Sunday, 10 November 2019

TRADE OF THE WEEK #25 : MUDAJAYA GROUP BHD


Outcome
Gross Profits : RM4,608
Return on Investment (ROI) : 10%
Duration : 2 days



Despite what our trading style and profits might suggest, we are actually very conservative traders. 

We almost always miss out on the 'meaty' part of a profitable trade. We'd sell a stock at 20 sen and watch it go up to 28 sen. Or exit at breakeven point just before the stock skyrockets. It happens to us all the time. 

But as we always like to say:


Things seem clear and easy to digest when they're in the past. In the present - and by this we mean during that stressful time of active trading - you will have to make decisions based on limited information.

We frame our mindset this way: trade, meet the predetermined targets, get out. And disregard what happens next.

To take the logical thinking process further : why regret losing profits you never had in the first place? Sounds obvious, right? But yet... people think like this all the time.

When you take a profit - let's say RM500 - the most important thing is not the fact you missed out on an additional RM300 in profits had you stayed in the trade. It's actually whether that RM500 was the result of calculated planning.

"Profits from planning always beat profits from dumb luck over the long run"


Our followers know this conundrum well. When we disclose that we have exited a stock at this point, we almost invariably exited too early. Perhaps if they're really smart and devious, they could follow our trade and exit a few points above us constantly. Perhaps....😈

So it was this situation which we found ourselves in. The trade was in MUDAJYA, a well known but long-suffering stock. The construction company has had some troubles in recent years, and the market battered the stock from RM1 all the way down to 20 sen in two years. 

We ended up exiting this trade early but do we care?? The answer is... yes. Otherwise we wouldn't have written the rant above to make our point.

But to be clear, logic trumps emotion. We understood our rationale for exiting and we made peace with it. We didn't get greedy. Can't lose what you never had, eh?

Anyway : MUDAJYA is a very interesting case study. We'll explain how all the pieces fit together, and how you can formulate a trading idea just like how we did it. 

THE TRADE


The last week of October was very kind for penny stocks. We saw incredible rallies left and right, some for no particular reason. We usually don't trade penny stocks, but we make exceptions for exceptional cases.

Here's the thing about exceptional opportunities : you have to recognise them quickly, and capitalise on them. This means moving from trade identification stage to execution within minutes. This is something we can do, out of experience. You have to spend some time (and more than some money) tinkering with this kind of approach. Believe us, there's a pot of gold at the end of this rainbow if you're willing to work on it.

MUDAJYA was an exceptional case for a multitude of reasons. We will break down the different components that contributed to our decision to trade this thing. 

Be forewarned that this was not an easy trade. These components have to come together; then you have to understand the collective whole as a singular insight.

If you're too late at figuring out, you won't get good pricing. If you invest first and investigate later, you stand a chance to lose loads of money. So the optimal point of execution is somewhere in between - limited information, but decisive action at the right time.

Sheer conviction is necessary for us to come in and build a meaningfully sized position in order to make profits. If we don't have it, we would be indecisive. We'd be toast.

1) Price-volume analysis:

A rally from 20 to 30 sen in one day is nothing to sneer about. But simply buying at the peak would be a foolhardy decision, yes? So what you need to do is look at how the stock deals with a price correction.

MUDAJYA presented a golden opportunity; on 30 October, the stock suddenly broke the 30 sen mark  (from 22.5) and peaked at 33.5 during the morning session. 

What really matters next is how the stock performs at the 30 sen mark. Tantalisingly, MUDAJYA closed for the afternoon break at 31 sen.

Here we have our first set of expectations : if momentum is set to continue, the stock should consolidate temporarily at the 30 sen mark - an obvious support/resistance point - before staging a new breakout. What this really means is : better price and better volumes at higher levels.

The visualisation of this whole theme can be found in this five minute chart on 30 October.

Buy range as described via the Telegram message above

See the 'spike' on the left side? That seemed like strong volatility within a 5-minute period just before the morning session close. Someone was clearly buying large volumes at any price. As highlighted, it peaked at 33.5 before closing at 31 sen. We know it's a big deal because this involved 76,000 lots traded. That was the first indicator.

2) A positive market:

This is so incredibly awesomely important. We prefer to see the broader market to assess its 'health', and by extension, investors' enthusiasm.

It was no trifling matter that on 30 October there was a slew of inexplicable movements in small cap counters. You should know that these kinds of movements are cyclical, but they are not trivial.

This kind of enthusiasm is supportive for cheap stocks, and MUDAJYA was well positioned to benefit. We noticed (as did everyone else) that the stock moved harder and faster than others. Maybe there's another reason for it?

3) A mysterious stock-related development

This was evident in the buzz generated across day trading chat rooms when a large block was apparently transacted in MUDAJYA, in what is called a Direct Business Transaction (DBT).

