Sunday, 24 November 2019

PART II : TRADE OF THE WEEK #26 - TEO SENG CAPITAL BHD




Outcome
Gross Profits : RM46,342
Return on Investment (ROI) : 150%+
(above figure of 24% includes in and out trades at higher prices)
Duration : 1.5 months

(Editor's Note : we understand that our claims might be difficult to believe - RM46k profits?? Hence we are including actual brokerage statements to prove our purchase , and subsequent sale of the warrants)

We had described our thinking in terms of the fundamentals in Part I. This time, it's the execution.

For this post, it's all about technicals, and of course we have an endless array of price charts to share with you.

The angle is simple : TEOSENG-WA was dead in September. But if - and only if - TEOSENG stock stages a rally, the warrant could skyrocket.

And it has to do this prior to expiration in January 2020. Near-expiry warrants can be very volatile if suddenly the underlying (mother share) shows a strong gain.

A 10% move in the stock could very well result in a 100% increase in the warrants if all goes well. 

We were counting on this. 

Staying in a gigantic trade requires conviction and sheer gumption. It's hard for us to describe how it felt like when the trade was ongoing, except that there's always a knot in our stomachs. 

We stayed true to our core beliefs:

Trust the analysis.

Trust the charts.

Trust the execution. 


As a recap, we'll highlight the trade structure again. Our core position (the first batch, as much as we could accumulate) amounted to 330,000 warrants. 

The purchase took about two weeks - the market was nearly totally illiquid. We will discuss this core position for the most part, aside from additional trades we made once the warrant finally took off.

Here's the basic structure. We always define our trades like this.

Buy range for TEOSENG-WA : Between 5 and 7 sen.

Stop loss point : 4 sen (potential loss of 42% of invested capital)

Target price : 12 sen (potential upside of 70% and beyond)

Then the parameters.

Parameter 1 : 
Establish a core position of 200,000 warrants (at 7 sen apiece, the maximum cost is RM14,000)

Parameter 2 : 
Add to the core position if it is profitable (the 'profit buffer' having been established).

Parameter 3 : 
Only buy more if the chart, price, and volume, suggests upside momentum.


PHASE 1 : COLLECTION

It's like a barren desert landscape on Mars. It's empty of life. Nothing's growing. Nobody's around.

In late September, we could also describe TEOSENG-WA the same way.

Got in on 24 September. Bought it ALL THE WAY DOWN.

For the entirety of September, the total turnover for this warrant was about 20,000 lots. About 12% of that was from our purchases.

See the nice descending ladder pattern above? That was us; acquiring bits of warrants as the market keeps selling down.

To be truthful, we initially thought 23 September was the point in which the warrant would skyrocket. But it did no such thing.


First position, 24 September 2019. Bought between 6 and 6.5 sen. 779 lots.

What the warrant did, however, was go down from 7 sen to 4 sen. Doesn't sound like much? Well, that's a 42% decline in five insufferable days.

The best part? We were already saddled with 150,000 warrants, bought between 23 and 27 September. LOLs are in order. 

So what does a 42% paper loss feels like?

A kick in the teeth, plus your eyeball is gouged out at the same time. 

We did not panic, though. We figured it was a waiting game. TEOSENG-WA looked like it was completely screwed (as were we), but the mother share was doing juuuuuust fine. Of course, we had to keep telling ourselves this.

TEOSENG. Highlighted is the price on 23 September 2019.


Notice here that TEOSENG hit a high of RM1.17 on the 23rd - the day we bought the warrants. 
The mother share basically fluctuated and went nowhere for a few days, aside from a single day (30 September) when it touched RM1.10. A couple days later it found strength again.

We took note of two major things:

1) TEOSENG-WA fell 42%. But TEOSENG only fell by 6% at its worst point.
 
2) We will hold on to the warrants as long as TEOSENG stays above RM1.10, also known as our 'puke point'. A price collapse to RM1 would essentially cause us to regurgitate our insides like Niagara Falls.

We drew a line in the sand. If the mother share goes bust, we go bust. But there was no reason to panic just yet - we were comforted by the steady but un-enticing movements in the mother share. It can be boring; just don't go down.

At this point, our 42% loss translates to about RM4,000 in lost capital. It's a major amount relative to the capital cost.

This stretch was not easy to stomach. Nobody else was in the market, and the low trading seemed to point to dumping activity at lower and lower prices.

Second position, 26 September 2019. Bought at 5.5 sen. 468 lots.

