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Tuesday, 9 July 2019

PENTAMASTER IS HEADING FOR THE SKIES : BURSA MALAYSIA STOCK ANALYSIS

We, for one, look forward to the robotic, automated apocalypse

We are short term traders, but usually we are willing to bend over to the buy-and-holds of this world. In the background, away from the flashy trades and easy money (not really), we are still first and foremost students of fundamental analysis. Stocks that go up and stay up are backed by good fundamentals; there is no denying this, ever.

Other stocks with more hype than substance will go parabolic: that is, they will go from 50 sen to RM1 before returning to 50 sen. Hype is sentiment, so of course the stock goes up. Yet sentiment is finite; once it is exhausted, the stock price will simply normalise as punters dump their positions. 

But substance AND hype? That's a powerful combo... it's a theme we will delve into with Pentamaster Corp Bhd, our favorite long term pick. Let's say for at least six months and beyond. 

We will make an investment and trading case for Pentamaster as something you can hold for a while. Our thesis is this: the fundamental prospects are intact, as shown by earnings growth. But the stock has transformed itself to turn this into an even more appealing investment opportunity.
 
THE BACKGROUND

We have been lustily gazing at Pentamaster since our voices broke. This goes back at least two years, when the company demonstrated its capabilities to grow its revenue exponentially. By now, it has all the plaudits : it's already among Forbes' top performing companies in Asia.

Two years ago, the stock is about half the price it is trading at now.

 Weekly chart for PENTA, July 2017 to July 2019

 
Back then, due to its steep price (prior to the price adjustment, Pentamaster was trading at near to the RM4 mark, on very low volume) and lack of liquidity, there was simply no way to hold a meaningful position. What we mean by that is; there is no way to optimise returns relative the the amount of capital we have. We would have preferred the stock to have an associated call warrant or three, enabling us to put on a large enough position and realistically target four-to-five figure profits. 

Fast forward to July 2019 and suddenly : PENTA now has call warrants.

 More details on their technical characteristics here.

Fun fact: call warrants are typically issued by investment banks based on several factors: price stability, positive historical performance, and a few others. But the key consideration is market capitalisation : the company needs to have a market cap of at least RM1 billion and above for a certain amount of time for it to be considered warrant-worthy. This criterion reflects the stability of the stock, interest in the stock, and its not-so-bad historical volatility (it doesn't go parabolic, so to speak). In other words, nobody issues call warrants to shitty companies (Editor's Note : this is up for debate).

Being the weirdos that we are, we have always tracked these things. The 'graduation' of a small cap company into a RM1 billion market cap stock indicates many, many positive things. Longevity. Real earnings growth. Long term upside trajectory (for earnings and stock price). Resilience against negative market conditions. Management acumen. Growing cash flows and ideally low borrowings. PENTA has all this and more. 


THE INSTITUTIONAL FACTOR

We know that PENTA is a great small-to-mid cap stock. But this is what will really drive the stock to the heavens: its investability.

Let's go back to the price adjustment: the company undertook a one-for-two bonus issue in a bid to improve liquidity and 'reward shareholders with more shares while not incurring dilution' (commonspeak : we make the stock cheaper so you can buy more of it). Given its status as a small cap champion, it's natural for institutional investors to look into it. By this we mean the PNBs, EPFs, KWAPs, mutual funds, and hedge funds of this world.

Note the fragmented nature of shareholdings by funds according to PENTA's latest annual report. Previously funds can barely get a position going. Aside from the guy who owns the company and three funds, everybody else in the top 30 hold less than a 2% stake.


Institutions can't really come in before in huge numbers because the stock is simply too illiquid. It was very hard to accumulate a position worth RM50 million, for example. No avenue is available to buy that many shares in the open market; a private transaction would be also a risk, precisely because of the lack of liquidity in the stock.

In other words, institutions prefer a good stock that is easy to buy and sell. Yields are narrowing in the blue chips segment; for those with the right mandate (or the freedom to buy whatever the hell they want), they should also be lustily gazing towards a strong growth counter like PENTA.

 From the annual report.

And growth is all the upside potential: PENTA does not pay dividends, and will likely not do so until Najib becomes PM again. This is understandable: the company is conserving cash for an expansion, a noble goal that in itself is an appealing prospect for the long term investor. 

In fact, the company is so fiscally responsible that they are fully in a net cash position. Profits are fully reinvested.

Think about it this way: the major shareholder, who runs the company, believes in his company so much that he does not take the easy approach of declaring fat dividends as a cash reward to himself and shareholders. This is Marvel Cinematic Universe levels of heroism here.


 *not an actual photo of PENTA's management. Source.
The message is clear: Pentamaster is a capital appreciation play, and if you're in, you're in it for the stock to potentially gain 30%, 50% or 100%  in value. No BS,  and no get-rich-quick crowds are welcome.

The timing to consider the new call warrants is impeccable, as evidenced by the following developments:


2) PENTA-CA and PENTA-CB becomes available to trade from 28 June 2019.

3) On 2 July 2019, Pentamaster stock hits RM3, and a new all time high.

4) It looks as if it's revving up for a rally (but really, don't just take our word for it. As of 8 July, it's still trading at an all time high of RM3.14 (Editor's Note : this post came out on 9 July. Any guesses to where the stock is now?).


THE STANDBY TRADE : A SIMPLE APPROACH

All these boil down to a simple trading thesis. Our parameters are so simplistic that even a monkey can understand it.

We feel this trade is better represented with the call warrants. 

1) Pick a range to trade. Avoid exposure to the volatility. Mitigate downside risk and optimise the position to profit greatly on the upside.

Let's say the call warrant is trading below 20 sen. When the warrant hits 20 sen, you already have created a profit buffer. For example, a purchase at 18.5 sen per warrant means you already have a 5% yield and a 1.5 sen per warrant profit once it hits 20 sen (Editor's Note : given that the warrant values have gone up, this is still applicable at above the 20 sen mark, provided you have set aside a reasonable profit buffer).

