place for many decades and continues to work well.

Since 1984, when the FTSE 100 was introduced, shares rose 22 times from December 15-31. It is not a perfect record of course, but the historical statistics confirm the validity of this year-end trend. Short-traders would do well to heed its advice in most years.

Experience teaches that seasonal trends are more like to be compromised during periods when the broad averages are strongly trending in the “wrong” direction. This problem is not occurring at present. Shares have been drifting sideways for the last two months. So I sense this might be a good year to trade the Father Christmas seasonal trend.

When it comes to trades in shares of individual companies, many of my ideas are triggered by regulatory announcements that companies are required to make. But lateral thinking is occasionally required.

A good example relates to my interest in Treatt, a provider of conventional and organic ingredients to food and cosmetics manufacturers.

The company popped up on my radar screen after competitor Yule Catto announced the sale of its PFW Aroma Chemicals division. The price tag was 13.6 times current operating profits. Companies in this segment change hands at healthy multiples, even during difficult economic times.

Applying a similar multiple to Treatt’s operating profits results in a theoretical market value of more than £40m. This is more than double Treatt’s current market value. To be fair, the company’s founders control 30 per cent of the business and indicate no desire to sell. Even so, it is plain that Treatt is ripe for a significant re-rating once small company shares come back into favour.

But while my long-term view about Treatt is positive, several short-term problems concern me. Treatt will issue its 2008 results on Monday. I shall look for assurance that certain problems are being resolved. Success in each area could trigger a substantial share price bounce.

One problem relates to its former 50 per cent ownership of a poorly-performing division. Treatt recently acquired complete control of this operation. I shall look for signs that profit and operational problems are being addressed.

A weak performance by its US division is also of concern. The company recently claimed this problem is being addressed. Once again, I shall look for further signs that the recovery process is on track.

The effect of a strong dollar on Treatt’s earnings also will hold my attention. The company stated last year that dollar weakness hurt 2007 earnings. But the dollar has now bounced back. Continued dollar strength should enhance company earnings in 2009.

But the effect of a strong dollar on 2008 earnings is more difficult to judge because many of the company’s costs, revenues and borrowings are in dollars. I am unable to determine the net short-term effect once different revenue and cost elements are converted to sterling. Monday’s statement will answer this question.

I shall also focus on Treatt’s forward order book. Management recently stated its order book is well ahead of last year. Further signs that this trend continues will be welcomed.

Should Monday’s report be positive about each issue, there is scope for a healthy rally next week.

Stock market historian David Schwartz is an active short-term trader. Send any comments or suggestions to tradersdiary@ft.com

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