Tuesday, 24 September 2019

TRADE OF THE WEEK #22 : PENTAMASTER CORP BHD



Outcome

Gross Profits : RM13,300
Return on Investment (ROI) : 20%
Duration : 7 days


It's been three months since our call on PENTA*. Since then, our gross profits have accumulated to RM20,000. It's one of those car-sized profits we try to hunt for every year. If we can get a few of these each year, we'd be pretty happy.

We did not conceal or kept anything to ourselves in our coverage of the stock; every inch of our thinking is on this blog. We just thought it was a good company with all its stars neatly aligned.

And when the stars do align, it always makes for a very powerful trade, and our eventual profits have not disappointed. And we're not saying the rally is over; did you notice that it has only been three months??

Since flagging this stock, we have discovered some interesting things:

- it is the best kind of momentum stock relative to the market. When the stock market declines, PENTA declines at a lesser rate. When the stock market recovers, PENTA rallies much, much farther.
- it is a clear leader in the broad tech sector category for companies of its size.
- it's closely correlated with FRONTKN, another of our top picks which we have not been smart enough to buy into recently. We do tell our readers about it constantly in the Telegram group, though.
- over the past three months, PENTA has returned 33%. The FBM KLCI? Down 5%. 

The alignment of stars that we mentioned was also very straightforward. You don't have to be Svengali or Sherlock to realise this. We realised it, and we are not smarter than you. We just took note of it and did our jobs. 

- fundamentals remain solid.
- technicals (the price chart) were favourable, especially in the context of this trade.
- market conditions paved the way for a blistering rally (that window of opportunity opened).
- our timing was impeccable as we correctly anticipated the breakout in the stock price.
- we had the perfect instrument to trade this in order to express our view.


THE TRADE

There was really one thing that made this trade stand apart - the timing. We nailed that not out of luck, but preparation.

After a flattish post-earnings performance since the end of July, the daily chart for PENTA looked like this.

As at 11 September 2019.

What looks like a disfigured 'M' is actually a representation of PENTA stock reacting to different stimuli. The first one is the post-earnings blues; the 'sell on news' adage was well and truly alive.

Remember our earlier trade in PENTA-CB? We sold that after the stock retraced from RM3.75 to RM3.40 in early August. Poor form on our part; we sacrificed about 6 sen per share in profits for that one. Yes, we sold at the bottom, at least in a three months context. But that's a forgivable sin; we met our profit targets and exited with dignity.

Notice the first two peaks of this 'M'? They are failed breakout attempts. If you really want to picture it, it's essentially a bunch of uncles trying to drive PENTA stock beyond that RM3.75 range, only to be met by selling pressure by sellers (possibly uncles who are institutional traders) both times. That resistance point was Normandy on D-Day; the Allies are being repelled by Nazi firepower. (Editor's Note : we're not trying to compare institutional traders to Nazis...).

Another factor you should know: during the time period captured above, the markets also underwent a mini-Doomsday scenario. Stocks in Hong Kong and the US were hit hard by potential market crash jitters and Trumpian B.S. ; these are not new things, but they hit hard regardless. Such concerns drove down prices of stocks in the volatile tech sector, and PENTA was no exception.

The second failed breakout was when we started paying attention again to the stock. It had been just a few weeks since we got out of PENTA-CB. Buying into it again was not an option due to the low liquidity and low trading volumes.

It's also priced much higher than at the point when we sold it, so we felt icky about buying into the same warrant at higher prices. That love affair was over; it was time to seek a new date.

We found true love with PENTA-CG on September 11 (Editor's Note : never thought we'd write that sentence in a million years...). It was a quick introduction, companionship, and consummation of marriage. We bought into the warrant in a big way on the 12th, just one day after it made its market debut.

There was really no need to wait; this bit of timing made all the difference. We ended up finding the right trading instrument, but more importantly, we successfully executed this trade at the right time.

We were anticipating PENTA to break out strongly beyond RM3.75 when we got in. Third time's the charm, but there was also something else that went in our favour.


Whatever this is, we love it. Source.

TIMING IS EVERYTHING!

That something else is this : positive market conditions provided a window of opportunity for stocks like PENTA to rally onwards and upwards.

While markets were abuzz on the Saudi oil attacks an implications for Malaysia stocks, we were also counting on the leading tech players to outperform.

Here's the thing about PENTA and FRONTKN, regardless of whether you have full conviction in their fundamentals or not. Both stocks will do well in a good market; by this we mean an active market with enthusiastic buying and selling of stocks, and some prominent leading counters.

A good market is not just about whether the KLCI is positive or negative; it's also about the breadth of activity in Bursa Malaysia stocks. A rally in crude oil prices is typically positive for Malaysian stocks; you're probably aware of this.

With the right timing, the right instrument and the right market conditions, we were able to achieve significant profits. The chart below illustrates what we mean.


It was important that PENTA-CG was newly listed when we bought it on 12 September. It made its debut on 11 September, just the day before.

It just so happened - and this is a coincidence - that PENTA stock exhibited signs of breaking through to a new all time high after two solid months of consolidating, trying and failing. We were very comfortable to take up a large position in the warrant just to get exposure in this angle.

Because we were early to get in, we managed to enjoy a profit buffer of 1 sen per share from the outset. We first entered into PENTA-CG at 15.5 sen, and by the time the breakout happened - as we anticipated - the warrant was already trading in the 16.5-17 sen range.

We had not been constantly watching the stock since July, by the way. We only began paying attention again after the stock made a strong move up from RM3.50 to RM3.70 within days.

As one of our favorite sayings goes, "if the stock wanted to collapse, it would have done so a while back". But it did not, and the repeated signs of strength and buying interest made us pay attention.

On 12 September, PENTA stock broke a new all time high and practically never looked back. This particular breakout was good for a 13% gain within a single week; it was a very strong move. (Editor's Note : as a general rule, the longer the consolidation phase, and the more failed previous breakouts, the eventual breakout move would be much stronger).

Recall our previous posts on the importance of creating profit buffers. In PENTA-CG's case, ours were large enough that they allowed for further accumulation of warrants. We bought a large position at the 18.5 sen mark, with a view towards the warrant breaking 20 sen. This it did within a couple days.



You may think we were lucky to have found the right timing and the stock just so happens to break out. We'd partly agree, but we were also thoroughly, fully prepared.

How do we prove this? Simple: this trade uses the exact same trading strategy that we had shared in our first PENTA post back in July. It is literally the same angle: newly listed warrants, good company prospects, good charts, positive catalysts.

The only difference? We traded a different warrant. Indeed, this strategy can be replicated for future trades, and for different stocks. You just have to find one with similar circumstances, and that confluence of factors culminating in a trade with massive profit potential.

This is the true power of warrants trading. By choosing the right warrant, and under the right conditions, you can boost your profits sky high.

For PENTA-CG, our holding period was just under a week. We fully exited on 19 September.





This is worth repeating: 20.5% yields and RM13,300. From one Thursday to the next.

It all stems from one good idea and some good execution. Really, anyone can do this.


*Our PENTA series of posts for further reading:


9 July 2019 ~ PENTA stock was around RM3 at this time.

PENTAMASTER IS HEADING FOR THE SKIES : BURSA MALAYSIA STOCK ANALYSIS


7 August 2019 ~ 1st round profits of RM7,700

TRADE OF THE WEEK #18 : PENTAMASTER CORP BHD














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