Extra charts for Resource World article:

Do to space limitations, some charts had to be cut from the magazine article. We also include links to stock screeners at the bottom of this article with quick links.

(To download this article in pdf, click here. ) 

Analyzing Mining Stocks

Resource World Magazine

June 2007 (pages 26 - 27)

By Matt Blackman

Have you ever wondered if there was a way to quickly and easily find resource stocks that have the highest potential for gains?

How often have you bought a stock on a hunch or after hearing a “hot tip” only to watch helplessly as it drops in price? This brings up an interesting question. How do you pick stocks?

Some simply rely on recommendations from their brokers. Others rely on financial TV programs for their research. If the system you use is consistently making you money, congratulations! You are member of a small but elite group of investors.

But the reality is that playing the stock game is no simple task especially considering that most TSX Venture companies are exploration companies with little or no earnings. Pouring over financial statements and filings is usually of little help.

While no system in the world will remove the risk of loss, here are a few ideas that will help you find winners while keeping you from losing your shirt.


Figure 1 – Graph showing cyclical periods for various sectors on the Toronto Stock Exchange. Chart by www.TradeSystemGuru.com

Seasons in the Sun

Before deciding what to buy, it helps to know if a stock is cyclical. If the resource the company mines or explores for has seasonal cycles, this will often move the stock.

We analyzed various resources for the evidence of seasonal cycles. While seasonality is not the only consideration for when to buy and sell, it is important in providing a timing backdrop. It is also important to point out that seasonal cycles are not ironclad. They change over time as conditions change so it’s important to conduct periodic tests to insure they are still in vogue before relying on them to time your trades. Figure 1 shows the patterns we found in backtesting for stocks and commodities on Canadian markets.

Screening for success

Stock trading record holder Dan Zanger who turned $11,000 in a cool $42 million in 23 months in 1999-2000 tells an interesting story about a call he got from regulators a few years ago. He’d sold a rather large position in a stock that got pummeled a couple of days later. Suspecting that he might be operating on inside information, they wanted to know why he’d sold when he did.

“The stock was no longer going up and I make it a habit of getting rid of any stocks that have stopped moving higher,” he told them. It was a short phone call but clearly demonstrated his momentum policy. If a stock isn’t moving up, why own it? 

Here is our shopping list used to build our stock screener.  While the one we used (VectorVest Canada) is subscription based, there are some free screeners available that do a reasonable job of helping in the task (please see the list at the end of this article). The difference is that they require more manual work.

1)    Exchange – TSX Venture Exchange.

2)    Industries – Energy and mining-related stocks.

3)    Price - $0.05 or higher.

4)    Volume – To facilitate quick and easy entries and exits with a minimum spread cost, we want liquid stocks that                              trade an average of 50,000 shares per day.

5)     Momentum 1 – Since we are looking for short-term trades we used a weekly gain of 5% as our performance or                                   delta parameter. If you’re looking for a longer hold, use a longer period but remember that this                                      group tends to be very volatile. The longer you are in the trade, the greater the risk. 

6)    Momentum 2 – To eliminate stocks trending lower, we searched for stocks that have not dropped significantly in                                 the last four weeks.  

7)    Momentum 3 –To find stocks in near-term uptrends we added the condition that the 5-day simple moving average                                (SMA) was above the 10-day SMA. Moving averages are a great way of smoothing a volatile                                        stock and providing a clearer picture of what is going on. Stocks in an uptrends have shorter-term                                moving averages above longer-term. 

8)    Fundamental criteria 1 – TSX Venture resource stocks don’t generally have earnings, using price/earnings,                                                        price-earnings-growth or other traditional ratios don’t work. But we want to avoid                                                       those bleeding cash. To eliminate these stocks, we searched for those with rising                                                       earnings per share (EPS).

9)    Fundamental criteria 2 – To locate companies that are growing, our search eliminated companies that have                                                         declining stock growth rates (GRT).

10)    Value – Our last parameter was to find companies in which the relative value (RV) based on analyst estimates was                       increasing. For a more detailed explanation of these definitions please refer to   
                      http://www.vectorvest.com/definitions/

Last but certainly not least, we need to give each chart the visual once over. Ideal candidates should show a strong chart without too much noise.


Table 1 – VectorVest stock screener showing parameters used. For definitions of each please see http://www.vectorvest.com/definitions/

And the winners are…

Since gold and energy have similar seasons seasonal cycles that start at the end of January and end at the beginning of June, we used the period from the end of January to May 2007 for our backtest.

In all, 5 companies came up in our search on January 29. Aeroquest International (AQL), a commercial airborne survey company that utilizes sensitive equipment to search for new mineral deposits by aircraft (see Figure 1) was top of the list. Wyn Developments failed the visual chart test (see Figure 4).

In backtesting the four stocks making the cut, only one stock lost money. They gained a total 16.13% between January 23 and May 1, which is impressive considering the meltdown we experienced in the final week of February. Energold Mining (EGD – Figure 3) was the top stock gaining 32% over the thirteen week period.

Figure 2 – Aeroguest (AQL) came up in our search. Not only does it demonstrate positive chart patterns such as a bullish rounding bottom and positive flag pattern, it also possesses some impressive fundamentals in the way of an accelerating growth rate and positive earnings per share. If price breaks below a support trendline or moving average, best to exit and wait for the rise to resume. 

Figure 3 – Energold Mining (EGD) is another stock that came up in our search. This company also has positive earnings per share ($0.17) and an accelerating growth rate (GRT – red line). This stock has a relative value (RV) of 1.53 which means that based on three-year price appreciation potential computed by Scotia Capital, the stock should continue to rise.


Figure 4 – An example of a stock that made the cut on January 29 (vertical black line) but that failed the visual test. Price demonstrated high volatility and was not in a sustainable uptrend. After the search, the price was nearly cut in half. This exemplifies the importance of giving candidates the visual test before deciding to buy them. (Not included in Resource World article).

Systematic Investing

Buying on tips or hunches may work for some but it has a number of challenges. Here is an approach that takes the emotion out of the process and should help you find winners on a more consistent basis. 

It is important to utilize a stop loss no matter what you buy and sell the stock if the expected move does not materialize within a week or two. By using a system that combines the best of stock momentum, chart patterns and fundamental parameters, you greatly increase your chances for success.

Free Canadian Stock Screeners

Globe Investor
http://www.globeinvestor.com/v5/content/filters

Money Central Canada
http://ca.moneycentral.msn.com/investor/finder/custstoc.asp

Programs

Program used for this article is VectorVest Canada (Subscription based)
http://www.vectorvest.com/products/onlineca.htm

About the author:
Matt Blackman, the host of www.TradeSystemGuru.com a website devoted to discovering the best tools for traders and investors, is a technical trader, reviewer, keynote speaker and regular contributor to a number of major financial publications, websites and newsletters. He is a member of the Market Technicians Association (MTA). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

 Published with permission from Resource World Magazine