In today’s Money Weekend…investments that flop…reality hits…Aurelia’s numbers disappoint…take action…and more…
The quarterly reports are coming in thick and fast at the moment. It is a time when stocks are flying all over the place and you hope your portfolio comes out the other side with more pluses than minuses.
I’ve had my fair share of wins so far with a bunch of stocks in the Pivot Trader portfolio jumping after their quarterly, but I want to spend today chatting about the one that went the other way.
Financial journalists spend a lot of time talking about stocks that are going up, but I reckon the most important thing to learn as an investor is how you deal with investments that flop.
I sent out a trade alert to enter the gold stock Aurelia Metals Ltd [ASX:AMI] two weeks ago on the back of a string of solid drill results at their various mines/prospects.
The technical situation ticked a lot of boxes for me on the monthly chart, with the possibility that momentum was shifting back to the upside playing out on the back of the great drill results.
The stock leapt from 38 cents to 48 cents at the start of the month and we bought the stock at 47 cents. The stop-loss I gave was at 25 cents. It is a volatile stock and I thought there was a lot of potential upside over the next few years, so I was happy to give the stock some room to move without taking us out.
I had seen various broker reports with expectations that production was going to jump from just over 100koz to around 135koz next year at an AISC of under $1,300.
With the AUD gold price sitting at $2,471, that meant their margins were huge and they could withstand a lot of volatility in the gold price without being hurt too badly.
They also have a lot of base metal credits which lowers their risk further by ensuring they will benefit if gold lags, and other base metals continue to rally.
They were also drilling out what many see as the best polymetallic find in the Cobar Basin in decades at Federation.
Their new acquisition at Dargues is a high-grade gold mine that is causing troubles for them but is expected to spit out around 50k ounces a year for the next five years at an AISC of $1,150–1,350, according to a recent presentation. There is also exploration upside there.
With $158 million coming in next year after costs (based on the current gold price) and plenty of exploration upside, the market cap of $570 million seemed like a no-brainer to me.
Fast-forward two weeks and the quarterly came out saying that their production had plummeted 34% and costs were up 29%. June quarter production came in at 22.9koz at an AISC of $1,848. Even worse, projections for next year’s production are 112–123koz at an AISC of $1,500–1,700.
My no-brainer trade had just taken a turn for the worse two weeks after we entered.
Aurelia’s numbers disappoint
Source: Business Insider/US Employment and Training Administration
The stock gapped down on the open to 44 cents and promptly fell to 40 cents on large volume.
I was in a pickle and needed to decide whether I should tell members of Pivot Trader to continue holding the stock with the original 25-cent stop-loss or not.
If I dumped the position early and then the stock bounced back to 47 cents next week I would look like a goose. But also, if the stock kept falling in a straight line to our stop-loss and I didn’t take the chance to get out of the stock as soon as the bad news was out, I would cause more losses for members than necessary.
I ended up deciding to dump the position then and there on Tuesday afternoon. The trade alert hit members’ inboxes when the stock was above 40 cents. Three days later and the stock is trading at 37.5 cents.
That’s not to say the stock won’t bounce back next week and rally to the upside. It could.
But the overriding thing that forced my hand to exit the position before the stop-loss was hit was that things had changed.
I had entered the position based on the numbers shown in the broker reports, but those numbers had been proven to be a fantasy.
Either the company has been telling fibs to the brokers or the brokers are throwing darts at a dartboard to guess what next year’s figures would be.
Either way, the fact was that the investment case that had led me to thinking the stock was a no-brainer was no longer true.
Therefore, I had to act.
Whether the stock turns and rallies on a soaring gold price or not is irrelevant.
Making decisions in the trading environment can be incredibly stressful because things happen that are way outside of your expectations and you are forced to act on your feet.
It is often tempting to stick your head in the sand and hope things improve down the track. But that can set you up for a world of pain as you watch your opportunity to get out with a small loss balloon into a painful hit to the P+L.
It can also wear you down if you had the opportunity to dump a position soon after the bad news came out but instead chose to hold on and then watch the stock slowly tick down day after day.
When prices are moving rapidly in response to bad news, the clock is ticking as you make your decision. Your mind is filled with a thousand thoughts as you try to work out what the right course of action is.
We can never know at the time whether holding or dumping a position will be proven to be the right choice down the track.
So the decision to exit shouldn’t be based on working out whether selling or holding is the right decision. If you follow that path it is odds-on that you will justify to yourself why holding on is the best thing to do because then you still have the hope that you will be made whole again at some point.
The overriding thought should be working out whether your reasons for entering the stock are still valid.
If they aren’t, then get out whether you’ve been in the stock for 10 seconds or 10 years.
Check out my ‘Closing Bell’ video below where I discuss the bullish nickel chart and show you why I think we could see another 30% rally in nickel before resistance is encountered.
For Money Weekend
PS: Watch the latest episode of my series ‘The Closing Bell’ on YouTube. Click here or the thumbnail below to view it.