We only knew to do two things at this point, and to do them well: buy on the way down, and stay calm. TEOSENG's stock held steady during this phase.

(Editor's Note : we would never average down a position. The distinction here is that we kept buying on the way down simply because we haven't accumulated our full position yet. We did not buy to average down, and neither should you, ever)
We continued to accumulate small bits here and there. On 30 September, TEOSENG-WA hit a bottom of 4 sen on low volume. We didn't make any moves here - we were keen to see how it progresses. Any slight increase would be incredible for us.

We got our wish on the subsequent days, primarily because TEOSENG's stock moved from a low of RM1.10 to RM1.16. The warrant followed.

TEOSENG-WA daily chart, 30 September to 4 October 2019

We felt that the worst of the downturn might be over. A move from 4 to 8 sen is of course, a 100% gain. We were in paper profits mode again.

At this point, the trading in the warrants is still erratic. One day can see about 500 lots traded for the whole day. On another day, like October 4, there were 18,000 lots.

For TEOSENG-WA to truly rally - and we had anticipated this - there needs to be more volumes coming in. This meant new entrants into the stock. Remember that as TEOSENG goes higher, the warrant becomes ever more appealing.

Here's our insight : new volumes coming in is just the beginning of the trend. Hence it was extremely important to hold on to the position.

But this was admittedly hard to do - we had to train ourselves mentally to deal with it. The human mind is preconditioned to be afraid of losing money; if we get this trade wrong, we might end up losing all paper profits that we were recording at this point in time.

Just as a fun example, imagine that you're being presented with two options:

1) The chance to exit a trade with RM5,000 in profits, or 35% yields on capital invested.

Or

2) The chance to wait and attain 50% gains (five figure profits), but with a possibility that you might lose all profits, and even enter into a loss.

Our primitive brains aren't well-equipped to choose anything other than option 1. But here's the thing.

To make truly insane profits, you have to commit, and commit completely. 

When your investment thesis is being validated, it's not the time to exit. 
It's the time to ramp it up.

So guess what we did when our TEOSENG-WA position went to 8 sen on 4 October? We bought some more, and try to disregard the fact that our paper profits were at 26% - if this was any normal trade, we would have exited with delight.

4 October 2019. Bought at 7.5 and 8 sen. 999 lots (for good luck)

What we did may seem counter-intuitive, but it really shouldn't be.

When an investment thesis is validated, you can choose to either exit or keep going. You keep going if your analysis suggests further upside, and if you can afford to sacrifice some profits. That's what we did, essentially.

We became just a bit more confident in the trade. However, the challenging phase was not done yet. We were about to be served a plate of humble pie.

After 4 October, the warrant becomes dead... again! Obviously we expected otherwise.

Up until 14 October, the chart looked like this. For context, TEOSENG's stock hit RM1.20 on 4 October, but hovered at the RM1.16-1.17 range in the subsequent days up until the 14th.

TEOSENG-WA daily chart, 4 to 14 October 2019

So from that 26% in profits, did we lose all and enter into losses again? You bet.

This period was a crucial one. We held on to our convictions, and we were comforted by the fact that TEOSENG's stock is showing upward momentum potential; slow movement, but better than nothing. The stock will take care of what happens in the warrants, eventually.

It's that mantra again : boring (movement) is fine, just don't go down.

So we spent that entire week just sitting back, shutting up, and wait. Again, not easy - but we are used to this, having been in this line of work for a while.

When there is nothing to be done, sit back and wait. For many itchy fingered traders, this is the hardest thing to do. 

At any rate, we can deal with the warrant being at 6 sen. Our average price was 7 sen; we can take the losses. At least it's not 4 sen (yet). 

PHASE 2 : BUILDUP

We know it can be a bit confusing jumping back and forth between the charts of the mother share and the warrant. But we need to show this to explain our thinking.

 TEOSENG daily chart - performance since our entry

When the stock shows this, we no longer care about minute by minute movement. Not even the day-to-day, not so much.

We look at it on a weekly basis. And on this basis, you can clearly see that the uptrend is there.

TEOSENG weekly chart - same time period

This was our justification. It offsets any fears and worries that we have about TEOSENG-WA. Perhaps the warrant is slow, or going nowhere. What we can be sure of is that if the stock keeps moving, the warrant will catch up eventually.

And more importantly - this is the best part - the warrants will move faster and harder once people notice that they are absolute bargains.
On 15 October, we got a nice bump in the warrant. It moved from 5.5 sen to a high of 8, closing at 7.5 sen.


