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Saturday, 4 May 2019

TRADE OF THE WEEK #12 : DWL RESOURCES BHD


 "What does your portfolio look like?"


This is not an inspiring story about bouncing back from adversity. It is definitely not a story of I-told-you-so's or we're-so-great (you can find those here). 

We're not going to start with analogies like comparing a trade to a marriage (you're more committed with your second one) or having a child (you're less committed with your second one). It is doubtful you'll even learn anything from this post.

This is a story about how easy it is to lose perspective, and how dumb luck can make all the difference in life (or a trade).

TRADERS = SCUM?

Bursa Malaysia has just recently moved to implement T+2 settlement in a move to discourage speculative trading. By eliminating one entire day from the settlement period, essentially you're given a choice of buying big or going bust. It's like losing a queen and both bishops at the start of a chess game. 

But in fact, we sort of agree with this move. In Malaysia, speculative trading can get out of hand very quickly. Some trades are the result of misinformed investors plowing into the next hot thing. In other cases, investors - with little money - are suckered into fueling the speculative frenzy to benefit the rich. We have seen so many gullible investors lose their money from the latest get-rich-quick stock; it is never a pretty sight.

As traders, we have to deal with some tough questions. If we benefit financially from said speculative frenzy, are we just preying on the less informed, or less skilled, in the market? Are our profits the result of someone else's suffering? Aren't we the ones helping to fuel speculation by tweeting about it or writing self-aware blog posts??

Admittedly, trading is a zero-sum game. We are bastards, but not naive bastards. We make money by identifying mispricing in stocks. And yes, they may be the result of unrealistic expectations or the greater fool theory (there will always be one just down the street). 


"Buy EKOVEST and DAYANG at their intraday highs or die trying"

Deep down, we are supporters of fundamentally solid companies. We hate to see good companies get ruined by their stock being a subject of speculative trading. These companies sometimes end up being unable to raise funds (over-inflated valuations due to hype) or get unfairly labeled as a 'crap gambling stock'.

Our existing trading strategy means that T+2 shouldn't affect us at all; our time frame tends to be a lot shorter. But we have been in situations where holding on to that extra day helps boost our profits. But if you want to trade like it's T+3, you just have to sell and buy back again, which can be the hardest thing in the world to do.

Speaking of selling and buying back... here's our experience with DWL Resources. This was a tough one. This trade defenestrated us. It emasculated us. It dropped us into a meat grinder with the setting on 'gooefy'. But it brought us back, and when we regained perspective, the rest was easy.

Change makers? Pottery to construction to wha?

Here's the weird thing about being a trader. We're forced to envision fantastical scenarios. Things that hardly happen must be given equal weight as ordinary things. Sometimes we even pretend that we can predict the future; we can't, but if you're thinking this one stock can rise by 20% in a day, you need a healthy dose of imagination.

DWL Resources is the new name for Spring Gallery Bhd. We see these weird name changes all the time on Bursa Malaysia, but at least this time it sort of makes sense (we have no godforsaken clue what the initials stand for : let us know). We first saw the stock come alive in mid-April.

 Is this Michael Jackson?
NOBODY CHARTS LIKE THIS

During this time, we searched for news and found little but the buying interest seemed real. There was this little nugget, yet it wasn't very enlightening. Then we saw an interesting name and did some basic digging:


 Which led to this piece of news:


After making sure that each of our Bangladeshi brother-in-laws are safe and accounted for, we thought: so what, right? It's just a well-connected figure. We were completely clueless, but we were guided by the stock's movement.

The second part of the Bursa announcement on April 12 did shed some light:

We liked this: it's a big block. It signified that changes are afoot, and not just because the company changed its name to a seemingly random set of acronyms.

We'll spare you the suspense. A few things have emerged since, and we had zero clue about this. It's not that we don't care, but our homework was not extensive enough to anticipate the hidden links and deep relationships.

To keep the story short:
1) DWL now becomes a fully fledged construction company.

2) 18 April - DWL ended up in a joint venture with Gadang 

3) 19 April - Out of nowhere (???) they hired the former MRT Corp CEO, as CEO. 