The expectation is for the warrant to never hit below 20 sen again. This means you can sit and relax. If you're a market timer, let's say the next important date to look out for is Pentamaster's next quarterly earnings announcement - that's about a month and a half away, and it's expected to be good. 

2) Downside mitigation. 

Pick a price you'd be willing to accept losses. If a trade is done at 18.5 sen, we'd be willing to exit at 17-17.5 sen. The maximum downside is 8%, but given that you're trading leveraged call warrants, let's just say your loss potential can be multiples of that.

You must accept potential losses before committing to an exit point.

Similarly, you decision to exit should also be based on the mother share's current trajectory. Let's say that another dumb Donald Trump announcement causes tech stocks to crater. There is no doubt that stocks like Pentamaster or INARI will go down fast; they are the sector leaders after all. In your mind, set a loss threshold for the mother share itself. From its current price of RM3, let's say your forced exit point is RM2.85 (Editor's Note : indeed, we started writing this post when the stock was at the RM2.95-RM3 range. Since then, it's already up by 13%).

Without over-complicating things, you would exit your call warrant position (bought at 18.5 sen) if either the warrant hits 17 sen, or if the mother share drops to RM2.85, whichever comes first. Obviously the stock determines where the warrant goes; what really matters is you're picking your own exit point.

To put it another way : who the hell rides a bus without picking his/her stops? 

3) Exit when downside range is hit; re-enter when necessary.

The last step in the execution stage is simply that. Sell your holdings if the warrant falls below your downside range. But try to buy and accumulate the position when the warrant shows signs of recovering. As it is tracking the PENTA stock price closely, you can reasonably use the warrant as a gauge for the mother share. 


Hard to look at the charts with feeling aroused.
THE ILLIQUIDITY PRINCIPLE 

Despite all this talk about improving liquidity, we'd like to highlight one thing: the stock still isn't all that liquid. This is both good and bad; let's focus on the good part first.

We have stated before that the key to riches is to focus on illiquid mid-to-large cap counters with a solid growth story, strong earnings growth to reflect said growth story, and (crucially) some tradeable cheap call warrants.

Illiquidity means the stock can easily go up by 20 sen in a day if there's a good catalyst. Your downside is protected by the company's continuing growth story. As long as you have this, there will be reasonable support in the share price to a certain extent. 

We particularly love expensive stocks that are trading at RM3 or more, simply because there usually aren't that many shares available to trade. Any positive news and the reaction will be outsized

With the right call warrant trade, you're buying into a cheap position that is linked to an expensive stock. The stock is presumably expensive because it's got a strong earnings record. Your cheap call warrant position will become considerably less cheap the further the mother share goes up. And because of illiquidity, the mother share can go up fast.

The downside of illiquidity is simple: during bad times for the market or sector, the stock may see near zero trading interest. This means it's definitely not for the contra / t+2 punters of this world. Any commitment must be of the buy-and-hold variety.

BUY IN AND STAY INVESTED

We get it; many of you are probably the trigger happy types, eager to chase the next trending stock when the opportunity arises. 

However, from time to time you may be better served by switching your strategy. To do this you'll have to get rid of the trading mindset, but retain the profit mindset.

It's hard for us too; we target hot IPOs to trade all the time, sometimes ridiculously successfully. But the priority of profits take precedence over what we like or dislike. The desired outcome from any investment/trade idea should be profit maximisation, not how much fun you'd have trading things (if that's your real priority, go here).

EXIT THE MARKET AT YOUR OWN TERMS

Of course, the trade has many pitfalls But assuming marginally improving earnings over the next few quarters, your risks are mainly three types : losses arising from opportunity cost, external factors, and technicals.

Opportunity cost here is simply defined (by us) as potential opportunities/trades you could have gone into but didn't because of the need to hold a long term position.

This must be considered at your own discretion : if you think you can make RM30,000 in profits by trading in and out over the next 2 months, compared to making RM25,000 from a buy-and-hold call warrant position, go for it (Editor's Note : most of us will end up with a -RM15,000  loss if we actually do that).

External factors are simple : Trump. Trade war. Fed rates. Jittery global investors. Geopolitical shocks. Back to Trump. Repeat. Also include broader KLCI conditions and sector newsflow.

Technicals : a stock like PENTA is currently at all time highs. There's a good reason for that, but there may be equally good reasons for it to start going down. Our remedy for this is simple: there will always be enough time to exit at a small loss if the stock reverses its course and invalidates our entire thesis. We don't recommend doing the buy-and-hold approach and carrying it into negative equity: it's suicide.

NOW GO DO WHATEVER YOU WANT

This was never meant as an inducement, or enticement, to acquire PENTA call warrants, or PENTA stock. The principles described here can be applied to any similar situations where a good, pricey counter comes along with a good, cheap call warrant.

When you find those - and we have found many such opportunities - try to stick with them. It's worthwhile.




Monday, 24 June 2019

TRADE OF THE WEEK #15 : GREATECH TECHNOLOGY BHD



Outcome
Gross Profits : RM3,862
Return on Investment (ROI) : 5% and 4% (2 succesful attempts)
Duration : 2 Days

This trade was a continuation of our contra IPO strategy described in last week's post. Following three rounds of trades accumulating in five-figure profits, we stretched that record a bit with Round 4 and 5 in this post.

We personally feel that the current rally may have overheated with prices going up too fast. However, this feeling did not stop us from trading a position in GREATEC yet again - we don't usually let common sense get in the way of a good trade!

The truth is, we (society, not just us) fully believe in our personal biases. We love feeling smart when it becomes true; if it doesn't, it's conveniently forgotten. Biases are as good as guesses, and whether you believe this or not, guessing has absolutely no place in trading. 

Every action taken must have a reaction in mind. This means that a trade can be distilled into a continuing series of plans. If the stock hits 95 sen, you would buy. Or, to make it more thorough (and effective as a risk management measure), if the stock hits 95sen within one hour, you'd buy the stock.

The difference between the two? The first is open ended, while the second is a ring fence approach; it forces you to focus and act. In trading, not having a proper plan is when you start... guessing.

