Trading Strategies - How to Play Resource Stocks

Interview with Reginald W. Ogden        January 18, 2005

In Volume 2, Issue 7 of Resource World Magazine, we covered how to pick resource stocks. This article will discuss what to do once you have identified a good candidate for investment. We asked Reg Ogden, a veteran investment advisor at Canaccord Capital Corp. who specializes in resource stocks, and James Dartnell, a mining analyst and investment advisor at Wolverton Securities Ltd., to provide some insight into trading strategies for resource stocks.

It's all very well to find a good company worthy of your hard-earned investment dollars, but it's another thing to buy low - sell high. If it was easy, we would all be millionaires. Fortunately, there are ways to lessen the risks inherent in buying shares on the stock market. It's impossible to assemble a lifetime of trading knowledge into one article, but we can cover the basics. In addition, there are a number of good books that discuss this subject in far greater depth. One that I like in particular is James Dines' Mass Psychology which offers a great deal of practical advice.

Since we are interviewing different experts than the previous article, we must first understand the investment philosophies of Reg and Jim, then examine how they put those philosophies into practice.

Resource World: Do you have a stock trading philosophy?

Reg Ogden: I like to start with a time frame. I look at the schedule of exploration and development programs, the criteria for success, etc, and hang all the other factors around the optimum trading time frames.

James Dartnell: My philosophy depends on the particular investment and the time frame looking ahead. Is it a one or two-day trade or longer term, say six months to a year?

RW: Do you use the five P's method?

i) Price within chosen range
ii) Proven management (good promoters)
iii) Position (management's ownership position and at what price)
iv) Project (good potential and promotable)
v) Past Performance (i.e.: Is the stock in the accumulation stage or is the big move over?)

Ogden: I don't use the five P's method as you have presented it, as this is conventional thinking. I believe that if you are going to make money in the market, you have to understand the nature of the market. For example, when playing the junior market, you have to be one step ahead of where you are in other markets. In other markets you can buy on rumour and sell on news. While in many cases, on the junior market, the rumour is the news. In other words, an investor has to devise rules, criteria and strategies that are appropriate to a particular market. But keep in mind that this is different than imposing your own personal notions on that market - that can be dangerous and unrewarding. When looking at a particular segment of the market, learn how stocks in that segment behave.

I use what is called the square root rule. Essentially, this means that if you are right, you will make more money on a $1.00 stock than a $2.00 stock. However, if you are wrong, you will lose more money on a $1.00 stock than a $2.00 stock. What I am saying is get arithmetic on your side.
In terms of successful management, this is a bit of an oxymoron. Sometimes, previously successful management can't come up with another major discovery - so I don't count on past successes to choose a company. It's a great deal of work to closely examine grass roots projects - there are too many unknowns. Therefore, I like to wait until someone has reported encouraging results from their property. I then analyze that project. This would be my starting point.

Are far as being promotable - I ask these questions: Could it be large? Is there a lot of "blue sky" in the project? What you want is a stock that analysts are following, writing up, and with a good trading market based on its merits. I like new or fairly new stocks because it doesn't take too much to move them up. If it is an old stock, it is tougher for it to react. In the junior market, all the accumulation takes place in the private stage with very little occurring in the after market.

Dartnell: I consider some of the points in the five P's list. I look for stock priced at the lower end of my chosen range. You can check this from the newspaper by looking at the 52-week trading range. However, if you think it's a really good deal, you might buy at the current asking price instead of waiting for a pull back. I do look for good management, but I prefer exploration expertise rather than slick promotional abilities. I don't really care if it's a low-priced or high-priced stock. I do like to see management with a large share position because if they do well, they will be rewarded. This means they have an incentive to build a successful project. I like to figure out how big a project could get, that is, what is the size potential of the mineral deposit? I think past performance of a stock can be a good indicator for the future. For example, when gold fell a few years ago, Glamis Gold, an excellent company, also fell in value. However, it came back even stronger when gold prices rose.

RW: Do you play stocks on hype from the company?

Ogden: No. I analyze the stock myself.

Dartnell: No - I don't listen to hype as I could be misled. I like to see positive market action.

RW: What kind of data retrieval would you recommend for the average investor: delayed quotes, real time quotes, Level 2 data (NASDAQ) or market depth data?

