Masters Series: Why This Week May Be Your Best Chance at a 10-Bagger
Editor's note: Yesterday, Extreme Value editor Dan Ferris said a quick and drastic reversal is coming in natural resource stocks.
Dan is a value investor. He makes stock recommendations based on business value and results. He generally doesn't try to "time" the markets. But there's a special opportunity setting up right now that could be so potentially profitable, he can't ignore it.
Unfortunately, most investors will ignore it. And they'll miss out on incredible gains in 2015.
In today's edition of our weekend Masters Series – excerpted from the November issue of Extreme Value – Dan shares why he believes a reversal to the upside for natural resource stocks will happen sooner than most people think... and how it may be your best chance to make five to 10 times your money in stocks over the next few years.
Why This Week May Be Your Best Chance at a 10-Bagger
By Dan Ferris, editor, Extreme Value
I hate the idea of timing the market.
It's impossible to predict short-term movements in individual stock prices, let alone whole markets containing thousands of stocks. Much of the time, it's a fool's errand.
I recommend you buy, hold, and sell stocks based solely on business value and business results. But as I mentioned yesterday, there's a timing opportunity in dirt-cheap small-cap natural resource stocks right now that you should take advantage of.
It could be the beginning of the five- and 10-bagger returns I expect to see in a lot of small resource stocks over the next few years.
Let me explain...
Humans aren't built for the stock market. They LOVE to hang onto a losing position way too long. They say they'll sell "when it bounces back." Despite a brutal three-year thrashing, investors have hoped and prayed to sell their small-cap resource stocks at less embarrassing price levels.
The market doesn't care about your desire to exit with some shred of dignity. The Market Vectors Junior Gold Miners Fund (GDXJ) has fallen 34% since January 1, to all-time lows. The Market Vectors Gold Miners Fund (GDX) is down 44% in the past three months alone.
And that's where our opportunity lies. We're in the midst of one of the greatest buying opportunities in natural resource stocks of the next decade or two. The opportunity comes from a phenomenon that's well-known among the best resource investors...
Investors who lose money in small-cap mining stocks often sell their shares late in the year, so they can write off the losses on their taxes. They wait until late in the year because they remain hopeful the stocks will bounce back.
To exit as quickly as possible, desperate resource investors start accepting lower and lower bids on their shares. That pushes resource-stock prices down. After the first of the year, the selling stops and the share prices spring back to life.
The general idea is you can buy when everybody is selling in November and December and sell when they're buying early the next year. Buy low, sell high.
Since 1982, there have been 32 opportunities to take advantage of the so-called "tax-loss rally" effect in small-cap resource stocks (buying at the end of the year and selling early the next year).
It makes intuitive sense that this would start with some heavier selling after the Thanksgiving holiday. And so far, it has...
The first trading day after Thanksgiving was November 28. The TSX/Venture Exchange closed that day at 741.87. By December 17, it was down to 659.03 – about an 11% drop. It closed down 11 of those 14 trading sessions.
All this selling has kept share prices depressed... and created an excellent buying opportunity.
To test this idea, I looked at historical trades for this timeframe since 1982. I assumed we bought the TSX Venture Exchange on or before December 24 (the last trading day before Christmas) and sold on or before March 31 (the last day of the first quarter of the following year).
Using these guidelines, the trade made money 26 out of 32 times, or 81% of the time. It lost money only six times. The average gain was 15%. The average loss was 3.9%.
As trades go, that's good. Your average reward potential is almost four times your average loss potential.
But I don't recommend short-term trading to try to capture the tax-loss rally. That's not my style at all. I recommend simply initiating or adding to positions in small-cap resource stocks that you already view as attractive businesses trading at dirt-cheap valuations.
These stocks are down this year, providing excellent buying opportunities for the tax-loss rally. Over the next week or so, I recommend you take advantage of heavy selling in resource stocks.
Good investing,
Dan Ferris
Editor's note: Dan says the tax-loss selling in natural resource stocks will only last through December 31. Then he expects the rally to begin. If by then, you haven't invested in the companies set to profit the most from a 2015 upswing, you could miss out on a chance to make five to 10 times your money in the next five years. This is a once-in-a-decade market anomaly.
To find out what stocks Dan told his subscribers to buy right now – and learn more about what's happening in natural resources – click here.