One useful analogy is to think of a trade as flying a commercial jet. It is indeed a matter of life and death (money = your passengers), and you carry a heavy burden to ensure a satisfying conclusion, which is a safe and timely landing (exiting a trade with good profits).

Obviously flying a plane is not just about going from point A to B. So why would you think differently about stocks? In flying, a series of tasks need to be done to ensure that the plane is doing what it's meant to do. Wind measurements (market volatility), the weather forecast (broader market environment) and a whole host of other things.

Good pilots are like good traders; they would be well paid assuming they do the job correctly. And like pilots, traders must have their own checklists to complete.

A trading plan is not about buying a stock just because that politician's son's company's stock has gone up. It is not about buying Speculative Construction Counter B just because Speculative Construction Counter A has rallied (and conveniently shares a common shareholder). Guesses cannot be quantified, but probable outcomes can, at least to an extent.

Our trading approach is basically a series of plans, distinguished by their probable outcomes. We are almost always reactive traders - that means we try to wait for a confirmation in the stock's movement before committing to a large size. 

These confirmations are valuable for us. They are the 'triggers' that pushes us over the edge; we would proceed to get as much as we can of the stock with utter conviction. In GREATEC's case, the triggers are essentially a validation that a stock's momentum is continuing, and that we can expect a sizeable increase in share price at least within a 24 to 48-hour period. 

We did this successfully in Rounds 4 and 5, proving that this was not a fluke. You can apply these concepts in your own trading, but be aware that they require constant observation of the stock. In other words, the wiser uncle traders of this world would probably take an MC to stay home and watch the counter.

Regardless, the smartest people in the market will always be those who acquired as much GREATEC stock as they can on Day 1 and simply held on to the position until today. We are not one of these people. The multiple rounds were necessary to lower risk and save us from the stomach churning volatility exhibited by momentum counters.

We missed out on a lot of potential profits by not staying fully invested all the time. But going in and out meant that we are saved from the downside volatility, any of which could have marked a permanent downturn in the stock. 

Another benefit? We can make four figure profits in a matter of hours and exit the trade with a positive frame of mind. No need to worry about overnight risk and potential gap downs the next day. If we see opportunity, we can always come back - hence why we did five rounds on this thing. 

We won't over-complicate the explanation to these trades; they're fairly simple to apply. We will show the triggers, represented in the charts, the outcome, and the profit opportunities.

ROUND 4

On 18 June, GREATEC has a little 'gap up' moment - it opened at 92.5 sen, compared to the previous day's closing of 90 sen. Within 20 minutes, it strengthened to 94 sen but gave up the gains for the rest of the morning.

By 10AM, we had considered the potential outcomes to frame our trade. Worst case, the stock goes back to 90.5 sen and possible breaches 90 sen. Best case, the stock hits 94 sen and begins a powerful rally for the rest of the day.

Naturally you'd consider 94 sen as the resistance point, right? That's correct, but it is what you do with that info that matters. For momentum stocks like GREATEC (and we have some experience in trading fast-moving IPOs), their consolidation phase does not last long; in fact, they can be in a matter of hours only. 

Having identified the probable outcomes, it was time to think of a position. We allowed a bit more time for the consolidation to play itself out. We explicitly planned to buy into GREATEC if it suddenly exhibited upwards movement to the 93.5-94 sen range.

This is reactive trading, but not in such a way that we'd miss out on most of the upside. A safer way was to trade once the stock hits 95.5 sen or so, thus fully confirming that the momentum is continuing. But the best profits don't come from playing it safe; we were willing to risk a small loss in order to capture a bigger profit potential. That minor upwards movement was the trigger for us. And you know what this trigger is worth? A quick 5% return on investment.

By 2:30PM, wouldn't you know it - GREATEC surged to 94 sen. The last subtle aspect that prompted us into the trade is the velocity of the stock's move; the price and volume activity was an added element of confirmation for us. In other words, when this moment occurred, we know that we had to get in.

The following five-minute intraday chart proves our point. They confirm that the trend continued, that we bought exactly when the surge was occurring, and that the position worked itself out for the rest of the day.


As a basic rule, if the stock price consolidates in the morning and surges in the afternoon, it's either a false breakout or a real momentum move. This guided us to hold on to the position for as long as we can. 

It was a comfortable ride since we happened to acquire the stock at the final moments before it went skywards - GREATEC never came down to earth, which for us was the 93-94 sen range.

Now for the exit. How did we know to sell the stock when we ended up selling it? This part is easy: a surge beyond RM1 almost never occurs for a stock that's never been at that point before (Editor's Note : we know this by experience). It means that we'd always end up selling just before that all-important ceiling is reached, which was why we evicted ourselves from the stock at 99 sen. 

We're saying that it takes time for a stock like GREATEC to get beyond the RM1 mark. Maybe it would fall back first (a lot likelier). Maybe it needs to test that RM1 resistance point several times. Whatever it is, we ended up with good profits for about two hours' of work. We knew that we didn't want to continue holding onto it until the market close.

And above all, despite all the planning, we knew we were fortunate to achieve this yield. So we got out with conviction.




ROUND 5

Remember when we said the stock might fall back? Of course it did.

This is where our strategy to go in and out was justified. We didn't need to deal with the headache of the stock losing 10% in value quickly. We had the privilege to wait until the stock shows its next move. Either it will return or the rally ends (Editor's Note : we probably thought the stock would stop going up at least on multiple occasions : at 70 sen, 80 sen, 90 sen, and RM1. We have been consistently wrong.. so far).

Anyway, GREATEC retreated from a high of RM1.01 early on 19 June (the false breakout) and subsequently fell to 94.5 sen. For the next 24 hour period, weakening was all that it did as speculators, traders and punters rushed for the exits.

On the morning of 20 June the stock was firmly in the red for the first time since listing, hovering at 92.5 sen. We knew that this was a pivotal moment, and we came up with some probable outcomes:

1) Stock goes below 90 sen in the afternoon.

2) Stock goes back up to breakeven (yesterday's closing price) of 96.5 sen. That's a 4.3% upside. Not bad.