Ogden: If an investor is looking a three-month or longer time frame, it is not necessary to have sophisticated data retrieval systems. What you are looking for is a change in the behaviour or liquidity of a stock - not the hourly fluctuations (unless you are a day trader).

Dartnell: If you have a full-time job, you won't be able to use sophisticated data systems. It is better to have a good broker - they can literally be worth their weight in gold. That's what they are there for. If you are a full-time day trader, use all the data you can get.

RW: How much should the average investor spend per month on data services?

Ogden: Not much. Many professional stocks traders only use rudimentary data retrieval systems -
some pros only use the newspaper.

Dartnell: You can call your broker for free. In addition, there are many free services that provide delayed stock quotes, which is good enough in most cases. Companies often have web sites that link to their stock quote.

RW: If an investor can't monitor his stocks several times a day, what is the best plan?

Ogden: Unless you are day trader, you don't need to monitor stocks several times a day. The only time you need to monitor stocks closely is when it is one of those short, active phases when it is moving from one price range to another. This works out to be about 6% or 7% of its trading time. It's more of a problem to try to analyze every little move.

Dartnell: Stay in touch with your broker (but don't call him or her seven times a day!). In most cases, you don't need to constantly monitor your stock.

RW: What do you think of hot tips or buying on a whim?

Ogden: I would rather see some action in a stock than pick up a tout. Since rumours are often the news, they are rarely substantiated. It's not a very good way to make money; otherwise, lots of ordinary people would be very rich.

Dartnell: Hot tips are very dangerous.

RW: Do you prefer playing stocks under or over $1.00?

Ogden: I like Canadian stocks that trade between 80¢ and $3.00. Every country is different - $1.00 is high for many British stocks. In the United States $1.00 is low.

Dartnell: I don't care what the price is - it depends on the deal. I have had success with 5¢ stocks as well as $100 stocks. Cheap stocks are in a completely different category than expensive ones and are evaluated differently. That is, low priced stocks are usually grass roots projects seeking financing and looking for minerals. A $10 stock is probably a producing company and would be evaluated as an industrial concern with earnings.

RW: After picking a resource stock you like, do you: buy it immediately; wait for a pull-back; wait for strong market action; watch for a technical buy signal (e.g. stock price crosses moving average going up)

Ogden: While there are some basic rules (type of stock - exploration, development, production; time frame for its program; project funds; duration of program), I usually judge timing for buying by the activity of the company, rather than impose a hard and fast rule on trading.

Dartnell: In my opinion, the best strategy is to monitor the stock for five to 10 business days to pick an advantageous entry point such as a pull back, especially if you are accumulating. Sometimes I use a buy signal such as the stock price poking up through the moving average when awaiting assay results that could result in a big increase in ore reserves; however, you might want to speed things up a bit as the signal might be too late in this case. While there are a number of buy signals, buying on weakness is the most common. Every stock has its own "personality" in the way it trades, so decisions must be made on an individual basis rather than following a set rule.

RW: If you bought a stock at 50¢ and it goes to $1.00, would you: sell all your shares; sell half or a portion of your shares; buy more shares?

Ogden: In this situation, I would need a very good reason to hold more than half - I like to ride "free" stock. I'm much more willing to take risks on stock that is free. Usually I sell half if the stock doubles in price. This takes away the anxiety.

Dartnell: It all depends on the particular situation. It's fine to sell on a double or sell half on a double, but I may sell just a quarter or maybe a half, but more than likely, I apprise the situation. At a double, the stock may still have tremendous potential for appreciation - so I don't use hard and fast rules because I might short-change myself.

RW: If you bought a stock at 50¢ and it fell to 25¢, would you: sell all your shares; average down and buy more shares; sell it when the value went down 10%?

Ogden: I probably would have sold it before it went down to 25¢. The rule in this business is to never ride down a loss for more than 20%. I would not average down because you will probably compound your original mistake.

Dartnell: Usually, I don't like to average down. In my experience, I have found that stocks I buy either start to rise or stay about the same. If I held on to a stock that fell from 50¢ to 25¢ I would sell it in November or December as a tax loss no matter what the potential prospects were. But normally, I would be out at 45¢. By the way, sometimes stop loss orders don't always work because the stock price might "gap" on the way down and miss your sell order with the automated trading systems.

