Fundamental traders of speculative stocks

[doctorj]

This is a question to fundamental traders of speculative stocks.

I understand how to value companies that are producing an income or companies that have non-cash assets, but the question of how to value (for example) the likes of explorers without a defined resource always escapes me as the risk premiums to attach to such companies is so subjective and is likely to influence the final valuation more than what you're actually attempting to value.

In the case of stocks with significantly valuable assets or those that produce an income, there is always going to be a push to some intrinsic value.

However for companies with nothing but a dream, a drilling rig and good intentions no matter how good it is, there is no real intrinsic value for the market cap to push toward. And this is evident everywhere - companies that have seemingly fantastic prospects languish for years while those that are no further advanced, significantly appreciate with no apparent differential.

So, for a fundamental trader, there are no shortage of opportunities to identify companies where an arguement could be made that they are materially undervalued. After entering one of these companies, how do fundamental traders of speculative companies manage their opportunity cost if the SP does nothing for extended periods? Are they happy to hold?
I get the impression that at the moment, things are relatively easy. There's a lot of speculative money floating around at the moment looking for a home and as soon as one of these little companies get some press (eg a forum) people start buying in and they move very quickly. How do people that trade like this (eg. Young Trader) plan to trade when things aren't so good? Abandon the philosophy or extend their time frames?

Yes, I know this post seemingly has no point, but its something that i've been pondering of late. Fundamental traders of speculative companies seem to be highlighting new companies here at ASF every day that they claim are significantly undervalued (with reasonable success I might add) and I'm beginning to think there is no end to such opportunities. So feel free to ponder along with me and share your thoughts on the matter.

 

[nizar]

YT, I think this one is yours!

 

[yonnie]

This is a question to fundamental traders of speculative stocks.

I understand how to value companies that are producing an income or companies that have non-cash assets, but the question of how to value (for example) the likes of explorers without a defined resource always escapes me as the risk premiums to attach to such companies is so subjective and is likely to influence the final valuation more than what you're actually attempting to value.

In the case of stocks with significantly valuable assets or those that produce an income, there is always going to be a push to some intrinsic value.

However for companies with nothing but a dream, a drilling rig and good intentions no matter how good it is, there is no real intrinsic value for the market cap to push toward. And this is evident everywhere - companies that have seemingly fantastic prospects languish for years while those that are no further advanced, significantly appreciate with no apparent differential.

So, for a fundamental trader, there are no shortage of opportunities to identify companies where an arguement could be made that they are materially undervalued. After entering one of these companies, how do fundamental traders of speculative companies manage their opportunity cost if the SP does nothing for extended periods? Are they happy to hold?

hi doc,

dont think any fundamental trader would buy a speculative stock with an oil rig and no earnings.
I am in this type of stocks, but I always look at least at their debts, running costs per quarter and cash position before jumping in.

What to do when the company might not be doing much for extended periods goes for any type of trader/investor. When do you fold? For me my patience wears thin after a month.

I get the impression that at the moment, things are relatively easy. There's a lot of speculative money floating around at the moment looking for a home and as soon as one of these little companies get some press (eg a forum) people start buying in and they move very quickly. How do people that trade like this (eg. Young Trader) plan to trade when things aren't so good? Abandon the philosophy or extend their time frames?

When the stock market is in the doldrums, this type of trader will languish, because even with good company news, price will hardly move.
Time to look for another strategy as circumstances has changed.

Yes, I know this post seemingly has no point, but its something that i've been pondering of late. Fundamental traders of speculative companies seem to be highlighting new companies here at ASF every day that they claim are significantly undervalued (with reasonable success I might add) and I'm beginning to think there is no end to such opportunities. So feel free to ponder along with me and share your thoughts on the matter.

Just wonder if they`re still there in 5 years time

 

[nomore4s]

Good question doctorj. I've thought about these things as well. It will be interesting to see some of the replies.

While I'm happy to dabble a certain amount in the specs, I still need some sort of confirmation off the charts, and I still set stops using the charts, if I get stopped out I can re-enter later on. I just don't have the funds to hold on to losing stocks for too long even if I think in the long run it will pay off, there are plenty of stocks moving up now that I could be on.
I will admit that I do sometimes miss the boat doing it like this but I just don't have the fundie skills of someone like YT(although I don't think many people do in this end of the market) and like doctorj said there are plenty of opportunities atm.

I also only have a small amount of my small capital on the fundie specs, the rest is traded on breakout/chart type trades with tightish stops.

The thing I've also noted about these type of traders/investors is that they tend to be younger types (no disrespect to anyone here just an observation), meaning that -
a) they have only been trading during this amazing bull run
b) they are probably willing to take more risks.
Now I will admit I also fit into both a & b.