3) If (2) happens, we'd probably try and get into a position....

4) High volatility drives the stock to the RM1 mark again. Best case scenario.

Remember that on 20 June, all this was not very clear. GREATEC seemingly looked very weak, but lacking in panic selling activity.

This is where one of our favorite phrases comes into play: "if it wanted to go down so much, it would've done so already leh..."

And by 2:30PM, this it didn't do - there was no break below 92 sen. Instead, the opposite happened: a quick surge to breakeven by 2:45PM. Probability (3) is occurring, and it may be linked to Probability (4).

The surge was like this: GREATEC went up from 94 sen to 97 sen within five minutes, easily reversing the earlier sentiment of weaknesses. We figured the market would jump back in at the slightest opportunity of a rebound; we just had to be fast to capitalise.

We were not fast! The stock had already hit 99 sen by the time we had a chance to get in at 98 sen. This was a slightly risky proposition but our targeted range was small. With our sizing, a 3-4 sen movement would already yield us a four figure profit. At 98 sen, this meant an approach towards RM1.02, or a new high.

What were the triggers to make us jump in? If you guessed the sudden surge, you're probably one of those who sat in front of the class back in school. The second reasoning for us was the velocity of the move: when a seemingly weak stock (10% off the highs) transformed its status within minutes (just 2% off the highs), you'd better be paying attention.

Our trade plan for Round 5 was to get in at out within small margins. The high risk profile of this stock, at this point in time, demands it. With all this in mind, within 19 minutes we exited GREATEC at RM1.02 for good returns all around: 4% yield and about RM1,500 in gross profits.

The following chart shows the 24-hour consolidation phase, the sudden surge, and our positioning, for your viewing pleasure.


And for some final wise words:











Sunday, 16 June 2019

ART OF THE HUSTLE : 5 FIGURE PROFITS FROM GREATECH


There are always misconceptions about the daily work of traders. It is not about being cavalier and gutsy all the time. We do not spend our evenings with booze-laden parties among a bevy of beautiful women/men. We do not aspire to be the Wolf of Bursa Malaysia. 

In fact, if you ever decide to commit to trading full time, here's how your daily routine would unfold.

A Day In the Life of a Trader

7AM - Breakfast. Catch up on financial news and overnight US markets.

8AM - Analyse potential trading opportunities and Malaysian counters that are worth trading (there's only 2 or 3 in any given day, if at all)

9-10AM - Most of the active trading is done within this hour. Either a quick in-and-out or a position buildup to hold onto for the next few days.

10AM - Probably nothing. Do research. Read analyst reports. Read books. 

11AM - Check prices. Nothing to trade at this time. In fact, you might be fighting fires as your positions lose their value. Definitely not the time to buy into anything.

12:30PM - Bursa Malaysia closes for the afternoon. Lunch. Before that? Definitely not the time to buy into anything.

2:30PM - Probably nothing, except if some major corporate news come up during the lunchtime period. Like what happened with TM the other day; that was a great trade.

3:30PM - You remind yourself not to be dumb or tempted to buy into that new counter you just discovered. Anything new on the radar should be observed first for a few days... 

4PM - If you're lucky, something in your portfolio is probably profitable by now. You'd watch for the late stage build up. Maybe that RM1 stock went down to 92 sen early but now it's back at RM1 - a potential buy sign. Or maybe you sell everything.

4:45PM - Market about to close for the day. Analyse existing positions. Check each one against your set of expectations. Have they been validated by the price move? If not, now's the time to cast that ego aside and prepare to dump the counter the next day. Or maybe you'll give it a couple more days for the stock to work itself out..

5PM-7PM - Research. Review the market roundup in Malaysia, Asia, and globally. Know the general themes that are making the rounds in the current news cycle. Everything affects momentum, and if you're a trader, it's something you must care deeply about. 

7PM-8:30PM - Dinner. Maybe read a book (about trading or finance history, of course).

8:30PM-10:30PM - Read research reports, review portfolio, review each trading plan for the stocks you have or planning to have. Come up with 2-3 names to target for the next day, or week. If you like your global thematics, perhaps you can express it by buying Hang Seng index linked warrants

10:30PM-1AM - Self assessment. Review your mental state and recent performance. Maybe write everything in your wonderful blog (ha!). Sleep.

7AM - Start over.

Dress for the job? Sometimes we trade in our bath towels. Source.


We have come to understood a very simple, but hard-to-accept fact : the life of a trader is exceedingly mundane and filled with tedious homework and groundwork. It's distinctly unglamorous and it can be tiresome. On days when there's nothing to trade - and there will be plenty of those - you might as well go out and drive that Grab or deliver that GrabFood after market hours.

But your mundane existence will be punctuated by bouts of extremely volatile and extremely profitable trading, which brings us to today's case study. However, even though your active trading period is roughly just those two hours as we described, you do have to observe the market as closely as you can throughout the whole day.

Let us put it simply. On 29 days out of 30, you will be scraping small profits in order to continue your meagre existence. But there may be that one day when you can suddenly make profits that are out of this world. 

There are no easy shortcuts. You have to be vigilant and look for the opportunities. Once in a while a bucketload of cash will show up - you just have to be around to take some. 

 The full-time trader's daily outfit.

We have done all this before. Those outlier opportunities explain how we suddenly could make RM27,500 from REVENUE, RM50,000 in a single week, and RM13,000 from MI.

REVENUE and MI are the special ones - they are IPOs that immediately rallied after listing, blowing way past their IPO prices. The same happened with GREATEC last week, and we took full advantage of that too, as we will show.

As a trading strategy, you should probably take a close look at all the new IPOs and listings. They can lead you towards a huge pile of cash. But it is 99% hustle, 1% luck - most of us can't accept this. 

Our success in GREATEC was down to hustle and somewhat competent risk management. We went in and out and in and out and in and out: 3 rounds in 24 hours. We went out at the first sign of weakness and back in at the first sign of resurgence. We were twitchy but careful with our positioning, allowing us to accumulate big positions each time.

