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.

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