The Stockscores Approach Through Gold Eagle Mines
Stockscores.com Perspectives for the week ending August 1, 2008
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In this week's issue:
The Stockscores Approach is based on the idea that abnormal market activity tells us something about what will happen in the future. We reason that stocks that are doing abnormal things do so because there is significant fundamental change coming and that those who know the most about the company create the abnormal trading activity in the stock in anticipation of that change.
In the July 11th edition of this newsletter, I featured a stock called Gold Eagle Mines, T.GEA and included a brief reason for why I featured it:
"Breaking through a very long term line of resistance this week, T.GEA has support at $8.50 and not much for resistance to slow it down. And, it is in a good sector of the market."
That Monday, I received an email from one of our readers. His email made some very good arguments for why the stock should not be bought:
"I always read your newsletter with great interest. However, I sometimes wonder why your approach completely ignores the basic underlying fundamentals of corporations. For example GEA is in exploration phase and have not even submitted an NI 43-101 yet. The only reason why its stock is trading so high is that a "major" has bought significant share of the company because of the geopolitical location of the property. This company will not make a red cent for many years to come. The stock price will likely decay with time until production is started up. Wouldn't it then be more appropriate if company fundamentals were part of your stock analysis?
I will appreciate your thoughts."
At the time, the stock was trading at $9.87 a share.
I replied …
"My feeling is that the market does all the work of analyzing the fundamentals and I would rather trust their opinion than my own. Keep in mind that the market moves on what the fundamentals will be, not on what they are or have been. All of the information you have outlined is public knowledge that everyone who does that kind of analysis knows. However, despite the seemingly bearish argument, the stock is breaking to new highs. Now, maybe the market is wrong to do that but I have found that the market can be wrong longer than most traders can be liquid. I prefer to trust the market's opinion, it is not infallible but I have made a lot of money doing so."
The point that I wanted to make was that it is the future that matters and that the market was predicting something positive was likely to happen soon. While most gold stocks were seeing profit taking, T.GEA was breaking to new highs and trading abnormally.
It appears that someone could not keep a secret because this past week Goldcorp announced that it was buying the outstanding shares that it did not already own. Here is an excerpt from the news:
"Goldcorp Inc. ("Goldcorp") (NYSE:GG, TSX:G) and Gold Eagle Mines Ltd. ("Gold Eagle") (TSX:GEA) today announced an agreement whereby Goldcorp will acquire, through a friendly plan of arrangement, all outstanding shares of Gold Eagle … the transaction values each Gold Eagle share at C$12.62 and C$13.39, respectively. On this basis, the consideration received by Gold Eagle shareholders represents a 19% premium to closing prices and a 36% premium to the 20-day volume-weighted average prices for each company."
Here was a case where a rational investor looked at the fundamentals, the publicly available information, and determined that T.GEA shares were over valued. Based on what was in the public realm, he was probably right.
But the market does not price stocks based on what is in the public realm. The market looks ahead and this stock was breaking to new highs because some investors knew that a deal to buy the company at a premium price was imminent.
In short, the stock market is not fair, some people get better information than others.
I spent a lot of years investing in companies that I knew a lot about and I have to say that I really did not make a lot of money doing it. But, when I started letting the market tell me what to do, I began to succeed. The market will be wrong some times, but it will never lie.
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I ran a Market Scan to look for stocks making abnormal moves to the upside with higher than normal volume, a scan I often do to find position trading opportunities. From the list of candidates, I check the charts to see if the stocks are breaking through resistance from a predictive chart pattern. I want to see optimism in the chart and enough upside potential to justify the downside risk of the trade.
Here are some stocks that I think are worth considering:
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1. PPCO
PPCO saw some strong buying interest on Friday that took it through resistance and out of its four month trading range. This stock has lots of overhead resistance to work through but with support at $2.65, the downside risk is not much compared to the likely upside to $5.50 or even $7.
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2. PWAV
PWAV is the classic bottom fishing chart pattern set up that I often write about. The stock is breaking from a rising bottom after breaking its downward trend about three months ago. Support at $3.90, if this trade work the stock should be able to get up to $6 before encountering some major resistance.
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3. USMO
USMO has really been beat up over the last year but it made a big jump Friday after stabilizing over the past six months. I would like this stock better on a pull back because the jump Friday was pretty substantial relative to the recent price movement. On a pull back, the risk reward ratio will improve. Support at $7.80.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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