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Ellis has been a major reason for the company’s astronomical rise over the past six years. He took over when the share price was $4.50 and has seen its move all the way to $42 over that time; that is just shy of 900% appreciation and 120% of that share price movement has come in the last 12 months.
The reason for that price action is pretty clear as the compound annual growth rate in NPAT is 33.9%. Ellis transformed the business model from a subscription-driven revenue stream to a listing revenue stream which has allowed REA to decouple itself from the ailing ad market to find a duel income model.
His vision and business nous has certainly been a key driver of the REA story and the announcement of his departure has, and will have, a detrimental effect on the REA share price. It also comes at a time when the company is in the process of finding a new CFO after Jenny Macdonald tendered her resignation in November, having been with the company since 2011. Board volatility is a real issue at the firm currently, and is going to halt the share price rise
This is news which will shake up the price action in REA; it has lost over 9% on the announcement and questions will arise in the next few days regarding who has the ability to take the company to the next level.
Downside in the short term looks likely, having to find a new CEO and CFO will be disabling and I would suspect it to react so in the short term. The MACD indictor shows REA has crossed over into negative territory, and retracing the July low to high shows the share price may fall back to the 61.8% level of $36.37.
I would look to short at market with a limit at 50% retracement ($34.34) if the shares fall through the 61.8% level, and a stop loss at $38.55 to cover a pop that may come on company news. This trade is likely to finish inside two weeks.
On a longer term view, be aware REA reported a 27% jump in sales a 42.8% pop in EBITDA, with margins at 48% and are forecasted to report a 38% increase NPAT for FY14.
The other possible trade here is buying on support. Wait for the MACD to show signs of recovery and buy at market and ride the price back to pre-announcement levels. I suspect that will begin early in the New Year so there is a possible double trade; one following the share price lower, before reversing and retracing the momentum higher.