Three stock trading opportunities right now
A volatile market offers money-making possibilities on stocks where the key feature is trading volume.
I advised buying back into the stock in small bites: taking a trading mentality, you have to make sure you can handle price drops and not go bankrupt or worse, put yourself in a bad mood (don’t borrow, whatever you do).
In the eye of COVID-19, nominating Kogan among a number of stocks we tagged as speculative buys was timely — our recommendation picked some up at its post-COVID-19 low at $3.50.
The fact that we got the price right was luck. The fact that we got the timing right was not.
Who knows at any point where the price will go, but everyone knows when there is market panic.
In fact, I have been taking profits on that trade once it reached $7.21 and as you would be aware this has proved to be too early. The stock is now trading well over $10.
The market has gone on a bull run since central banks around the world started pumping record amounts of stimulus into securities. The crowding-out effect it’s had on fixed-interest markets has caused zero to negative interest rates, causing investors to rush for risk assets, the most popular and easiest to buy being listed stocks.
The value on display in mid-March is now much harder to find. What do you do? For one thing, put valuations at the centre of your portfolio decisions. Flying under the radar means there are routinely small-cap opportunities that have been ignored. And take trading opportunities when they are sitting there.
When you have a heavily traded stock such as Kogan, investors rush in and out as if they were ATMs. Which, to some extent, they are. In the depths of the global financial crisis, one of the only sources of cash was the stockmarket. This is an important point.
Situations such as Kogan offer a high-risk, momentum-based game, but the rewards are there for the brave.
The first thing you need in a stock is volume. If you don’t have enough buyers and sellers, you can’t get in and out quickly and, most importantly, cheaply. This might rule out many small caps, or stocks with market caps below $600m right now, but some stocks in consideration were valued at below those levels when the market fell in March, which brings me to the second requirement.
We need to find stocks whose price has been shoved violently up and down by sentiment. They can be growth stocks whose valuations aren’t anchored to traditional metrics for earnings and hence become barometers for the market. The discount rate and growth rate is unknowable, and sentiment is critical.
Many stocks are still in what I would describe as the “crash range”. In many cases this range will hold until you get enough fundamental information (real sales, profit margins, dividend news) on which to generate an idea of what the real value of the company is.
Two other stocks I rate as tradeable in the market are Seven West Media and “buy now, pay later” operator Zip Co.
The share price of Seven West Media whipsawed between 6c and 12c in April as sentiment ebbed and flowed. It now sits at the mid-point. A legacy issue is that it did have more than $600m in debt versus a market cap of $125m. This creates opportunities to trade.
Remember, in finding stocks that are candidates to trade we’re not necessarily looking for great companies, just ones that move up and down a lot.
On the debt issue, Seven West has had something of a reprieve, having paid off $120m and it doesn’t have to pay off any more until November next year.
Zip Co is likely to trade in line with sentiment in the same vein as Afterpay, now one of the most highly traded on the sharemarket and is focusing attention BNPL stocks. Zip has a post-COVID-19 trading range of $1.13-$3.74, achieved on very heavy volume.
The individual characteristics of Kogan, Seven West Media and Zip are critical over the long term, but when trading, you’re only interested in the next move in the stock — get it right and it can be lucrative under these conditions.
Richard Hemming is an independent analyst who edits undertheradarreport.com.au
r.hemming@undertheradarreport.com.au
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Pure play online retailer Kogan is a lively stock at the best of times. But back in mid-March as it fell 50 per cent to under $4 who knew where it was going to go? It could just as likely have gone to $2 or as high as $6 in the short term.