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    Small Stocks for Big Profits: Generate Spectacular Returns by Investing in Up-and-Coming Companies
    Small Stocks for Big Profits: Generate Spectacular Returns by Investing in Up-and-Coming Companies
    Small Stocks for Big Profits: Generate Spectacular Returns by Investing in Up-and-Coming Companies
    Ebook367 pages4 hours

    Small Stocks for Big Profits: Generate Spectacular Returns by Investing in Up-and-Coming Companies

    By George Angell

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    About this ebook

    Praise for SMALL STOCKS for BIG PROFITS

    "George has done it again with Small Stocks for Big Profits. His in-depth experience is invaluable in helping traders explore stocks that are $5 or less, without getting caught up in the fly-by-night idea companies that plague this investment level. He shows you where to look for opportunity and more importantly how to lock in profits in this little understood investment arena. Impressive!"
    —Noble DraKoln, author of Winning the Trading Game

    In Small Stocks for Big Profits, George Angell outlines an effective strategy for finding up-and-coming companies with the potential of earning you incredible returns. Filled with in-depth insights and practical advice, this reliable resource shows you how using a combination of technical and fundamental analysis-along with other essential tools-can put you in a position to profit from the explosive growth of smaller companies with undervalued, low-priced stocks. Page by page, you'll discover how to incorporate this proven approach into your own investment endeavors as Angell discusses how to use it to select, place, and exit trade after profitable trade.

    Small, speculative stocks are quickly beginning to appear on the radar screens of investors around the world. If you want to make the most of your time in this lucrative market, pick up Small Stocks for Big Profits today and put its invaluable insights to work for you.

    LanguageEnglish
    PublisherWiley
    Release dateOct 14, 2008
    ISBN9780470437643
    Small Stocks for Big Profits: Generate Spectacular Returns by Investing in Up-and-Coming Companies

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      Small Stocks for Big Profits - George Angell

      Preface

      About 10 years ago, I had the luckiest day of my investment career. I received a phone call from a fellow in Las Vegas who made a living investing in small-cap stocks. We discussed the markets for a bit, trading background information. Did I ever come out to Las Vegas? the caller inquired. Sure. I enjoyed an annual trip to the gambling capital. I liked to bet on sports and the occasional craps game. Indeed, I had a trip to Las Vegas already planned for the following month. He suggested I look him up. We could have lunch. I made a mental note of our conversation and went back to whatever I was doing.

      Five weeks later, I took a cab over to his Las Vegas office just before noon. We had lunch. And, as our discussion about the markets continued, we later had dinner. The entire day had been taken up with talk of his—and now my—foremost investment passion, the buying and selling of small stocks. This was an eye-opening event for me. In the years that followed, we invested in approximately a half-dozen stocks. Each of them proved to be a winner. And I mean a big winner. One, a small Vancouver-based mining company known as First Quantum Minerals (FM.TO), later soared from just 80 cents a share (where we bought it) to over $100 a share! The other stocks—mostly mining, gaming, biotech, and oil issues—returned more modest gains, but never failed to at least quadruple or quintuple in value. He was a firm believer in loading the boat. Constantly buying up 9 percent of the shares of these little-known companies (in order to stay under the 10-percent reporting limits for insiders), he usually owned a larger piece of the company than the key officers and board of directors combined. Needless to say, he earned millions. I made less, of course, because my investment commitment was on a more modest scale. But just recently, one of his little gems rose a whopping 42 percent in one day on discovery of gold on its Ontario property. It is getting so that I’m not even surprised by these spectacular winners anymore. But I know one thing: I could never find anyone to pay me this kind of money that I’m making in small stocks.

      What is his secret? There isn’t any secret. It is simply hard work. Being a confirmed dyed-in-the-wool value player, he seeks hidden value in everything he buys. Quite often, these hidden gems have value written all over them, but most hapless investors are too blind to the possibilities to risk taking a chance on an unproven, low-priced stock. You don’t believe me? Turn on CNBC and monitor the stocks that they highlight all day long. You’d be hard-pressed to find one that triples or quadruples in value over six months. Yet these kinds of percentage gains are routine in the world of small stocks. Moreover, for a variety of reasons, the bonanza in small stocks is just beginning. In the coming three years, we should see unprecedented gains in the prices of small stocks as entrepreneurs seek out new opportunities in the fields of alternative energy sources, biotech advances, and technology. These modern-day explorers will be requiring financing by issuing shares in new companies that will undoubtedly see their fortunes—and share prices—grow. We are only at the bottom floor, the very beginning, of this exciting time in the investment world.