But we also learned something new : when you identify these golden opportunities, go in, and go big. Absolute conviction is necessary. The best traders can handle singular, highly concentrated positions, because they know that the profit opportunities outweigh whatever other stock ideas they have at the time. 

DECIPHERING THE TRADE

So now you know that new listings are exceptional trading events that can deliver fat profits. But obviously not all of them are certain to rise. The key to getting five-figure profits is that you have to identify the stock's potential to go up further and acquire a large position as quickly as you can. 

This comes from directly analysing the price and volume activity within the first hour of the stock's listing. Among the things you have to do:

1) Pay attention to the opening price : is it a healthy premium to the IPO? If so, whoever subscribed to the IPO has an incentive to sell (flip and make easy profits). Perhaps this will drive the stock price down. Who can argue with easy profits?

2) See if the stock actually falls down. This is where you have to assess the stock's liquidity. If there's too much liquidity, and too many shares issued, it would be harder for the stock to go up and sustain a rally. In our past analysis of REVENUE, the stock actually fell far below its IPO price before rebounding. The rebound happens when there are more takers than givers; if the public market can absorb the selling pressure, there is no way to go but up.

3) Come to a conclusion on (1) and (2) within that first hour of trading; all the action typically comes during this time. After that, come up with a list of expectations for the stock. An easy example: if the stock hits xx sen in the next hour, you'd buy xx amount of shares. Another : if the stock keeps gaining one sen or more in each of the next 15 minutes, you should buy into the stock. 

4) Volatility is normal for new listings. A stock's debut is marked by sudden highs and lows. If the stock suddenly hit a new high, and repeatedly hits new highs after that, you know what to do. The new highs should be a validation of whatever fancy theories you have come up with; they are the reaffirmation of your intent to buy. It's time to play and risk your money.

5) Be fast and make the hard calls. The whole thinking process shouldn't be more than 10 minutes: idea, positioning, execution. The rest of the day is just position management. The faster you come up with a plan, and the faster you execute, the higher the likelihood that you will get in at a good price.

6) If all goes well, manage your profits. It's not so easy but obviously this is a nice problem to have. 


The full time trader's daily outfit after utilising our IPO TRADING STRATEGY.

And that's all there is to is. Let us demonstrate what we did with GREATEC, and why it required several rounds of ins and outs. There are many ways to trade first-day listings, but our approach worked for us, and we've had repeated success with it.

FAST RECOGNITION, FAST FINGERS 

GREATEC was listed on 13 June. We've seen the basic financials - it's a great ACE Market company in a growth industry. The stock opened above its IPO price of 61 sen - it's all about whether it can keep that momentum going in the next hour.

In the first five minutes of trading, the stock hit 68 sen before retreating to 64 sen in a frenzy of activity. We has set a simple time-based expectation: if the stock breaks 68 sen in the next 20 minutes, we would build up a large position.

But before that happened, we were willing to go in with a small, exploratory stake, so we bought some shares at 66.5 sen. We'd be out if it hits 63 sen, but we'd grow the position if it hits 68 sen again. Remember, tight stops or death.

If our time-based expectation is met, the next likelihood is for the stock to easily break 70 sen.

Our train of thought from 9:00AM to 9:45AM :




And GREATEC's price movement during the same time period, represented in 5-minute increments:


What happened was this : as soon as our 68 sen target was met, we bought the stock immediately at the 68.5-69.5 sen range. By 9:20AM, by virtue of the chart's positive movement as seen above, and by the level of buying interest versus the selling, we were convinced that the real profits lie way beyond the 70 sen range. It was just a matter of time.

The context of this trade is purely contra : we're looking to wrap this up within the T + 2 timeline (three days), earlier if possible. In terms of managing profits, we are guided by our usual profit target rule : 10% yield and above, or four figure profits, or both, always.

After a comfortable and predictable consolidation phase, GREATEC hit its stride by the morning session close. As of 12:30PM, the stock closed at 75 sen.


We decided to sell when trading resumed in the afternoon. Prices failed to breach the 78 sen mark, indicating toppishness. While the stock hovered at 77 sen for a while, we managed to get out at 76 sen, before prices weakened further.


Note the above 10% profits and four-figures that we targeted. This was the first round.

ROUND 2 : BUY ON WEAKNESS

Some people may prefer to hold on to their positions and stick with it for a while. For listings with strong debuts, like REVENUE and MI, this would be a brilliant strategy. You might as well just buy as much as you can and ride the profits for a couple of days; this would have worked for GREATEC too (Editor's Note : at least for the 13-14 June period).

But we approach this differently. Our act of exiting is rules-based, and we didn't want to risk whatever profits we have accumulated at that point. We always have the privilege of going back into the stock if the rally continues. 

Discipline is really the key. It also helps to remember that if a stock goes up swiftly, there's a good likelihood that it can also go down just as fast. In fact, for a stock that consistently rallies over several days, its chances of rallying further diminishes quickly, leaving you with the downside risk instead.

What we do is break up the stock's positive trajectory into several phases. Phase 1 was the early onset rally that was buoyed by optimism, The volumes were there, but there is no guarantee that it would continue. 

For the rally to resume on Day 2, the stock would have to make a strong move right at the open. We considered this possibility, so we re-entered and bought a small position in GREATEC.

The beauty? We sold out of Round 1 at 76 sen and re-bought into it at the 74-75 sen range before the market closed on Day 1. We let go of the stock at a premium and went in again at a discount. The stock closed at 74 sen, so we were about breakeven with this new position.

And on Day 2,  that expectation of a strong move was met.. and it paid off in a big way.



On 14 June, in the first five minutes of trading, we bought some more shares at 76.5 sen and 78.5 sen. There were two key traits here : the stock opened at a 'gap up' of 75.5 sen, and the breakaway was very swift. By 9:05AM, GREATEC had already hit 80 sen.

We did intend to sell at around 80 sen anyway, sensing that this resistance point will be a bit harder to break out of.

