Are You Trading the Right Thing?

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Caution Buying Stocks Assuming They Are Cheap - Stock Market Investing

Did you see what I wrote to you yesterday?

The market loves it when a big powerful company does some sort of deal or transaction with a smaller one.’

And by jingoes we got an example that same day.

Hot off the press was an announcement from Zip Co Ltd [ASX:Z1P] that it now has a deal in place with eBay Australia.

The shares jumped 25% yesterday.

I tell you…these types of announcements are the thing to be hunting in the market.

You can’t get them all…but I only bother with stocks that have this kind of latent potential.

I call them catalysts.

There is a very important point to be made here. Most people buy ‘narratives’.

Today I’ll show you the difference from a previous trade…

Are you trading the right thing?

Back in June I recommended my subscribers take a trade in gas stock Cooper Energy Ltd [ASX:COE].

The rationale for the trade was that COVID-19 had smashed the stock down…but it was on the verge of activating a huge gas field it’s been developing for years. It’s called the Sole field.

All Cooper needed was their processing plant to be firing on all cylinders to get that gas to market…and a big uplift in revenue.

We entered the stock at around 43 cents.

I knew Cooper had some teething issues with the plant when we entered the trade. I reasoned this would be resolved sooner rather than later.

Some time into the trade my warning system went off.

If the processing plant stayed inactive or only partly functional, the gas from Sole couldn’t get to market. No sales means no revenue!

I pulled the trade. We took a tiny loss on it.

That was a good decision. Cooper still doesn’t have the plant fully operational.

This isn’t a criticism of the company, by the way, because energy is a complicated business.

Either way, we trade to make money, not support any individual business.

Cooper has now fallen to 34 cents…and we’d be down 20% if we stuck with it.

We’d also be wrestling with the complications that Cooper now finds itself in.

It needs more money and time to fix the plant. Gas prices are weak. And fossil fuel stocks face an increasing uphill battle to win investors.

I’m not saying Cooper can’t become a winning investment from here…but I don’t see any positive catalyst for the stock in the short term.

The stock is likely to drift along until Sole becomes fully operational and the economy begins to ramp up energy demand again.

Time is money, folks. I don’t want to tie up capital in such a situation right now.

I only trade stocks with big announcements brewing.

However…

An easy way to get caught in the wrong stock

I mentioned earlier that most people have a tendency to buy
narratives.

Let’s widen our focus for a moment.

The prime minister has been making noise about Australia’s imminent ‘gas-led’ recovery.

The energy market regulatory is warning that the east coast faces a gas shortfall in two years if we don’t have more supply brought to market.

All these things may be true…and lead to the conclusion to start accumulating a stock like Cooper.

Well, I have learned over the years that something may be ‘inevitable’ but it certainly may not be imminent.

The only thing that would tempt me toward a gas stock right now would be a high potential exploration campaign.

See the difference?

An exploration campaign can lead to a demonstrable release from the stock: the results!

That’s something I can position for.

I cannot trade — with confidence — some airy-fairy notion from the government that something may happen, at some time, if they do something about it when it suits them.

And, as I emphasised, a trade in Cooper may benefit from government policy but ultimately the outlook for the company depends on its ability to get gas from the ground cheaply and sell it at higher prices. It can’t really do either at the moment.

Again, none of this is a criticism of Cooper.

My assessment is that they’re a well-run company with some compelling assets in Victoria.

I feel for the management because they’ve put in a lot of hard work only to see COVID-19 come and demolish the Victorian economy.

But a trader’s job is to find high payoff plays with acceptable risks. The best way I know is to position in stocks on the verge of a big, positive announcement.

Think Z1P, not Cooper. I’ll show you more on this tomorrow!

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

PS: Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.