During this phase, guess what we did? Yes - we bought some more.

16 October 2019. Bought at 8 sen. 425 lots.

There were more small purchases in subsequent days between 15 and 31 October. Eventually our core position amounted to 330,000 warrants, at an average price of 6.9 sen.

The accumulation and buildup phase was over. We knew it was time to sit tight and be patient. And so it was for the next couple weeks.

PHASE 3 : LIFTOFF

We'll keep this part short; you probably know what happens next.

The following chart comprises the day we first entered and the day we exited. 24 September to 7 November when we exited - about 1.5 months.

TEOSENG-WA, daily chart

We got our rocket ship, and we held on until the end.
We even traded some at the top end of this rally, such as on 4 November.

By this point, we were holding more than 450,000 warrants in total.

To be honest, we never expected such a swift rally. We were preparing to struggle up until end of November, when TEOSENG reports its quarterly earnings. Or worse, up until January, ensuring us of a miserable Christmas.

Our mindset on managing this trade - a massive position that was never less that 4,000 lots on its way up - is straightforward; if the trade is exceeding our expectations, same goes for the profit potential.

We were planning to exit at around 14-15 sen (implying potential profits of 100%), but we stuck to it. If it can go to 15 (already beyond our initial 12 sen profit target), we thought it could go to 20.

All we needed to do was time our exit to match the end of the TEOSENG stock rally. It jumped from RM1.20 to RM1.40 in about three weeks. This 16% jump was enough for a 150% increase in TEOSENG-WA; again, it's the principle of a near-expiry warrant suddenly attaining high valuation.

On 7 & 8 November 2019, we sold everything. We were far too big in this; we felt lucky to be able to hold this position all the way. Our selling range was between 18.5-20.5 sen; as it turned out, this was right at the peak.

How big was our sizing relative to the daily volumes in the stock? Well, our selling accounted for 17% for the total turnover for TEOSENG-WA in those two days.

3,989 lots sold.

3,310 lots sold.

Not bad for something that we first bought at 7 sen.

POSTSCRIPT

On 20 November 2019, TEOSENG finally released its earnings. They were fantastic.


The results basically confirmed our analysis in September. We never intended to carry the position beyond the quarterly earnings anyway. Our belief is that the poultry sector angle - the trading angle - has come to pass.

This is the real power of the artificial mispricing principle. We had the perfect conditions to go in, and the perfect instrument to trade to express this view.

This is how you can make 150% profits in a month and a half. Insane.

For further reference:

PART I : TEO SENG WARRANTS. RM46,000 PROFITS IN 1.5 MONTHS. HERE'S HOW WE DID IT.  

- 17 November 2019

A BRIEF, CRYPTIC NOTE ON POULTRY STOCKS - LEONG HUP & TEO SENG 

- 16 October 2019 

The trade was originated and shared with our Telegram subscribers back in September. Join our Group to get real time updates and trading recommendations.

Sunday, 17 November 2019

PART I : TEO SENG WARRANTS. RM46,000 PROFITS IN 1.5 MONTHS. HERE'S HOW WE DID IT.

 
I'm writing this post in the first person, for a change. This will be an extremely long winded account of a trade that went right - so long that we broke this into two parts. 

More than anything, this is a personal account of what this trade represents, for me personally and for the team. I'm not sure if this is written with our readers in mind, and I apologise for that.

You can see from the title itself how much we made - the trading aspect will come in Part II. Somehow, we managed to score a decent (car-sized) profit for once. It's the result of a painstaking preparation process, and sheer effort to maintain a position. I have to admit that our holdings in this trade is far larger than our conviction.

I'd like to think that it's not about the money, but of course that's a factor. This was an important test of our credibility and ability to come up with meaningful insights. We did the research ourselves. I made sure we covered all the bases, and that we would not commit to any dumb decisions. 

Perhaps in a very small way, I felt like we had cracked the code - just a bit. My ambitions are as large as my capacity for risk taking. We all have day jobs, but perhaps with this kind of performance, we can do this full time eventually, at some point.

Hence the importance of this trade as a test case. It was crucial that we took care of both sides of the research equation - fundamentals and technicals. We pored over financial statements. Several annual reports, we tried to read from front to back. We scrutinised the charts. We envisioned about 20 different trading scenarios. There were some sleepless nights.