Being able to sell at 81 sen was a bonus as we expected the stock to fall back to below 79 sen, and this it duly did.. but not before we exited.  We achieved a smaller but significant profits of RM4,000 in Round 2. It wasn't 10% yield, but it was four figures.




Total winnings so far from Rounds 1 & 2.


After this, chances of quick profits would diminish further. We had to think differently about approaching GREATEC now. But the optimism was still there.



ROUND 3 : DIMINISHING RETURNS POTENTIAL

Here's why it helps to think in phases. Imagine that the profit potential from GREATEC can be represented as a pyramid. The base was Round 1, where the fat profits were derived. Round 2 is the middle, where the profits were smaller. You can guess what Round 3 means.

PROFITS
Round 1 - RM7,000

Round 2 - RM4,000

Round 3 - RMxxxx?

It's not exact science, but the notion of diminished returns can easily be visualised in this manner. By this we mean that Round 3's expected profit upside should be in the RM2,000 range, if we are fortunate. There's also every chance that Round 2 would mark the peak of GREATEC's rally, and the rest of the way is a collapse in prices.

The expected profits from Round 3 serves as a reminder of what's at stake. If we can achieve that target, we'd get out without hesitation. 

After selling out earlier, we were wary of re-entering the trade at 81-81.5 sen. It's too close for comfort and prices could easily break under that range, or below 80 sen.

Since we had sold out during Round 2, the stock had already fallen below the 80 sen mark before rebounding quickly to 82 sen. We took this as a sign of buying strength.

So for Round 3, our range and stop-loss points are tighter. We acquired a position at the 82.5-84 sen range, committing to exit completely if the stock goes back down to 81.5 sen. It almost did, but we managed to hang on.

The rest of the morning was just a quiet consolidation phase, until GREATEC surged to 85 sen by 11AM, a new high for the stock.



We were eager to see this thing through to the 88-90 sen range. But... we didn't think it was going to happen on that day. The chart above represents a rather weak consolidation phase, compared to the one when the stock was trading at 70 sen.

There was an encouraging surge to 84 sen just before the morning session close, so we were keen to exit by this time.

Here's where the 'gap up' at 2:30PM needs to be treated differently. The stock surged to 85 sen, but it cannot be interpreted as a sign of strength, due to the diminishing returns potential as we have explained.

Instead of treating the surge to 85 sen as a bullish sign of a breakout, the opposite is actually correct. It's the dying breath of that day's rally. There was also the slight issue of 85 sen being the obvious resistance point for the stock, since the mark was hit earlier at 11AM.

Diminishing returns are correlated with diminishing stock price increases. Instead of betting the house for GREATEC to hit 90 sen, we quit instead. Our target profit was met, and we ended up selling near the day's high.




The range was small, as anticipated. We managed to achieve about RM2,000 in profits, as intended. That's all that matters.

Our total winnings over 3 rounds in this eventful 24-hour period:



The gist of this whole trade is straightforward: preserve profits, follow the targets and rejoin the market when necessary. To maximise profits out of opportunities like this, you will need to hustle a bit. It's worth the trouble.









Sunday, 9 June 2019

TRADE OF THE WEEK #14 : DOLOMITE CORPORATION BHD



Outcome
Gross Profits : RM2,750
Return on Investment (ROI) : 16%
Duration : 12 minutes


We all know that stocks can temperamental, volatile things. They can be erratic and possibly neurotic with wild grasping movements (MYEG, PERMAJU, DAYANG), or they can be sedate and sluggish (most stable blue chip or KLCI counters).

We like to think of them as - in a serious, not hallucinatory sort of way - horses. Really, horses.

Some are meant to loiter around ol' Macdonald's farms. Some will forever stay in obscurity. Some thoroughbreds are destined for fame and fortune. As you read further, you will know why we didn't compare stocks to cats (they are all erratic, with no exception).

Taking this analogy into ever more frightening directions, let's say that an occurrence causes a lame horse to turn into one fit for the racecourse. It becomes stronger and faster, or in other words, it exhibits all the right characteristics and tendencies.

Our horse on steroids today : Dolomite Corporation Bhd.

The steroids? A piece of encouraging news

Yet again, we had no clue what the company does until we read the news piece (Editor's Note : shame on us). We are vaguely familiar with the stock instead, knowing that it's an obscure penny counter that hardly trades.

We feel the comparison to narcotics is appropriate. Think of a stock that gets a sudden injection (of news) and suddenly it powers itself up to new heights (in price). 

And most importantly, it's a high that does not last. There is almost no exception: when it comes to news involving asset sales, the stock does not stay up permanently. It only remains at stratospheric levels via two ways : a takeover offer, or a fantastic/unexpected jump in earnings.

So what's better than knowing about drugged up horses? The answer : actually riding them in the past. If we were to simplify the trade in DOLOMITE, it's basically the same as our experience in trading GETS and SEDANIA. They are basically the same kind of horse on steroids - we rode them hard and made some good money.

THE TRADE

First, you have to understand the implications of Sunway's deal to acquire DOLOMITE's land. It was apparent that the pricing itself (RM125 million) is worth multiples of DOLOMITE's market capitalisation prior to the announcement (RM22 million!!).

This alone is reason enough for us to at least observe the stock. The next step is to see how it behaves. A reminder : like everything else in this world, there are zero guarantees. Even with this news, we did not know if the stock will fly.

As with a lot of things we do (and with many of the trading tips we share on this blog), we are reactive traders, not proactive. We wait for confirmation, or validations of our theory, before making a move. This is totally different from someone who buys at a consolidation point (let's say 95 sen) prior to a strong breakout (RM1). Using this example, we're the ones who would buy at RM1.05.

We lose out by sacrificing entry at best price point, but we more than make up for it from the subsequent rally. Buying at 95 sen means you're risking a fall to 90 sen if the trend is invalidated (or worse, if the trend proves to be false). Momentum stocks are like waves (timing is crucial to surf them), not like trains (where you absolutely know the schedule for arrival).

This explains why we can commit to do things that seem crazy at first glance, like buying into a warrant when it has already gone up by 1,400%.

