Sunday thoughts on when to sell....

Its Sunday again, time to sit back and relax and consider those things in the market that daze and amaze, astound and confound.  The things that both thrill and send chills down the spines of retail investors.  Today I'm going to write about selling, not just any selling though....about selling after you've made profits.  

I've put forth some long ideas here at Avoid The Bag that have made some nice gains:

Lithium Americas at $0.75 cents CDN now trading over $0.90 with  gusts up north of a dollar.  

http://www.avoidthebag.com/2016/04/lithium-americas-cup-and-handle-forming.html

Eguana Tech when it was $0.15 CDN now trading around $0.30   

http://www.avoidthebag.com/2016/05/the-lure-of-clean-energy-eguana.html

Xenith Bankshares (pre-merger when it was HMPR) at $1.81 now trading for $2.26.

http://www.avoidthebag.com/2016/05/hampton-roads-bankshares-hmpr-great.html

Resverlogix at $1.25 CDN now trading at $1.53

http://www.avoidthebag.com/2016/06/resverlogix-phase-iii-clinical-trial.html

I also wrote about Aurora Solar at $0.15 CDN and it is currently trading for 10 northern coppers: http://www.avoidthebag.com/2016/07/the-lure-of-green-energy-aurora-solar.html

Four out of those five stocks that I've written bullish opinions about are green, which means there is the potential for profits.  Not bad....gains are good, but until those gains are crystalized by selling, there is no profit.  

My legion of loyal fans (all three of them) have probably come across someone who's owned a stock that dropped in value and heard them say something like:  "Its not a loss until I sell".  And that is true, but it also works when a stock climbs.  There's no profit made until the shares are unloaded. Paper gains and paper losses are notional and only become real once a stock is sold.

But selling is hard, and I will suggest it can be even harder after big gains than after a stock has dropped.  Why?  Psychology, and the triumvirate of emotions that seasoned market players know oh so well: Fear, Uncertainty and Doubt....or FUD for short.

FUD doesn't just rear its head when a company's stocks falls, it also pops up after a stock has climbed.  You've bought my favorite hypothetical stock ABCD at $1.00 per share when things were quiet and volumes were light.  You've read all the filings, the PRs, all the industry stories related to ABCD, you even know the histories of the CEO and other board members.  

Then ABCD starts attracting attention, volumes pick up....it getting mentioned in social media. The PPS starts climbing, to $2 then $3....before you know it ABCD is trading at $5 per share and you're sitting on a 500% paper gain.  Its not a capital gain though because you haven't sold.

And here's where FUD kicks in.  Let's say you bought 5,000 shares for an initial investment of $5,0000....and now those same 5,000 shares are worth $25,000 for a paper gain of $20,000 if you sell. But things are obviously going well now, better than they were when you bought shares at $1. Maybe there's analyst coverage, or a newsletter has picked up ABCD and is touting it to its readers. Those storming into ABCD are all over social media with predictions of $10 and $20 valuations to come.

What if they're right?  What if ABCD does go to $10...or even $20.  Those 5,000 shares could be worth $50,000 or maybe even $100,000 for monster gains in other words.  A new car, a bigger and better house....that dream vacation.  Sure $20,000 profit is incredible, but damn!  Won't you be kicking yourself if you take $20,000 when you could have had $95,000 in profit?

Time to take a deep breath.  A lot of people start investing with the goal of making huge "life changing" returns.  The stock market is the epitome of the Dream Factory.  And people do fall in love with their stocks, digesting every tidbit of news and opinion that hits the internet.  Whether its something from a respected analyst, a Seeking Alpha or Motley Fool author, or some moron like me with a blog.

I will suggest that you consider, when a stock has made big gains, whether or not its a profitable company.  Of the five stocks I mentioned at the beginning, four of them are not....

Lithium Americas is a junior mining company developing a Lithium mine in Argentina, Eguana makes inverters for battery storage power systems, Resverlogix is trying to develop a drug that will reduce major adverse cardiac events and Aurora is in the solar panel space.  None of these four companies is profitable.  Only Xenith Bankshares has actually achieved positive earnings.  

Next I will suggest you look at recent volumes.  Has trading in the stock exploded or is the PPS climbing higher and higher on light volume?  I have a rule of thumb, if between 5 and 10% of the float trades in a day, I start thinking about looking for the exit.  And that is doubly true if higher than historic volume happens in tandem with lots of Promotion, News and Hype.  Especially when its a company with a history of using shares to fund operations, pay salaries and keep the lights on.

My ultimate goal with this blog is to help retail investors understand the forces at play.  And I will suggest that these forces are most active when a stock has made big gains.  The goal of the industry players, in my opinion, is to get retailers buying when stocks are high while the true professionals sell.  And if a retail player is lucky enough to have bought in early and is sitting on big gains, to keep that retailer holding tight.....to fall in love.

