Some trading ideas for a traders' market
IF day traders were to gather after work for a drink and to exchange views on
the stock market, it'd be a fair bet that much of their conversation would
focus on the current rotational punting of small-cap stocks and the best ways
to exploit this. For instance, the conversation might centre on searching out
new, low-priced warrants on underlying stocks that are significantly off their
highs or are just off their lows.
Or maybe they'd talk about the stocks which have been quietly creeping up to
new highs and the merits of chasing such counters ever-higher. Some might even
discuss a relatively simple approach to stock-picking, namely choosing those
recent IPOs which have a decent story but have slumped below their issue
prices. In a similar vein, traders would also probably exchange ideas on small,
promising stocks that are only just coming off their lows.
If such a discussion were to include new warrants, a likely candidate might
be the Federal International 2007 instrument. This was issued when the
underlying stock was bashed from a high of around 70 cents last February to
around 30 cents at the end of last year - something that wouldn't have escaped
the attention of sharp-eyed day traders. When it listed last month, the warrant
sank to a low of 12.5 cents. It now costs 18.5 cents - nearly a 50 per cent
rise in three weeks. The shares in the meantime, have bounced off their 29
cents low to about 37 cents now.
It could be that interest in the company is stirring again after it
announced two joint ventures last month via its wholly-owned subsidiary Alton
International, with partners in Indonesia and Brunei.
Is there any upside left in the warrant? Its exercise price of 22 cents
means the conversion premium is a modest 9.5 per cent while gearing is an
average two times, figures that are not overly taxing. If the oil and gas
sector swings back into play, Federal's warrant could be the best way to enjoy
a geared exposure. Note, however, that expiry is in three years and not the
more typical five.
Any conversation about stocks that have risen unnoticed to new highs has to
include FibreChem Technologies, which now sells for an all-time high of 68
cents. Having cost just 31 cents last Aug, what might some of the reasons be
for a 100 per cent gain in four months?
Apart from expansion in China, perhaps the most significant development
surrounding FibreChem recently was the entrance of fund managers NewSmith Asset
Management last October at an effective cost of 42 cents per share.
The deal between NewSmith and FibreChem seeks to raise $25 million for the
latter, dependent on FibreChem hitting certain pre-specified profit targets. It
could be that the market believes this to be likely, hence the solid price
Is there value in chasing FibreChem any higher? Possibly - anecdotal
evidence from traders is that there is strong support almost every day for this
counter, though much of course depends on whether the company really meets its
What about battered yet promising IPOs? If such a discussion were to take
place among traders, it must involve China Paper, which was offered last July
at 36.5 cents but has never crossed this mark. It currently trades for 32.5
Recall that China Paper was rated by Standard and Poor's Equity Research to
be worth around 52 cents just after its listing, so clearly, this is one
counter with a lot of catching up to do.
Last but not least is MultiVision Intelligence Surveillance, which makes
video surveillance equipment. This counter has progressively collapsed from 37
cents a year ago to 16.5 cents now, but is now showing signs of life, having
climbed off its floor of 13.5 cents last November.
It traded a hefty 14 million shares on Tuesday, always a good sign to those
who believe in the old market adage 'volume always precedes price'. Was there
some quiet accumulation of the stock on that day? Only time will tell.
So there you have it - what traders probably talk about over lunch or after
work. Of course, such banter would also question the sustainability of the
small-cap interest, especially since a significant portion of volume is being
generated in-house. Also, there's the spectre of rising US inflation/interest
rates to contend with and a weakening Wall Street which could deter full-scale
Without the retail public's entry, a long-lived small-cap rally is a dubious
prospect - and most traders know this. For now though, there's always that
other old adage to cling on to - 'make hay while the sun shines' (or should
that be 'the trend is your friend, until it bends'?).
《The Business Times》