      For the would-be investor in these up-and-coming stocks, the challenge remains daunting. How do you pick a winner? The fact is: Many of these opportunities exist in start-ups, unproven companies that have never earned a dime before. Anyone can ask their broker to recommend a dividend-paying blue-chip stock. But how do you put a price on someone’s dream? Needless to say, there are people out there building a better mousetrap. I can remember back in the 1960s when a college professor told our class that hi-fi couldn’t get any more advanced. Recently, I purchased an iPod the size of a pack of matches that holds virtually my entire CD collection—a collection, incidentally, that occupies a sizable portion of the shelving space in my media room. Who says the better mousetrap builders aren’t out there today, utilizing new technologies that were unheard of even several years ago? The challenge, therefore, becomes one of finding these hidden opportunities and putting our money on the line. The payoffs will be impressive.

      WHY ANOTHER STOCK MARKET BOOK?

      I’ve been reading books on trading stocks, futures, and options for more than 40 years. Indeed, I’ve even written close to a dozen books on Wall Street. But not one of them prepared me for what I learned in the first two weeks as a pit trader on the floor of one of the Chicago exchanges. The theory is one thing; the reality of risking your money is quite another.

      Not long ago, when I glanced through the pages of a number of investment books at my local bookstore, I noticed how useless most of the well-meaning advice was for the beginning investor. The books told the reader to diversify, as if that were the answer to finding the best stock. This, in fact, is known as the spaghetti technique, in which you throw a bunch of wet spaghetti against a wall to see what sticks. Similar investment books sang the praises of mutual funds or dollar cost averaging, in which you willy-nilly keep buying regardless of the wisdom of your stock selection. This latter piece of advice is given in hopes that the market will subsequently rise. What about not purchasing a bad stock in the first instance? There are a variety of ways in which stocks tell their stories. One is when a formerly quiet company suddenly experiences overwhelming share volume. There are other technical clues. But a stock’s story may be highlighted in something as simple as excessive insider buying by company officers and directors. These individuals, who are closest to the company, are often the ones who buy and sell significant blocks of shares just before a market-moving event. There are ways to read the footprints of the insiders for those in the know. One such good indication is worth a dozen guesses. When you think about it, you need only a few good stocks to make a significant amount of money.

      In the pages that follow, I’ve tried to outline some of the best ways to find undervalued, low-cost stocks. If you are a believer in the conventional wisdom, chances are you will have to turn everything you’ve learned until now on its head. As in any business, the cream rises to the top; only the few win the lion’s share of the profits. The rest scramble for what’s left over. The reason for this rests with human psychology. It is not that most people want to lose money in the stock market—only that most people are so risk-averse that they almost guarantee a negative outcome. Given a ground-floor opportunity, most people would rather wait until their profit is a certainty—a virtual prescription for trading losses. Once everyone knows a stock is worth buying and has done so, it is inevitable that the stock will decline. Witness the enthusiasm for buying stocks at the top.

      THE SPECULATIVE VERSUS THE SURE THING: THE CRAY RESEARCH STORY

      Most of today’s stock market successes were created by companies that started small. The reason you keep hearing about the Microsoft millionaires is because they purchased or were given stock when the company was in its infancy—and dirt cheap. But the opportunity to make the real money in a stock like Microsoft is now over. Such a stock, which has undoubtedly minted hundreds of millionaires, is strictly a ho-hum affair today. The bloom is off the rose. The big opportunity has passed. The rule is you have to get there early.

      The value of finding one good speculative stock comes home to me when I think of this true story that was told to me by a former New York University student who went into the brokerage business. After graduating from business school, my friend became a stockbroker in New York City. After working in New York for several years, he decided to take a position with a brokerage firm in La Jolla, California. New to the West Coast, he took what business came his way while building his book, which later consisted of strictly high-net-worth individuals willing to put up millions in investment funds. At any rate, a retired schoolteacher appeared in his office one day, looking to invest $10,000 in the stock market. The broker recommended an investment in an up-and-coming high-tech company known as Cray Research, a computer company. My broker friend explained that on the one hand Cray was a risky investment and the teacher could lose all his funds. On the other hand, the broker said, there was a considerable upside. At the time, little-known Cray traded on what was known as the over-the-counter market. This was a market for lesser-known stocks that didn’t qualify for the Big Board. Years later, of course, the over-the-counter market morphed into what is known today as the Nasdaq.

      After careful consideration, the schoolteacher agreed to buy the stock and wrote a check for $10,000. The stock was purchased and placed in the teacher’s account.

      Several years passed.

      Focusing on high-net-worth individuals, the broker lost contact with the schoolteacher and began seeking out promising stock opportunities for his wealthy clients. His business grew and he prospered. Finally, after a number of very successful years, the broker decided he wanted to start his own public company and get out of the brokerage business. But before he could leave his job, he had to call all his clients and tell them about his impending move.

