Sunday, February 12, 2012

Be A Better Trader If You Must Trade

You know who you are out there. You call yourself an investor when you are really a trader. You describe your activities as investing when its really punting. You know next to nothing about the stock, how many shares, what is the free float, what biz, what sector, have they been making losses, how close to PN17, who is helming the company, what about the reputation of management, what is their normal net margins, how sustainable are those margins and will the product or services need reinventing every few years, what was the high-low during the last "play", whats the overhang for the stock, and at what levels ...
Image Detail
If you do not know remotely any of the above, you are not a trader but a PUNTER. A genuine trader may not know all of the above, but he/she would check quickly. Naturally you can ignore all of the above and rely solely on technicals, but then you need not read my blog anymore.

I will cite a few examples of what constitutes good trades and bad trades:
Image Detail
NICORP - A stock that has hovered forever below 10 sen, suddenly perks up to 20 sen and then 30 sen, then 40 sen. Its PURE GORENG. If you must trade these type of stocks, you MUST BE IN AND OUT in the same day, heck, same session, heck even same hour or shorter. Never, never overnight, you do not know whether distribution is finished, or suddenly Uma Thurman comes a calling or a designation. A more reasonable financial engineered stock would set bases, build bases, move in predictable ranges, collect and distribute but always not going very long on your own account. Then when its time to distribute, start moving out of your usual range. NICORP is not a normal goreng stock.

Think about it. If someone bought the counter at 10 sen, would it be worth 40 sen overnight? I don't care what assets you inject, somebody must win and somebody must lose in a RTO. It trades at 40 sen, do you think the new business will get shares in exchange for their business at 40 sen a share. Of course not, it will be at 12-15 sen at most because the owner will want A LOT MORE shares of Nicorp for him/her to inject. So, note the dilution.

The only way is for that business to be giving 40% net margins, let me know if you find one that does that. If you do, you might want to keep that private, very private.

GREEN OCEAN - This has not moved for over 3 years. If you do your research quickly you will find that the new owner who came in at 30 sen, has been writing down doubtful debts by previous management to near zero. The newsflow on Novelin is substantive since its from MPOB. If you talk more with industry insiders, you will find that companies such as IOI has this technology "fractionation" which makes oil palm not to solidify. But IOI's technology goes to 8 degrees Celcius. Green Ocean's technology allows oil palm not to solidify at zero degree. Hence as you know more, you may choose to trade in and out of this  stock as the story may not be over for sometime. Discover and familiarise the stock's daily range so you can move in and out. Know the ranges and normal daily volume well, so that you will double up when it registers significantly higher volume and price jumps.
Image Detail
DBE - The news flow was there, the volume was magnificent. Supposedly there was a bid to buy control at 20 sen. If you examine the free float, there was more than 70% out there, with over 600m shares. If any of the news was remotely close to reality, the shares would have reached 17-18 sen with little problem. Genuine traders will note the humongous queues at every levels. With such a high free float, that is to be expected, but usually the long term overhang sellers would have been eradicated after a few bids involving a hundred to two hundred million shares. At every fresh level, there are more shares.

"Orcam's Razor", the simplest answer is the probable truth, the news is probably not correct. There are probably a lot of stale holders just wanting out.  Maybe there is still a deal for the company to be sold, but certainly not at 20 sen. I would avoid trading this baby looking at the terrible free float. What are the chances of going for 100m-150m shares traded a day again?

PREMIER NAFLIN - You look at the stock, it has cash per share of 33 sen. Speculation began to surface as investors look at the potential of the acquisition of a substantive business. Its a PN16 stock, which means with the cash it has to give back all to shareholders or buy some business soon to prevent being delisted. The fact that volume has perked up recently means the counter is in play and/or an RTO is coming very soon. What is the downside? Naturally when it has cash of 33 sen, it was hovering around that price forever. When there is action it should never be at 33 anymore. The bare minimum for the counter should be 43 sen - the reasoning being what would you pay for a clean counter for RTO? Take out 33 sen as cash, consider it as a penny stock, it should sell AT PAR of 10 sen. The news report may have prompted a few other big investors to clamour for control of the stock because what more you want? 33 sen cash, add another 10 sen or even 15 sen, you get a very clean counter for RTO. Hence as a trader I would anticipate a lot more activity for the stock, I would buy aggressively when there is no volume or on down days, and wait for levels above 50 sen to trade out.

Why would big investors be interested in the counter for RTO? Imagine you have submitted an IPO application for your company but was rejected for various reasons. Imagine you found out that it takes 2 years to list your company. Now imagine looking for companies to buy to inject your business, you can locate some, maybe at 12 sen or 15 sen (par value 10 sen) but inside the receivables are very doubtful that they can be collected and the liabilities are very certain that they would need to be paid, you get shitty balance sheet. Which is why I would pay a premium for Premier Naflin if I have a business to inject: 33 sen cash per share plus at least 10 sen par and another 5 sen to 8 sen premium = 48 sen to 53 sen.

Image Detail
Knowing that, I will continue to trade this baby within those ranges. Not all penny stocks are the same. Learn and research more. If you rely on pure technicals, you will make a good living if you are good at it, but you will also miss out on the valuable nuances/confidence in trading that specific stock if you don't spend a bit more time on them.