These are the type of news that smashes stock prices. Especially one as illiquid as DWL. We liked the stock enough to trade it.

Yes, there was little fundamental basis that led us to trade this. We just liked the stock movement. Maybe instinct helped. 

ROUND 1


 15 April - OK the last part is wrong: over-eager imagination, remember?

We had three different options to trade - DWL, DWL-PA, or DWL-WA. We chose the last one as it's the most reasonably priced and arguably the least illiquid. If there is no active buying and selling, we'd get killed.

So naturally we got killed during the first round. Essentially, what happened here is that we bought at 42 sen and were knocked out at 38.5 sen within 24 hours. Losses were around RM2,000, just like that. In case you were wondering: it hurts.

 Death.

There was no liquidity. The warrant stopped moving. And because our sizing was fairly large, we couldn't stay invested. there was nothing to do but avoid a larger loss. 

We of course had a seemingly foolproof plan and all sorts of stop loss thresholds to rely on. But we couldn't rely on anything once the trading (volume/buying activity stops). At this time, the mother share was having trouble staying beyond the RM1 mark. Helplessness is the easiest route to feeling dumb, and we sure felt that.

To be frank, we were trapped and we knew about it early on. One of the key signs is that the warrants literally stopped following the mother share. The warrant was already trading at a discount to the mother share's intrinsic value (here's the details for you warrant nerds) but the spread widened. More on this at the end... we have a valuable indicator for you to use.

But at the time, this was bad news for us - we had expected the warrant to follow closely. And when it stops moving, the momentum shifted. People are led into selling the warrant, and prices fell quickly because the volume was not there.

We goofed both ways - by ignoring the apparent sign (the spread widening) and by not reacting fast enough (to sell). The trade was a spectacular bust.

ROUND 2

After a couple of days of cooling off, we were ready to kiss and make up. We noticed signs of consolidation in DWL-WA (support point near 40 sen) and DWL itself (stubborn refusal to breach the RM1 support point). We spent some time mentally purging the very recent loss in order to jump back in. 

It's not hard to do when the breakout is so clear. So on 18 April, before all the news came out, we initiated another position in DWL-WA as all signs point to a big move. That occurred at precisely 2:35PM on 18 April. (Editor's Note ; we initially weren't aware that the DWL-Gadang JV news had already come out, at 1:50PM. We traded the warrant first)

14:35 was time to buy

When this kind of chart makes itself known, we bought into DWL-WA swiftly and decisively. It was a bit delayed, but our expectations were suddenly quickly validated. Technicals and overall trading activity converged to give us that conviction to go in.

We accrued a position at around 44-44.5 sen, which is close to where the warrant traded for the rest of the day. The position was slightly over 50,000 warrants.

DWL's stock was obedient this time, and it gave us another vital clue. The intraday high closing is something that we cherish, and this it did, ending the day at its highest price point of RM1.10 despite  low overall trading volume.

The next day, 19 April, the stock and the warrant went ballistic. And of course, that other news came out.

 Validation = sweet

We ended up making back all our previous losses from round one. This second traded yielded a return of 25% - a wacky amount. It proved to be a worthy trade, with solid net profits. We somehow made a 10 sen per share profit within 24 hours. Offsetting the earlier losses, our RM5,000 in profits came to this:


Is there a lesson? Probably not, other than the fact that if you get knocked down, get up quickly and be ready for that one important shot. You might be smart, or lucky. You might never know which one.

Also, profits are not always linear. Sometimes you have to go under before you return to the surface.

Before We End...

Remember the part about DWL-WA no longer moving to reflect the mother share price fairly? This is actually a leading indicator. If you're flustered/bamboozled/confused by the widening spread between warrant and stock, take it as a negative sign.

Simply put, it means that the warrant has priced in the mother share's near term growth potential. When it no longer moves, the expectation is for the mother share to fall, and fall hard.

So when you see this movement - Sell. Sell. Sell. If you don't believe us, check out how the stock has performed since, up until 3 May 2019.

You're welcome.





Outcome
Gross Profits : RM3,442
Return on Investment (ROI) : 6.1%
Duration : 4 Trading Days