      That’s when he called the schoolteacher.

      Oh, it’s you! the teacher responded when the broker called. I’m not interested in buying any more stock.

      The broker explained that he wasn’t suggesting the teacher buy more stock. He just wanted to tell him that he was leaving the firm and another broker would have to handle his account.

      What are you talking about? the teacher demanded. The stock went to zero. It is not even listed in the newspaper anymore.

      Zero? responded the broker. What are you talking about? You own Cray Research.

      Well, it’s not in the newspaper.

      Not in the newspaper? said the broker. Go get the newspaper and bring it to the phone.

      The teacher did as he was told. The broker explained that the stock had split numerous times over the years and was now traded on the New York Stock Exchange—not over-the-counter. In fact, the teacher’s shares were now worth well over a million dollars. The broker explained that he would be happy to sell the shares and place the funds in a mutual fund. The teacher couldn’t believe his good fortune. For years thereafter, the broker received big baskets of fruit and candies every holiday season from his former client, who greatly appreciated his investment advice.

      The broker later learned that the million-dollar bonanza changed the retired schoolteacher’s life. It was a story he told with a great deal of pride.

      HIDDEN GEMS

      Finding similar opportunities is what this book is about. Not long ago, I went back and checked the performance of some of the stocks I recommended in my book, The Best Small Stocks for 2007 (TradeWins Publishing). One mining issue, FNX Mining (FNX.TO) has gone from $10 a share to $30 a share. Zix Corporation (ZIXI), a stock that highlighted its potential by a number of volume spikes, has doubled in value this past year. Beas Systems (BEAS), a software maker, has risen smartly from under $14 to over $19 a share. Equinox Minerals (EQN.TO), a Toronto Exchange-traded mining issue, has risen from under a dollar to $4.70 a share. And, of course, Pelangio Mines Inc. (PLG.TO), which I purchased at about a dollar a share and was my stock of the year, is now trading above $4 a share. What these issues all have in common is that they were small, speculative stocks, with very little following in the investment community. They are now appearing on the radar screens of investors around the world. The key was identifying them before the crowd even noticed.

      In the pages that follow, I spell out some of the key elements necessary to win in the market. Not only must you understand what stock to buy, but you must understand how to buy as well. Timing is everything in the market. Moreover, a premature purchase of a stock need not be a disaster. You can always average down, which is a time-honored tradition among stock market professionals.

      I place a lot of emphasis in the book on entry techniques. The general rule is: The market will tell you when a stock wants to run. You simply must know what to look for. Moreover, once a stock tips its hand, it also offers you an opportunity to get aboard at a low-risk price—if you know what to look for. Take a quick look at Northgate Minerals Corporation (NXG). This was a stock that was a screaming buy at $2 a share (with virtually no downside risk). It is now trading at $3.35.

      A lot of the book deals with time-tested support and resistance calculations. These are the same techniques that professional floor traders use—and you should as well. A stock forms a support pattern for a reason. Investors think the stock is a good value at that price. That’s why it makes so much sense to always know the support and resistance levels.

      The issue of money management is addressed in a straightforward fashion. Anyone can be reckless and make money on a few lucky trades. But the professionals prefer to risk as little of their initial capital as possible, taking capital off the table and letting their paper profits ride. You’d be surprised how confident it makes one feel to know that regardless of the subsequent movement of the stock, you won’t be taking a loss—because you got your seed capital out on the first move up. In a nutshell, professional traders become very proficient at doing one simple strategy. Then they repeat that investment strategy over and over again. The low risk is the key to their success.

      Every successful trader will tell you that he or she has made a lot of mistakes over the years. In this department, I am no exception. But I find learning from mistakes is one of the best teachers around. Success tends to breed overconfidence. But failure requires that you examine your shortcomings and do something about them—if you intend to survive. There are a number of red flags that serve as a warning that something is wrong. I discuss some of them in the book. Unfortunately, however, the real lessons very often have to be learned firsthand, as you will see if you trade stocks for any period of time.

      Whenever possible, I’ve tried to illustrate the principle with an example of an actual stock. In many of the examples, if I’ve traded the stock, I’ll try to add my personal observations about what happened—for better or worse. I’m a big believer on stepping in when most other investors are heading for the exits. That’s because I’ve had years of experience watching people panic at precisely the wrong time. There is a certain mob psychology that exists in the markets. Learn to understand it and you can be the one person standing amid a scene of wholesale destruction. It is especially gratifying to buy a stock near the bottom of its move only to see the price later skyrocket. Timing, indeed, is everything. It is so important that I’ve devoted an entire chapter to timing alone.