We'd rather commit our hard earned cash to sure things (as sure as it can be) rather than uncertain may-or-may-not-be's. In DOLOMITE's case, the stock responded as well as we thought it would. On 4 June, it opened at 12 sen, already a 50% increase. The stock would end up hitting an intraday high of 250%.

We first bought into the stock at 17 sen, or at a 112% increase to the previous day's closing price. Our parameters are simple: go big and go hard, use tight stop loss points (16-16.5 sen), and aim for at least 20 sen, which is the all important natural support point for penny stocks. What we're saying is: with this target, our profit buffer translates to at least 17% in immediate yields. Anything above 20 sen is a bonus really.

Another crucial factor is the stock's liquidity, or the general lack of it. There were little trading interest or activity in the past prior to this major news. It was very likely that the new buyers are... well, new. They are the ones that will drive the price up, and attract even more fresh money when the market notices that this humble stock is having its day in the sun.

 Think you get the idea...

Here's the thing about investor psychology, one you absolutely have to bear in mind if you want to trade. It's counter-intuitive and annoying as hell but you know it's true (Editor's Note : not that you have to believe us, but we have made literally five-figure profits from applying this)

Investors don't like it when they see a stock go up by 100%, but when it keeps going up to 200%, suddenly everybody in the world wants a piece of it. 

The trick is to get ahead of the broader market's realisation that DOLOMITE stands to move up even further. A bit of illiquidity helps to push the stock's price up faster and further, but new liquidity is what keeps the stock up, at least for a while.

Simply put, the trader's path to getting super rich is as follows:

1) Target an lliquid stock that's moving, then buy a large position (relative to the buy and sell volume queues).
2) Wait for the stock to attract outside attention.
3) When the whole world is buying into the stock, marking the peak of the frenzy, sell everything. 
4) As always, the hardest part is to sell when the world is buying. Have a predetermined exit plan to achieve exactly that; you will not be tempted by greed to stay in the trade. 

Similar to our move in GETS, here's how this trade unfolded. 

Morning of 3 June, five minute increments.

When we bought into DOLOMITE at 17.5 sen, the queue was like this:


BUY - 600 , SELL - 300

Those are in lots of 100 shares. To make this a meaningful trade, we bought a total of 950 lots (95,000 shares). Not too hard to get out of, but tricky nevertheless (Editor's Note: In hindsight, we could have bought 2,000 lots and got away with it).

Naturally with the best trades, we got out pretty early. It's not reflected in the chart, but the trading activity itself was rather erratic during that 30-minute period. It could've either gone down to 16 sen or 28 sen in 5 minutes. Naturally, it went up to 28 sen. We missed out on a lot by selling at 21 sen per share.

Yet if viewed another way, it was the perfect trade. We hit our profit targets. We got a respectable four-figure profit out of this whole thing. Did we mention that the trade only lasted for 12 minutes? A regular pang sai tends to last longer.

And the best thing out of this? We are getting better at identifying such opportunities. Our only hope is that we can react faster and stay in the trade longer to derive maximum profits. But we're trying to not be greedy.

















Sunday, 2 June 2019

TRADE OF THE WEEK #13 - TELEKOM MALAYSIA BHD


 
Outcome
Gross Profits : RM9,000 (Round 1) + RM1,500 (Round 2) = RM10,500
Return on Investment (ROI) : 60% (Round 1) and 7.7% (Round 2)
Duration : 79 minutes (Round 1) and 3 hours (Round 2)


Wow, here's a rarity. We almost never get to trade blue chip counters or their associated warrants - there was just too little incentive or volatility for us to do so.

However, from time to time these companies, whose stock prices tend to be extremely stable (and thus - boring), would break through the roof. Occasionally a stock like TENAGA can trade like a penny stock. We're talking huge double-digit one-day gains, extreme volatility, et cetera.

The big counters only make such moves in the event of... well, an eventful development. This can be super positive (or negative) news, sudden company announcements, surprise government announcements (as many of these blue chips are GLCs), or the best, most predictable factor of all: a positive earnings result.

Or better still, a very positive earnings result for a company whose stock has been suffering for a long time.

This brings us to TM, which had been in the doldrums for quite some time. Facing greater competition from service providers that offer better Internet speed in a cheaper package (TIME), government-imposed reduction in subscription prices, and endless capex commitments, the stock had been a serious laggard over the past year. 

TM was trading at around RM6 this time back in 2018. On the morning of 30 May, the stock was trading at around RM2.80, or 50% below those prior highs. It was not a good time to be a TM shareholder (Editor's Note : We did believe that the prospect of drastically lower dividend yields had more to do with the stock's decline, rather than the regulatory uncertainty / government measures). 

Then, the company announced solid earnings for Q1. What caught our eye were mainly three things (we didn't have time to fully analyse the results) :



1) A doubling in the Earnings Per Share (EPS) on a quarter-to-quarter (q-o-q) basis.
2) Negligible difference in the revenue q-o-q.
3) Much lower overall operating costs suggest that the cost cutting measures had an immediate positive impact. This was a big deal; it was the major catalyst for the stock to fly.

Bear in mind that our success in this trade was not down to predictive powers. We didn't sit on our asses and fiddled our thumbs as we awaited TM's results that afternoon.

We didn't anticipate such a huge improvement in overall net profit in advance; leave that to the real smart investors, of which we aren't one of. 

Instead of anticipating, we were reacting. By 2:30PM, the stock had already exploded. It gained 11% within five minutes, from Rm2.80 to RM3.13. The extent of our research at this point was that we saw the stock make a huge leap in the 'top gainers' list. That's it.

Now, at this stage there are a few mental hurdles to overcome before we could even think of committing to a trade. We decided early on to target the call warrants, of which there are many. So choosing them is already hard enough.

Harder still is making the decision to commit to a trade in spite of some seemingly insurmountable challenges.

First : assessing whether TM can go further still, having already advanced by 11% in such a short time. It could just as well retreat and fall back to below RM3!

Second : finding the right call warrant to trade, given that the time frame for this trade to be profitable is very, very short. As a general rule, the more volatility there is, the better to enter and exit quickly.