RW: How do you know when to sell?

Ogden: There is no old adage to follow. In junior resource stocks, often they will break out individually, but fall back collectively. Whenever a stock has had a few days of new highs, then levels out, that's the time to sell. During this time, I will check out the leader in the group to give me indications of when to sell the individual stock.

Dartnell: Profits can be locked in by advantageous buying. I like to buy stocks when they are slow and quiet to lock in at a cheap price. This provides a better chance of selling high. When I start to see vigorous selling, that's a signal to bail out.

RW: Do you monitor volume vs. share price performance as a sell signal, i.e., if the volume is huge, but the stock price is levelling off, is that a sell signal? Do you watch for sell signals such as the stock price falling through the moving average?

Ogden: The moving average only confirms the trend. If you wait for the stock price to fall below the moving average, you have already lost 50-60% of your gains. I'd rather be a reactionary buyer and an anticipatory seller. For instance, I would rather sell after a few consecutive highs than wait for it to break down. If you rely on a moving average signal, then you are selling late.
There are many sell signals - your question just notes one of them. I would say that trade frequency is more important than volume. You can have a large volume with not too many trades and you can have a moderate volume with many individual trades. If a stock has many individual trades, but then the buyers start to dry up - that's the time to sell.

Dartnell: Big volume coupled with a levelling off in share price is a sell signal to me. Basically, I look for the horizontal support-resistance line.

RW: Do you play "corporate groups" where you can buy several companies controlled by a group?

Ogden: I would want to make sure which one of the group of companies is being promoted. You can make money on the leading stock that is their current focus, but the sister companies can remain rather dormant.

Dartnell: Usually, I focus on one or two stocks in the corporate group because most often it's only one or two that will do well at the same time.

RW: When awaiting drilling results, do you: sell before the assays are released or wait for the assay results, then sell?

Ogden: If there was a positive rumour before the assays came out, I would sell into the rumour because it is not always substantiated and buyers will be bidding the stock up. If there is a surprising big discovery, I would buy the stock. You can buy on the first great drill results or wait for a pullback. Bear in mind that if you sell prior to assays, it means that you will never have a big winner.

Dartnell: Typically, I would sell the stock before the results come out. If I am bullish on the stock, I might sell half and keep half. If I am extremely bullish, I would not sell, but see it through. The stock will probably be rising in anticipation of good assays and you can sell into the higher prices. When the assays come out, even if they are decent, it is anticlimactic and the stock will often fall. If the results are fantastic, that's when the stock will keep going higher.

RW: What do you think of contrarian investing?

Ogden: I don't buy stocks that other people hate. In addition to being very dull, you may have to wait a long time for the stock to move, even if you are right. Time is the most valuable commodity we have. If I have to wait two years for a stock to move, it's better to be in a dividend-producing instrument.

Dartnell: Generally, I am not a contrarian, but I can be under special circumstances if the near-term potential is great.

RW: Do you use newsletters to play resource stocks?

Ogden: No - I like to do my own research and newsletter writers often have different strategies than my own.

Dartnell: Yes, I subscribe to a number of newsletters to get new investing ideas.

RW: Maybe this question is not a fair one because you work for a full-service brokerage house, but - should an investor have a full-service, an online brokerage service, or both?

Ogden: Many investors like full service brokers because their research departments provide valuable information. In addition, a good broker can provide a sounding board for investing ideas. I know many successful investors who use nothing but a full service broker, but some do prefer to use both a full service as well as an online broker. If you are a novice investor, don't use just an online broker.

Dartnell: Of course this is a biased answer, but most of my successful clients like to use a full service broker and don't seem to mind the higher trading fee. As far as they are concerned, they get it back many times over with the broker interaction as well as the useful research offered by a full service brokerage house. Online brokerage accounts are better suited for people who want to go it alone. For many investors, it is penny-wise but pound-foolish to use an online brokerage account.

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This newsletter is solely the work of the author for the private information of clients. Although the author is a registered investment advisor at Canaccord Capital Corporation ("Canaccord Capital"), this is not an official publication of Canaccord Capital and the author is not a Canaccord Capital analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Capital.

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