Happy New Year – and all the best for 2022! I took some time over Christmas to review my trades.
I’ve found that my best type of trade is small-cap turnarounds. This is because the small-cap market is inefficient. Private investors make up a lot of the share dealing on the smaller stocks and so it is private investors that set the price – not institutions. Quite why many companies don’t care about private investors is beyond me. Many small-cap stocks require injections of capital at various points in their stories. Raises that are always anchored to the current price. Capital that keeps the company going and pays the directors’ salaries.
But the fact that these stocks are mainly dealt in by people who are not professionals opens up an opportunity. There are certainly many private investors who outperform the so-called “smart money” – but going by the spread bet companies the majority are losers.
Inefficient pricing means any fundamental changes can be slow to be taken up by the market. My best trades have been stocks where the fundamentals have changed for the better, the price action has been trending sideways or starting to trend upwards, and the market reaction has taken some time.
Do your own research
This is why, if I see a stock trending sideways for several years, I look deeper at the company to find out the story. If the story is improving for the better, then there is a potential trade. If the stock is also unloved, that means two of my three criteria are hit. The final one is the technical breakout. Buying when all three criteria are ticked usually results in a highly skewed risk/reward trade. The reward can be high because nothing is priced in. The risk is also low because the market already hates the stock. One problem in these stocks is that the liquidity can be thin. Therefore, sometimes you have to buy when you can even though you’re taking a big liquidity risk. If you don’t, when the market starts to wake up or the stock breaks out then you can find it difficult to acquire a meaningful amount of stock. Liquidity is always a problem with small caps, and often these stocks trade on the SETSqx platform, which is market-maker driven. So, if I’m pre-empting a move, I need to be sure that the risk/reward is stacked in my favour before executing. Another issue is that pre-empting a move can see you waiting a long time. I took the placing in Bidstack (BIDS) at 2p in July. Since then, it’s mostly traded below this level until mid-December when the stock broke out. It now trades at 5p – but for several months not only was I underwater but paying the opportunity cost of not deploying capital elsewhere. Plus, if I was wrong, in a weak stock I would have marked down the stock with my selling. These trades have been great for me but they do come with risk.
An unloved energy opportunity?
One company that came to my attention this week is a company called Savannah Energy (SAVE). It was previously called Savannah Petroleum with the EPIC code of SAVP.
The attraction here is that the stock has been suspended since June. That means it has likely fallen from the radar of many. It relisted on 31 December 2021 having raised $65m (£48m) at a price of 19.35p per share, including a £2.2m subscription by Savannah’s CEO Andrew Knott. The company has acquired ExxonMobil and Petronas’s oil businesses in Chad and Cameroon for up to $700m. But the assets acquired are expected to generate so much cash that come the completion date in mid-2022 the cash outlay will be only $330m (according to FinnCap’s note).
It also doubles Savannah’s EPS in 2022 and trebles in 2023. That the stock has had a lukewarm restoration of trading, currently printing at 22.5p, tells me either the deal is not as good as FinnCap thinks or that the deal is not being priced in. The forecast net income (adjusted) for 2022 stands at $66.6m, giving a Sterling amount of £49.3m. Contrasted with the market cap of £293.4m, the market doesn’t appear to be ascribing much value to the stock’s future earnings which are forecast to grow.
Savannah Energy has had several suspensions throughout its history, and many longer-term shareholders will not be too pleased with the performance.
Chart 1 shows the downtrend here. The stock has peaked above the 200-exponential moving average several times but failed to register a sustained rally. Whenever I see stocks like this, I just ignore them. If a stock is going down it doesn’t make sense to bet against it.
Chart 2 shows a different story. The stock was in the process of rerating and had broken out of the base I’ve drawn on with the bottom arrow. The stock had trended up above all the moving averages and was in the process of forming another base before suspension.
Patience is required
The placing was done at 19.35p and the stock opened at 22p. I traded the stock on the open as described on my Twitter and scalped for a quick profit. But since then the stock has come back. I’ve since taken half a position because I believe there is upside. I’ve not taken a full position because after a suspension I think it’s possible there could be some profit takers who take advantage of the fact that the stock is now available to be sold after six months, and potentially placees who want to flip for a 10 per cent profit.
If the stock drops below 20p and fills the gap – I intend to add the second lot. I believe the previous high of 28p seems a reasonable target.
- You can trial some of Michael’s stock trading course at https://www.shiftingshares.com/online-stock-trading-course/
- Twitter: @shiftingshares
- New subscribers to SharePad can claim a free month of data with the code: Michael