I call this a test case simply because we are now fully validated in our approach. We had an original insight, and we were certainly early in this trade. I did not see anyone else in the market when this warrant was at five sen, apart from a few souls who were probably smarter than we were. 

We got into this warrant at around 7 sen or so in late September; we bought it all the way to the bottom. Then, in early November, the warrant jumped to 20 sen.

Now we know we have the tools. We can utilise them when a similar opportunity presents itself. In fact, we can scale the trade ten times larger. Maybe. 

It would be neat to achieve financial independence out of this whole business. But to do that, we will have to replicate these kinds of trades another 100 times, perhaps. But I don't think money is the main motivating factor, nor should it ever be.

I'd do all this for free, with a virtual trading account and fake money, if I had no other option. Trading is not a hobby or a side hustle for me. I'm just an obsessive person who is naturally curious about things. Capital markets is my life, and how I define my identity. Maybe that's what it takes to trade this way.

So I'm telling the story of this particular trade - and it's worth reading in full, since I'm sharing everything I know about it - in extensive, painful detail. I do wish you can apply some of these findings in your own trading.

Now let's switch to our usual third person narrative.



A CHICKEN & EGG PROBLEM

We really have to go back to the events surrounding Leong Hup International's IPO and listing in May, which sort of put the brakes on the momentum of the high flying poultry sector.

As an associate company of LHI, Teo Seng Capital, was an earnings contributor and egg producer. LHI is primarily a chicken supplier; in a nutshell (egg shell?), these two are among the best poultry stocks you can buy on Bursa Malaysia. 

LHI, which in itself carries an awesome back story and a long history of entrepreneurial success, was relisted on Bursa Malaysia as a multi-billion ringgit poultry conglomerate. The listing did not result in a pop in LHI's share price; it went the opposite way, actually.

The listing somewhat unfortunately coincided with negative industry fundamentals. Chicken prices, already at four year lows, saw a major fall in the second half of 2019. Indonesia had to resort to mass murder to support selling prices. Small chicken farmers and corporates alike were in a spot of bother.

In August 2019, LHI disclosed that it expects a significant dip in earnings, owing to lower-than-anticipated selling prices for chicken. This of course sent the stock into a tailspin; from its IPO price of RM1.10, LHI's stock fell steeply to a low of 70 sen by the end of August. A 34% decline in barely three and a half months... not a good look. 


There are tons of reasons why the stock fell; this much is obvious. What we were really interested in are the reasons why the stock shouldn't have fallen as hard. It was a telling sign that LHI's stock bottomed out just after it released quarterly earnings to reflect the weaker-than-expected selling prices. Since then, it has exploded upwards. From 70 sen to 90 sen? A very handsome stock.

Without boring you with the technical details, let us describe the simple dynamics of this type of business. Because of the sheer scale of LHI's operations, a marginal shift in selling prices brings overall revenue down. 

This is a firm with huge fixed cost obligations, and huge capacity of production. Let's assume those costs are fixed, and take into account just the drop in revenue, which apparently wasn't enough to be offset by higher demand (because of lower chicken prices, get it?).

Ultimately what happens here is that your bottom line gets hit. So LHI ended up with marginal profits of RM16 million from revenues of RM1.47 billion in 2Q. 

We all watch net profit margins, and in this case the figure was a meek 1%. Of course some investors would up and run: if the company only makes this much, how do you think they are gonna pay the dividends??


We posit an alternative  theory. We think it's fairly awesome that LHI can even make all those profits when chicken prices are at multi-year lows. The economics of scale still makes sense. For net profits to return to their expected levels, chicken prices simply have to normalise, and we're talking about an increment of a few teens in cents here.

And of course, since chicken is clearly an indispensable part of the Southeast Asian diet, think of it as hedging : cheaper chicken, higher demand. Prices can only go down so much.

But you know what else is an indispensable part of our diets? Eggs. This is where the hero of the story comes in.



TEO SENG CAPITAL BHD

This company, in our minds, was a clear cut winner with a capital W. But it seemed to be held back by some exceptional factors. 

Just to rattle off some stats, if this company is to be compared to its listed poultry peers on Bursa Malaysia.

Best net profit margins. 

Strangely low price-earnings ratio. 

A diversified earnings base with reliably profitable exposure in side businesses such as animal feed and care products (which somewhat explains the higher-than-peers net profit margins).

Most other egg producers are nowhere near as profitable; clearly this company was doing something right.

TEOSENG annual performance, from the annual report

None of these are particularly insightful observations. The whole market knew this. Why else would the stock go up 51% between January and May?

