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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.

















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