Mirror, mirror on the wall...


Third : dealing with the very low liquidity prevalent in the warrants, and how to target meaningful profits (it can only be done by acquiring a sizeable amount, big enough that a 1-2 sen move can yield four digit profits).

Fourth : finding the 'confirmation points' - a moment in time when the stock's movement has fully validated our expectation - and managing the potential profits. This also works the other way around; what is the point where the stock movement indicates that our views are completely wrong? How big would the expected losses be?

Given the eventual outsized profits that we achieved, it is important to note that this was a very risky trade. You have to be absolutely certain that the rally will persist. We will share the methods we used to do this.

Lastly, here's another shocking thing : we made a calculated mental leap (against conventional reasoning) to buy a call warrant after it has already gained 1,400%. How / Why on Earth did we decide to do that? You will see.

THE BUSINESS OF DETECTING

We are holding back from sharing all of our tricks of the trade; we gotta save some of that special sauce, after all. But we can share two general observations that you absolutely can use in your own trading activity. It helped us a lot; it may help you too.

1) Learn to love the stepladder pattern : as short-term opportunists, we live and die by the five-minute price chart. In momentum situations, a gradually ascending price movement (hint : not too fast) signifies a real and sustained buildup.

Stepladder = Gradual, sustained buildup in a stock's price (supported by healthy volume)

You may see stepladder pattern in daily charts too; generally they can be considered a buy sign, though not always. These may happen pre or post-news. They may be in reaction to a sector-wide positive movement. Do your analysis, learn what you can, and you'll be able to decide whether you'd decide to buy the shares if this pattern occurs.

The stepladder is illustrated below:

TM's stock price on the afternoon of 30 May.


Notice the gradually ascending green candles early on? It essentially shows that prices are getting higher and higher.

2) Get repeated validations of your theory - whatever it is -  before committing to a large trade.

We were looking at TM when it was trading at RM3.10. We expected it to go up further, and so it did to RM3.19 within 10 minutes. What made us really pay attention was the even more rapid move to break the RM3.30 mark. This brings it very close to the limit up point - it only needs another 23 sen in gains.

This was Validation, Round 1.

3) Notice if the support point for the stock slightly above the most obvious ones : simply put, you'd naturally think that TM would see heavy selling resistance at the RM3.30 point, but the stock simply didn't spend much time there. It hovered around RM3.33-3.34 instead. This indicates that some large whale out there has dispensed with the subtlety and and was desperate to build a large position (tens of millions of ringgit worth).

THE MOST DANGEROUS WARRANT

Our weapon of choice, TM-C34, is problematic in many ways. Aside from the aforementioned 1,400% gain (it rose from 0.5 sen in the morning to 7.5 sen by 3PM that day), the damn thing literally had no liquidity. With a buy and sell queue of 300 lots or below, and nonexistent queues at some price points, it was a risky move to take a large position.

We decided to acquire 2,000 lots in one go. The upside? A one sen move will yield RM2,000. The risk? Get this shit wrong and not only liquidity will dry up, getting out of the position will be harder if the stock suddenly falls rapidly. This thing is not for the fainthearted.

Before we decided to commit, we had one factor going our way : the repeated validations as shown in (2) above. This was a strong sign that TM's stock could rise further. We acquired the warrant when it was trading at RM3.33. At precisely 3:05PM, the stock surged to RM3.40 on heavy buying volume. We were in.

This was Validation, Round 2.

Upon acquiring the warrants, we were already expecting the stock to hit limit up : RM3.53, the point in which it can go no farther for the day.

Strictly in numbers terms, this 20 sen range from RM3.33 to RM3.53 is where we can achieve extremely high profits from the warrants, but only if we are proven to be correct. Having bought 200,000 warrants at 7.5 sen, TM-C34 would easily break the 10 sen mark if the stock attempts to rally further. 

This was a big deal; it's a rare chance to possibly lock in a 33% gain from a trade that is less than half a day old - we'd be delighted to take profits at that point.

After our purchase of the call warrants, TM's stock consolidated in a fairly tight range. We were willing to wait it out, as the chart point to an upside bias. The consolidation phase in five-minute increments, taken from the big chart above:



Similarly, below was what TM-C34 looked like in increments of five minutes. Can't deny that we were indeed sweating bullets at this time. There was much less buying and selling action for the warrants, although a big clue was that the selling interest was quite weak - seems like the market was eager to get in, as we have already.


And of course, right after consolidation there was liftoff. As a result, we stayed for the ride, correctly deducing that TM would hit limit up (a 30% increase). Recall that we expected this to happen back when the stock was up by 22% for the day at RM3.33.

This was Validation, Round 3.

Simply put : the repeated validation of our (lofty) expectations increased the likelihood that our best case scenario forecast (TM hitting limit up) would be met. This it duly did, and we moved to exit TM-C34 when the going was good.


For the record, we never stick around when a stock hits limit up, having learned from bitter experience before. The logic is simple : regardless of where the stock heads next, higher or lower, we can always go back in. It is always preferable to being trapped, and boy do we have  stories to tell you about that!



As it so happened, we got out at the peak of the buying frenzy, at 12 sen. From a returns on investment (ROI) standpoint, it was our best pound-for-pound gain this year : a dizzying 60%. And it only took about an hour and a half.


In other words:




On 31 May, we managed to squeeze some further gains. It's basically residual profits, as we got into the stock late. TM had already made a strong upside move - having closed at RM3.46 the day before, it fell to as low as RM3.31 before resuming its rally in a classic momentum move.

Having missed out on the juiciest parts of this rally, we made do with the leftovers. We only bought back into TM-C34 when it had already hit 13 sen (it went to as low as 8 sen earlier).

We sold out at 14 sen apiece, having opted to be conservative. The stock ended up closing at its intraday high (RM3.61), but we were happy to close the trade with a respectable 7.7% yield.


 



All things considered, we made a total RM10,500 in 24 hours. It was a good win and a validation of our trading strategy.

Too bad these kinds of opportunities only crop up about once every six months....








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