Even when it peaked, there were reports suggesting that the stock was still undervalued.


TEOSENG daily chart, from January to 13 May, 2019


TEOSENG's stock was winning - until LHI went to listing.

For better or worse, the market's expectation of the poultry sector was readjusted after LHI came into the market. Of course, being an associate company, TEOSENG's stock was dragged down alongside it.

It went for a nosedive off a steep cliff, with some time to do a flip. Ouch.

TEOSENG's daily chart, 15 May to 28 June 2019

But let's not forget - the egg business is a whole lot different than the chicken business.

LET'S TALK EGGS

We spent about three months doing deep dive analysis on eggs, and everything there is to know about the protein. How to produce them. How to cook them. How to eat them.

We tried to understand the underlying economics, the supply and demand, and all those things.

We also nudged the Department of Veterinary services to update the egg prices for a week in which it came out a bit late. They were prompt with their replies. They are angels.



 Egg prices, Department of Veterinary Services Malaysia. Link here.

And from this we graphed the trajectory, for what it's worth.


  Weekly egg prices, Grade AA


The first thing that struck us was this : weren't egg prices much cheaper last year?

The second thing : why aren't people making a fuss about higher egg prices this year? Perhaps we all just came to terms with it somehow. Or we were all too absorbed (and disillusioned) by the current state of Malaysian politics.

The fact remains that an egg producer like TEOSENG can reasonably expect good earnings with higher egg prices. As a controlled item, the fluctuation in prices shouldn't be too out of whack.

Think of us as complete virgins on the subject of eggs and poultry farming. We are amateur sleuths, and we needed to understand a few things; real money is on the line, after all.

So we learnt about 'All In All Out' and 'Closed House' rearing systems that the company practices. It's a highly regulated industry with extremely tight quality control requirements, all laid out in lush details in their annual report

There is no doubt that their operations are of the highest quality possible : you don't mess around with biological assets. If the (egg laying) chickens die, the business dies.


No, seriously. It's a great site.

We also tested the product from TEOSENG's farms. Yolk is fine, quite tasty fried, or scrambled. We tried a comparison with eggs made by QL and LKH, but a taste test is somewhat useless (as we naively realised just then) since we are not egg taste experts. They all taste like eggs.

Most people go to the supermarket and they get whatever's cheap and available.  Preference is more on whether the egg is Omega-enriched, organic, or else. At the very least, we found out that we can easily get TEOSENG's eggs at any Tesco; as you will see by the end of this story, we are having only these for the next few years.


WHAT TO INVEST IN?

Let's revisit LHI again. Look, we have a personal bias into liking the company. It's a multibillion ringgit chicken empire that's going to continue making billions of ringgit. It also has a dividend payout policy.

And most important of all, we thought the selling in the stock was severely overdone. The lower it goes, the more valuable it becomes. Investors stand to get not just capital gains, but also great dividend yields. The smart money would buy all the way to the bottom.

We did separate research into LHI's business and the price trend for day old chicks prices. We won't bore you with them here, but some interesting charts. You can also read this on how to start your own reban ayam business.

Weekly prices, day old chicks (DOC)

And this little gem:

We didn't question the LHI's stock selldown; we just questioned its severity. DOC and broiler chicken prices clearly had a major dip in the second quarter, but the subsequent recovery was quite significant.

In fact, DOC prices just had to normalise slightly for LHI's net profits to recover. This thinking can be applied to the stock itself - LHI's shares just need to recover slightly for a smart investor to get double digit capital gains. There is a lot of money to be made here.

The first important hint that we received was when the stock did exactly this. After a sustained spell of selling, and more selling, LHI suddenly jumped. It seemed as if the bad stuff had already been priced in.

LHI stock, 29 & 30 August 2019 - a 16% increase in two days

As we have highlighted early on in this blog, in one of our least read articles, we were quite confident that the sector recovery was just beginning. Having done some legwork on the viability of the poultry sector, we narrowed down our stock picks to the market leaders - LHI and TEOSENG.

Both are set to enjoy better earnings in the third quarter as a result of higher average selling prices for DOCs, broiler chickens, and for TEOSENG, eggs. 

Check out this chart: LHI spiked, but TEOSENG hasn't recorded its own (we hope) 16% in gains. The two stocks went down together when LHI went for listing - we figured there is some room for TEOSENG to recover by 3Q, or end of 2019 at the latest.