It was definitely worth salivating over the fact that this transaction was done at 38.5 sen a share - MUDAJYA's stock started the day at 22.5 sen on 30 October.


After wiping the collective drool off our faces, we decided to make a move. The final decision is really down to experience, instinct, and the willingness to absorb losses if this thing turned south. It was a worthwhile opportunity.

You can see our trading parameters as shown above. When we came up with that, we managed to synthesise all these bits of information - technicals, market mood, news flow - and come up with a decision quickly. Obviously being fast made all the difference, as this was intended to be an intraday or contra trade.

The stock closed at 34 sen on 30 October, slightly below its intraday high of 35.

The next day, it exploded again, giving us the freedom to exit at our chosen price point. We opted to dispose at 10% yields; no mean feat as this was achieved in less than 24 hours.


Sold at 36 sen. The stock hit 39 soon after.

Too early? Of course it was! But hindsight is 20/20.

What really mattered was having a right plan and sticking to it. It's the road to riches.

(Editor's Note : Update, 9 November 2019 - a bit more light on this MUDAJYA theme that we will keep watching)















Sunday, 3 November 2019

THIS WARRANT GAINED 400% IN 4 WEEKS - WE JUST WATCHED IT GO BY





Hindsight is a bitch.

When you have all the facts at the end of everything, it all just becomes clear. You have a full understanding of your decisions, especially if they're mistakes. If your capacity for self-forgiveness is low, you will probably develop some festering self-resentment. Don't do this.

We'll do the next best thing - analyse a trade which we had zero part in. We tend to learn a lot from this exercise; we hope you will as well.

So how bad was it? Let's put it this way; if our trading profits were car-sized, we missed out on potentially three Perodua Axias worth of profits. To take the metaphor a bit further, these cars whizzed past us. We just stood watching, dithering, numb, and in silence. They sped through a puddle, covering us in suspiciously brown-ish water.

We had all the available information. Heck, we were even presented with a big clue right from the beginning.

Our failure was that we didn't manage to connect the dots. It was a lapse in judgment, and we were too slow to act.

HINDSIGHT = SOBERING

We are almost always early when we exit profitable trades. We'd have a fantastic trading thesis, we'd execute perfectly, and then it turns out that we exited a trade far too soon.

But that 'too-early' syndrome is only evident with hindsight. When the trade was ongoing, all available information suggested that we had acted the best we could to optimise profits.

Case in point is our trade in PENTA. Oh, sweet PENTA. The stock has yielded us nearly RM20,000 in profits since we flagged it in July. We caught it at RM3 and now it's trading closer to RM5. Every move up now slightly annoys us; we've exhausted the trading strategy the moment we chose to exit.

What is worse than exiting a trade early? The answer: missing out on a simple, massively profitable trade.

It really matters to us since such trades do not come by often, regardless of how our Trade Of the Week series looks like. A single great opportunity can come in one whole month, and if we miss that, our month is basically toast.

This was a trade that did not require complicated maths or a risky do-or-die massive position. All it needed was a bit of situational analysis, and a bit of connecting the dots.

I'M LOVING ANGLES INSTEAD

We love fresh angles; the more offbeat the better. One piece of insight can lead us into obsessive research work covering the mundane and the esoteric. Oftentimes they are not very useful. But when they are, the trading profits can be astounding.

A few things that we have done in recent months: 

1) We have been in steady contact with a lady at the Department of Veterinary Services to check on poultry and egg prices (we have an angle on that...). We also bought, cooked, and compared eggs produced by different poultry companies as a taste test.

2) We have been to several furniture dealerships to test (poke, touch, and feel) out some items that were manufactured by a listed furniture company that we really like. Why do Americans, and Western Hemisphere white folks in general, like our exported chairs so much?

3) We have test drove several variants of new car model(s) to assess their appeal to the target market to support our growth projections for a listed automotive company. We interrogate their salesmen about it. We do the car door test to determine its sexiness - a purely qualitative exercise.

4) Whenever we go to a shop/restaurant/supermarket that has a point of sale payment terminal made by a listed company that we absolutely love, we interrogate the cashiers about the product. Is it better than that other terminal made by the dominant industry incumbent? How user friendly is it, to the customer and the vendor? Since it looks like you have different payment terminals, which is the one you end up using more?

We are generally lazy (if we're not in manic obsessive mode), but these types of real life engagements keeps us grounded. We respect the companies behind these products. Our experiences are tangible, and obviously they give us a better understanding of those companies. We don't consider stocks as just a bunch of numbers.

You may find us weird and have a renewed desire to hide yo wife and kids, but be assured: we're only interested in facts and figures that can give us that small piece of advantage in our investing and trading activities.

We are... contextual predators.