      The challenge for the investor is to understand a stock’s story long before the investment community becomes aware of its existence. In the beginning, you won’t always know what you have. But if you work at it, you will find that a company’s real value rests with its potential and not what the analysts and pundits are talking about. That’s how I bought First Quantum Minerals (FM.TO) for about a buck a share before it headed to over $100 a share. It was also how I spotted Gigamedia (GIGM) before it skyrocketed. Remember, every stock has its story. It is just a question of figuring out which one is going to prove a bonanza down the road.

      For the novice trader, I’ve included a crash course in technical analysis. Knowing the basics of technical analysis is vital to becoming a winning investor. Understanding chart patterns and time and price calculations is also important if you want to understand when to buy a stock and—significantly—when to sell. I devote a section to the most reliable patterns to look for. But the thing to remember is: A professional rarely guesses about a stock because he or she knows where the stock is heading based on the price patterns, which are clearly knowable to the discerning investor.

      The longest chapter is devoted to exploring those strategies that are most likely to help you win. There are a number of pitfalls that you have to look out for. As you undoubtedly know, differences of opinion make the market. But it is downright uncanny how inaccurate most Internet-based opinion makers can be. My experience in buying Best Buy illustrates this phenomenon completely—right down to the point that these experts were saying Warren Buffett didn’t know what he was doing. People love to buy a sure thing, of course. That’s why I’m often out of a stock long before its name ever appears on CNBC.

      Stock selection is mostly about separating the weak stocks from the strong ones. For this reason, I cover how to develop trading filters and how to use them. You’d be surprised how fine-tuning your strategies can put you in the winner’s column almost immediately when you invest in a stock.

      I devote a short chapter to the basics of capitalizing on initial public offerings. This is a specialty that may appeal to some investors, but, for most, it is better left alone.

      One of my favorite topics is that of insider buying. When you have the combination of a rapidly falling stock price coupled with a massive buying program by someone within the company, it is almost always a sign that the next move is up. Shaking people out of the market is another time-honored tradition of the stock market. The problem is that if the smart money is buying, it is the worst possible time to sell. You’d be surprised how often the so-called fundamentals change overnight when negative news drags down a stock’s price. The insiders know what is going on within a company. For them, buying or selling the stock isn’t a speculative venture; they understand what is coming—sort of like when George W. Bush sold his shares in his small oil company right before the massive losses were announced. Fortunately, there is a way to track the footprints of the insiders.

      Finally, there is a brief discussion of stock options and how to use option volume to pinpoint when to buy or sell a stock. You can also use options to obtain heightened leverage in a particular stock.

      The Road Map chapter tries to tie everything together. Notice the price capitulation in Pelangio Mines Inc. at 30 cents. I own that stock, and today it is trading above $4 a share! Sometimes the best reason to trade small stocks is because it is simply so much fun! Here’s to profitable trading.

      NOTE

      While every effort has been made to report the names and prices of the companies listed in this book accurately, it is important that the reader understands that nothing written here is an endorsement or recommendation to purchase a particular security. The key to investment success is timing. With a manuscript written so many months before the finished book gets into the reader’s hands, it is impossible to present the current status of a particular stock as a buying or selling opportunity. Therefore, take the examples as they were meant to be used—as illustrations of specific strategies and nothing more. With a little work, the reader should be able to uncover his or her own examples.

      Lastly, the material presented here is intended as a jumping-off place for the investor interested in buying and selling small stocks. It is not the final word. Neither the author nor the publisher should be held liable for investments made by readers of this publication since no legal, accounting, or other professional services are intended in this work.

      CHAPTER 1

      Making Money in Small-Caps

      By almost any benchmark, small-cap stocks are the new value on Wall Street—and, increasingly, on its counterpart in Canada, Toronto’s Bay Street, where some of the highest fliers of the low-priced stock world trade. What’s more, in the years to come, you’ll find these hidden gems, these proverbial diamonds in the rough, leading the indexes higher. I say this with barely concealed enthusiasm because, given the current beaten-down investment climate, it is inevitable that the cycle will change and the small-caps will explode higher.

      Small-caps present a ground-floor opportunity—one that doesn’t present itself every day. We all know that expectations are the highest at market tops. But right now, because market expectations are less than stellar, the conditions are ripe for the astute investor to gobble up low-price shares in dozens of beaten-down companies whose stocks are selling significantly below their true value. Cheap stocks, depressed stocks, penny stocks, small-cap stocks—whatever you want to call them, they are the next new big thing. The question is: Will you get on at the ground floor, or would you prefer to wait until these shares sell at penthouse prices?

      SMALL-CAPS: THE NEXT BULL MARKET

      It’s a simple premise: With the indexes already

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