How some investors made 1,200% in one stock
Editor's note: Goldsmith is traveling this week and unable work on the Digest. So we've invited our resource specialist, Matt Badiali, to contribute. The timing is perfect... Matt is putting the finishing touches on a new trading system for small-cap mining stocks... a system that allows investors to remove much of the risk that comes with trading these explosive equities. We asked Matt to describe what's behind his new system.
In 2007, geology teams with Underworld Minerals found a multimillion-ounce gold deposit in Canada's Yukon Territory.
I visited the company in 2008 shortly after they announced the find. The mining executives knew they were sitting on a big winner... The drill program was still in its earliest stages, and concrete numbers were sparse. The company's shares traded around $0.70.
Earlier this year – less than two years later – Kinross Gold Corp bought the company for $130 million. That's a 266% gain. Anyone who bought in 2008 hit the jackpot, right?
Well, maybe... or maybe not.
Some 2008 investors made as much as 1,200% on Underworld... Others lost 77% of the money they put in the stock.
The difference was timing...
The fall of 2008 was among the most brutal downturns in stock market history. The S&P plummeted more than 30% between September 15 and November 10. Absolute panic washed through the market. Investors dumped anything that seemed at all risky.
And nothing is riskier than small-cap mining stocks. The Toronto Venture Exchange, the Dow Industrials of junior mining stocks, fell 74% in six months, from June 2008 to December 2008.
Between September 2008 and December 2008, Underworld shares fell to $0.16. That was a 77% loss in just three months. Its most violent decline came when the company lost 40% of its value overnight... from November 24 to November 25.
But by December 29, 2008, the stock bounced off the bottom and headed upwards. If you'd bought right at the bottom, at $0.16 in December 2008, you would have made 1,525%. Let me put that another way... for every $10,000 you put in, you made $152,500.
If you'd bought early... well... let's just say you probably weren't around for the big gains.
You might be saying, "Sure... you could have made 1,500% on this stock, but who ever buys at the exact bottom and sells at the exact top?" And you're right... trying to call exact tops and bottoms in the market is a fool's errand.
But here at S&A, we've developed a new system for trading junior miners that has proved exceptional at signaling the ideal time to buy small-cap resource stocks. No... it doesn't call exact bottoms. No system can. But it does signal when specific stocks are ready to rocket upward... when gains of hundreds (and even thousands) of percent are still ahead. Just as important, it weeds out the stocks that are in jeopardy of collapsing. Let me explain what we're doing...
The allure of junior mining stocks is easy to understand... Just look at the list of gold explorers we've recommended in the last year: Rainy River closed a 205% winner... AuEx Ventures is up more than 100%... and ATAC Resources returned 542% in less than a year – one of the three best stock recommendations ever made in an S&A advisory.
But trading these small stocks is risky business. The vast majority of these companies, which typically have market caps of less than $100 million, go belly up. So what's the trick to finding the huge winners in the junior mining sector?
Consider what my friend Brent Cook has to say about the sector. Brent has decades of experience analyzing these companies. He spent the majority of his career as a geologist, inspecting deposits across the globe. Then, he became a stockbroker, working for our friend, Rick Rule.
Today, Brent evaluates junior miners for funds and serves as an advisor to some of these companies. He also writes a newsletter on the topic, Exploration Insights. Here's what he recently wrote about the junior mining sector:
Speculating in minerals exploration is a very high-risk endeavor in which buying an indiscriminate basket of stocks will definitely lose you money over the long term and usually over the short term too. My experience has been that the more selective I am, the better the odds of success – provided the selection criteria are valid.
A more common strategy that many resource sector commentators employ is the shotgun approach. The advantage to the shotgun strategy is that you are bound to bag a few winners and it seems to work fairly well when the entire sector is moving: not so well when the sector drops.
The disadvantage, and something I saw all too often as an analyst at a retail brokerage firm, is that retail investors tend to end up with dozens or even hundreds of stocks in their portfolio. Usually they have very little idea why they bought most of these companies in the first place and whoever had recommended them (be it a taxi cab driver or letter writer) had failed to update them or suggest when to sell.
Like I said... it's risky business.
I know exactly what Brent's saying. It takes experience, hard work, and an expert's understanding in both geology and engineering to do a good job evaluating junior mining companies. The analysis is the most difficult part. But it's not the only part...
Once you decide a company meets your criteria, you still have to manage that investment. That's the place where many investors get into trouble. You can buy exactly the right company. But if you get in at the wrong time, your investment can tank... just ask the folks who bought Underworld in the summer of 2008.
The key to trading junior miners... and the key to the system we've developed... is to combine in-depth knowledge of geology with an understanding of when a stock's movement suggests it's about to rally.
After months of hard work, we've created a system that does exactly that... When I back-tested our new system on Underworld, it flashed a "buy" signal on December 29, 2008.
My jaw dropped when I saw that result. This system actually told us to buy at $0.20... the perfect time. Underworld's shares never fell below that price again. We would have closed our position on the buyout at $2.58 per share... a 1,190% gain.
The other results of this new system are just as encouraging. It flashed a buy signal on AuEx (XAU.TO) on August 27, 2010. The shares closed that night at $4.50.
On August 30, 2010, AuEx's partner, Fronteer Gold offered to take over the company. Shares shot to $5.70 literally overnight. They are currently trading around $6. That's a 33% gain in just a couple of weeks.
We're still in beta-testing mode. Alliance members will begin receiving alerts very soon. We plan to offer it to the public later this fall.
Since we're still in beta-testing mode, the only way you can get the initial alerts is through the Alliance membership. This is still the best value at S&A Research. You get everything we publish now, except Phase 1, and you get anything we create in the future. I know we have several new products in the pipeline...
Regards,
Matt Badiali
September 20, 2010