We waited a bit for this angle to confirm itself; there was still a significant risk that the upside in LHI would be temporary. By mid-September, the stock successfully maintained its value at between 80 and 84 sen.

As specialists in warrants trading, we immediately considered warrant proxies in LHI and TEOSENG. Warrants enable us to leverage and juice up our returns; we like them because we are risk taking cheapskates, that's all.

There was only one viable candidate for LHI, since the other call warrants were priced at IPO price levels; most were useless as a trading device. There was LHI-CM, one of the first call warrants to be issued after LHI's big fall. The benefit of this is that the upside potential is (we think) properly priced into the warrant structure. 

You can see here that the value proposition is clear. If LHI goes back to RM1 levels, the payoff in this call warrant would be huge. At this time (end-September), LHI-CM was priced at around 8 sen.

Note the break even price at expiry.

However, we were even more excited with the second option. It was a high-risk, high return proposition, with an amazing payoff potential if this sector recovery happens the way we think it would.

Presenting our rocket to the stars : TEOSENG-WA.

ACCEPT THE TERMS & CONDITIONS?

From the warrant structure details laid out above, we were presented with an option: accept the terms, and bear the responsibility.

TEOSENG-WA carries with it some major risks. It is not for the faint hearted, and we had to decide whether to commit fully to this angle.

So what are the risks? First, this warrant is nearing expiry in January 2020 - or about four months from the date we had considered an entry. It was listed back in 2015; it went through some up and downs, but at this particular point in time, it has never been cheaper.

Why cheap? It's simply a factor of time decay - warrantholders/the market are simply pricing in TEOSENG-WA's lack of potential. A near term recovery did not seem likely at the time. 

With an exercise price of RM1.35, one-to-one conversion ratio, and with the warrant trading at around six sen, the theoretical value of the stock plus warrant is RM1.41. 

In simple terms, if you got a bunch of warrants that you can convert into TEOSENG shares by paying RM1.35 apiece, the sum (RM1.41 = RM1.35 + RM0.06) would be beneficial to you IF the stock goes above RM1.41 in the future. But of course we had no intention of converting into shares. 

And oh, the warrant needs to hit RM1.41 before it expires - it's a race against time. The prevailing warrant price suggests that the stock did not have a chance in hell of this happening; TEOSENG was trading at around RM1.10 levels when we came in.

The warrant price basically collapsed because the market doesn't expect such a price point to be attainable in the short term, or at least before the warrant expires. Having done our research, we completely disagreed. Now all that's left for us to do is to commit.

But here we encountered a second, potential fatal roadblock: NOBODY WAS TRADING THE WARRANT ANYMORE. 

To give you a sense of how dead this thing is, the warrant had declined by 90% from May to September (!)


Here's one question that we get asked often : how insane do I have to be to contemplate such a trade?

The answer : your money, your call. Don't do dumb shit that you don't understand. Protect your money like your life depends on it, because in some ways it does.

This insane trade is the only way to really achieve insane profits. There aren't a lot of avenues in which you can trade and make 150% profits in under two months. This trade is the culmination of our collective experience trading in the markets. 

We really had to tread carefully by structuring a trade. We understood the payoff potential. We also fully came to terms with possible losses. So here's what we essentially did.

STRUCTURING THE TRADE

We defined our trading parameters first.

Buy range for TEOSENG-WA : Between 5 and 7 sen.

Stop loss point : 4 sen (potential loss of 42% of invested capital)

Target price : 12 sen (potential upside of 70% and beyond)

Then, we incorporated some automatic steps to take. To make this really worth it, we intended to buy as much of the warrants as we can.

Parameter 1 : 
Establish a core position of 200,000 warrants
 (at 7 sen apiece, the maximum cost of capital is RM14,000)

Parameter 2 : 
Add to the core position if it is profitable 
(the 'profit buffer' having been established).

Parameter 3 : 
Only buy more if the chart, price, and volume, suggests upside momentum.

In stark terms, we are investing in a dead warrant with an expectation of it coming back to life.

And if this angle works out even slightly, we knew our profits would be huge. If it doesn't work, we'd end up with the proverbial eggs on our faces.

To skip to the ending a bit, we guess it's not much of a surpirise to diclose the eventual outcome.


In our next post, we will discuss the trade itself: the many days it took to build a position, the nerve-wracking days and weeks with zero progress, the temporary losses, the long and painful validation process, liftoff, and how to really hold on to massive gains.

<Continued in Part II>

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)



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