The world offers so much context, if only we'd look at it more.

 "We didn't take the cash salary. We opted for equity plus free detachable warrants instead". Source.


THROUGH IT ALL, SHE OFFERS ME PROTECTION(ISM)

In this case study, the sector to pay attention to is.... garments. Clothes. Baju dan seluar.

Garment manufacturers are becoming a very real beneficiary of the US-China trade war, with orange-face Trump blessing these companies with a once-in-a-lifetime opportunity. With Chinese manufacturers being hit by tariffs and sanctions, garment companies in Asia and ASEAN are the ones picking up the slack. 

As client orders flow into this region, Malaysian manufacturers also stand to benefit as they have enough capacity to take up contracts, and the quality control needed to deliver apparels up to a certain standard.

We will discuss two of these companies. Magni-Tech Industries Bhd, a clear market leader and ridiculously expensive stock for good reason, set tongues wagging after reporting outstanding quarterly earnings on September 10. Ours touched the floor.


Magni-Tech has two manufacturing facilities in Vietnam, which is of course the primary beneficiary of the trade war diversion. The cheap labour force over there sure helps too.

So with demand rising and expenses laughably low, margins are expected to be fat. It's a very, very compelling story, and the linkage between Magni-Tech's fundamentals strength and an appealing macro angle should be enough to propel it skywards.

But don't take our word for it. Here's the price chart up to September 10.


And.... after September 10.


The story is compelling. As a theme, it was good enough to push Magni's stock up by 32% in one month.

THE SMALL DEETS MATTER

A very significant factor in this story is a minor detail - this company discloses its earnings outside of the normal reporting season; most companies disclosed their earnings by late August, with a cutoff date of 31st August. Magni-Tech reports in early September.

But this trade is not about Magni at all; it just provided an opening for another stock. That company is Prolexus Bhd (PRLEXUS), which crucially reports outside of the normal earnings season as well. 



We think you may have an idea of where we're getting at. Both Magni and PRLEXUS are garment manufacturers. Assuming improving fundamentals and overall demand increase for apparel (as was evident in Magni's performance), PRLEXUS stands to benefit too.

The fact that both report outside of the earnings season was a quirk which would prove to be very profitable for investors of PRLEXUS. Between 10 September and end of the month (when PRLEXUS releases its earnings), there was an opportunity to put on a sizeable trade to capitalise on the garment/trade war angle. 

And the best part? PRLEXUS had cheap warrants. They're not very liquid, but it's a good approximation of the mother share movement. At five sen apiece as of 10 September, there was not much further downside. We could, and should have built up a large position. The payoff potential was too good to ignore relative to the risk.

So we have the following ingredients that usually makes up a perfect trade:

A compelling thematic. A quirk in the system. A perfect instrument to trade. A low risk wager. 

But we failed to connect the dots. So let's see what happened eventually.

THE TRADE THAT DIDN'T HAPPEN

Hindsight suggests that this should have been a blinding obvious trade to us. We'd like to think we are trained to capture these kinds of opportunities.

To illustrate the strength of this angle, check out the price performance between Magni and PRLEXUS during that 'golden period' between Magni's earnings (10 September) and PRLEXUS's expected earnings (30 September at the latest).


As you can see, PRLEXUS immediately outperformed Magni after Magni's earnings. There are many reasons for this; the main one is that the stocks are priced differently. Compared to Magni at RM6.30, PRLEXUS had some ways to go from just 50 sen. So did PRLEXUS-WA, which had been trading at a pittance.

Theoretically, we would have been comfortable with 3,000 lots of PRLEXUS WA at 5 sen. RM15,000 is a manageable amount, and we could have bought them on 11 September. The stock and warrant were in and out of our watchlist (which you can view in our Telegram Channel). We certainly noticed Magni's movement post earnings; we simply forgot that PRLEXUS should react to the same fundamentals and compelling story.

And then PRLEXUS released their quarterly earnings, and of course they were good.


To cut a long story short, here's the PRLEXUS chart from September 10 to its post-earnings peak in early October. That big gap is the immediate reaction after its earnings.


And PRLEXUS-WA over the same period:


!!!!

That's a price increase of 21 sen within one month. A single, crummy month. 

The gains would have been astounding; a 400% return on investment. Assuming our theoretical entry point of 5 sen for a RM15,000 investment, that would have turned into RM78,000. (Editor's Note: at least now you know that these kinds of opportunities exist eh??)

The insightful trader would have made his or her year from just trading this. And when did we finally manage to connect the dots? At the peak this movement; that angle has run its course.

This is the real power of finding the right stock at the right time. These little bits of extraordinary circumstances would sometimes present themselves on a platter. It was a great story for a great trade.

Stories can be worth something, and sometimes they are worth A LOT.








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