It's been a painful 19 months for my shareholding in Reject Shop Ltd (ASX: TRS).
After the initial tumble from $19, I bought shares in Reject Shop at an average of $9.92. Poor performance subsequently saw them fall to $8, before an ignominious exit from the ASX200 sent them tumbling as low as $5.11, in July.
They now change hands for $11.19.
What's going on?
For one, the latest annual report buoyed investors and Reject Shop shares subsequently rose 34% in the month of August.
Apart from a spate of buying after the results in August, the volume of shares traded has remained average, at around 200,000 per day. This indicates that there hasn't been a major increase in buying activity, as there might be if major players were taking a stake in the company.
Yet, shares have still risen in value another 30% since August.
I believe the rise could be due to speculation that there will be a significant increase in buyers for Reject Shop shares in the near future.
As I mentioned above, Reject Shop's market capitalisation fell so low earlier this year that it was booted out of the S&P/ASX 200 (INDEXASX: XJO), forcing index funds to sell their stakes (and depressing shares further).
With the recent rise in value of Reject Shop shares, the company is now worth approximately $315 million, which is larger than Dick Smith Holdings Ltd (ASX: DSH), Arrium Limited (ASX: ARI), and Drillsearch Energy Limited (ASX: DLS) – currently the three smallest companies in the ASX200 list.
Even though Drillsearch is set to merge with Beach Energy Ltd (ASX: BPT), Reject Shop is still large enough to warrant re-inclusion in the ASX200. This could create strong buying interest as funds are forced to buy up Reject Shop shares again.
So, what should I do?
Well, speculating by buying Reject Shop shares – anticipating a rise – could get you burned, because if enough other companies are larger than Reject Shop it won't get added to the list at all. Speedcast International Ltd (ASX: SDA) has a market cap of $580m and will make for one new addition to the ASX200 – putting Reject Shop one step closer to not making it.
If it does make the list and experiences another significant price rise, I intend to sell a significant portion of my stake at around $14-$15, as I believe the company will then be greatly overvalued. Many other retail stocks change hands for a Price to Earnings (P/E) ratio of under 12, compared to Reject Shop's lofty 18.
Either way, I don't feel that Reject Shop is a buy at today's prices.