 

[rederob]

fundamental trading of speculative stock is not moronic, but oxymoronic
speculative means its fundamentals don't exist
speculative stocks might have "promise" or "potential"
but they also have risk
while I like BLG as a spec play it may be years before it has a commercial product
the risk is that another technology could gazump it
otherwise it appears to have very little downside

 

[questionall_42]

Just some musings on this very interesting topic... ...

I believe that there are many who take a punt on speccy stocks based on a fundamental view (or merely a hunch) and hold, and hold, and wait... ... They are not the traders but the regular shmos who know little in the stockmarket and want to have a bit of gamble.

For many, investing has a long term horizon (years). And investing money is really spare "play" money; if you have a steady income with good prospects, then any fundamental speccy investment can take years, because you don't won't to take the time to check a chart everyday or here about the latest announcement that "may" set the stock running. Add a lot of luck, and you
could have a winner.

One could punt on speccy stocks taking a macro approach (economic or commodity trends) over a long period and divide your investment pie into X number of stocks in a sector... ...

I have been asked to invest $20K for my sister who has a time-frame of min 5 years. I don't want to actively manage it; maybe once every 1-2 months spend an hour seeing that everything is alright. In my mind, this is the perfect situation for some speccy fundamental analysis and wait and hold... ...

Just some thoughts late on a sat night...

 

[hangseng]

Just a thought

Oxiana was a highly speculative stock in 1999 at about .036 - now $3.50
KZL was regarded as highly speculative in 2000 at .28 - now $7.05
GBG is still regarded as speculative and you could have bought at 9c in Sept 2005 - now .905
AAR is still regarded as speculative (even though it is producing) and you could have had that at .054 a few months ago - now .12

I like "speculative stocks" and yes they can have fundamentals, all of the above being evidence of same. Calculated risk definately, gambling I think not.

 

[brendan87]

What about expected present value of future cash flows? Can still be applied here - albiet with more generous assumptions.

For example, take an mining exploration company.

Lets say we have a discount rate and some assumptions about the future price of the commodity they're exploring for (at this stage - the same as typical PV analysis).

Next you might want to look at their tenaments, a geologists report or similar developed projects in the area etc and you work out:

a) how likely you think the exploration with result in a discovery an an economicaly recoverable resource (to make things easier, try and come up with some estimate of the probability of finding and devleoping a mine of a similar size as a mine developed in the area that mines the same mineral). This is where the most "guess work" comes in. Although - probabilities can be estimated using drill success rates of similar more advanced projects in the area, assessing the geology of the tenements, looking at surrounding/nearby mines. Alternately, you could assume the exploration company will find a recoverable resource equal in size to say, the largest mine for that metal/mineral in that region/country - and then adjust your probability downwards. Or just come up with an arbitrary figure based on everything you know.

b) estimate the costs and revenues of mining that resource- there is usually enough information to do this, because you look at the costs and revenues of the similar mine used as an assumption in (a). Apply whatever inflation rates, costs and commodity price adjustments necessary.

c) simply discount the expected future cash flows.

This can work. It can explain how uranium IPOs have such surprising valuations despite not being able to produce, often the best case, for 10+ years. Because you "assume" the company will find a resource similar in size to one of Australia's exisitng mines - put the chances of it happening at 0.5% . . . you get somewhere close to their share prices.

Essentially you could apply this to biotechnology companies as well, and although it is equally as much guess work - if you know alot about the field it is possible to calculate your "expected value" - which is how large exploration/research companies allocate thier R&D budgets: expected discounted benefits versus capital outlay (today).

Any thoughts?

 

[Knobby22]

Exactly right.

And the small companies are not looked at like the big companies due to size and liquidity, so you are more likely to be successful.

 

[happyjack]

Has anyone ever sat down and worked out how many holes were drilled in a particular field and how many of them were good? ie success rate. depth of hole and the contract driller, then with the first two you could work out how many holes you are going to drill and what they would cost , If the company does not have that much money then you are out

The driller of course is important, some of the clowns push so hard they get 50 feet of core for 100 meters of hole because they push so hard and seal the gas/water/oil off and what would have been a good productive well is sealed off because the driller stuffed it,

Obviously the stats would show which contractors are not worth going with, if a feild is giving 1 in 3 and a particular driller on that field is scoring 1 in 10 then something is wrong and you avoid any company using that driller

Normally the government would have maps, stats and details of all drill holes, what minerals were found and at what levels etc So it is probably only a matter of time before they get the stats onto websites.

Oh well something to think about anyway!

Happyjack