I'll end with my favorite piece of market wisdom:  Nobody ever went broke taking profits.  And if the stock you sold at a profit keeps climbing, and you miss out on even bigger gains?  Then cry into the money you made.  

Good luck

HMPR - Golden Cross

I'm not one to draw my hand into a fist and start pounding the table about any stock, its not my style. But if I was forced to pick one stock to pump, then HMPR would be the one I would choose.

Are there other stocks out there that will make bigger gains in the near term?  Oh yeah, much bigger...but most (and possibly all) will be in money losing companies playing the Promotion & Hype game to lure investors in on rosy projections about the future.  

If you've been watching the markets for any length of time you've seen it happen, and maybe you've been caught in one or more yourself. They soar, investors load up as they climb, convinced they're gonna be rich....then BAM, the bag closes and the PPS collapses.  Sometimes it takes a few months, sometimes a few weeks, and still other times its just a matter of days.  

HMPR doesn't qualify as that type of investment for me, because they aren't paying cheeseball promoters to interview the CEO, nor are they being hyped by email blasting chop shops and twitter morons trying to pass themselves off as stock experts.

Hampton Roads Bankshares is, (as the name implies) a bank, and it is profitable.  

If you like a company that puts out a news release for any and every little event....then move along, you won't like HMPR.  That's not to say there isn't news, just not the usual fluff you see so often with speculative money losing companies.  Hampton Roads Bankshares has a proposed merger with Xenith Bankshares that is expected to receive shareholder approval on July 29th. 

http://finance.yahoo.com/news/hampton-roads-bankshares-inc-xenith-212500712.html 

Perhaps in anticipation of that news the stock has gone on a bit of a run.  I've written about Hampton before, back on May 11th when the PPS was $1.81:

http://www.avoidthebag.com/2016/05/hampton-roads-bankshares-hmpr-great.html  

It closed Wednesday July 27th 2016 at $1.98 and now the chart shows the 50 day moving average poised to cross over the 200.  Followers of Technical Analysis (or TA for short) refer to this as a "Golden Cross", when a faster moving average crosses over a slower one.  And for devotees of TA the "goldenest" of golden crosses is the 50 over 200.

Full disclosure to my devoted blog dogs, (yes all three of you) I am a shareholder so my opinions are not without bias.  And while I believe HMPR is a solid "buy and hold" long term investment....I could be wrong.  Do your own DD and don't hesitate to consult with a licensed professional.  

HMPR hardly gets any chatter on places like twitter and stocktwits, this is not some speculative money losing company being hyped and promoted like its the greatest investment vehicle of all time and a sure fire winner.  If you want a stock like that sign up with some email blasting chop shop.  

Spotting the pumps easier than going long

This blog is not even three months old, and already I have managed to identify some stocks that, in my opinion, were inflated and due to come down.  Taking the PPS from my first write up on the following companies, here is how my bearish calls have performed as of this past Friday's close.

• May 8th  RYU.V   Down -18.9%
• May 5th  ZIOP     Down -27.2%
• May 17th KTOV   Down -54.9%
• June 12th ABRW  Up    +04.0%

My scorecard on bearish calls isn't perfect, but if ABRW does what I expect in the coming weeks and months, then I'll have to give myself an A+.  

As much as I'd like to pat myself on the back for my genius skills at sniffing out inflated stocks, it really wasn't that hard.  The way I see it this was all "low hanging fruit" so to speak.  Three out of those four companies, ZIOP, KTOV and ABRW were all hyped and promoted by an email blasting promotional outfit called StockReversals.  

I followed StockReversals long before I started this blog, and I've seen them pump a number of stocks that have all tanked.  In no particular order I've witnessed them pounding the proverbial table to drum up buyers for SBOT, MOBI, CLDN, LEJU and WBAI over the past 3+ years, touting long term value potential.  

If you want to check the charts on those stocks be my guest.  Those buying in expecting price appreciation over the long haul got creamed.  

RYU.V on the other hand was a stock I saw getting spammed all over a site popular for Canadian listed stocks, stockhouse.ca.  They'd just announced that Gwenyth Paltrow was going to promote their clothing line. I've seen so many celebrity endorsements for penny stock companies over the years, and have yet to see one deliver long term value to shareholders.

So why is identifying inflated stocks so much easier than finding companies with low share prices poised to make gains?

That's pretty easy to explain in my opinion.  Inflated stocks that are poised to drop big, they are SCREAMING for attention.  Why?  Simple....the smart money holders who want to sell need dumb money suckers to come in and pay the inflated price.  

Companies that are trading at or near their lows on the other hand, the good ones in my experience aren't experiencing heavy volume and don't have much in the way of news.  So it can be hit and miss trying to discern which ones might be good candidates.  

I have put out some bullish opinions on a couple that have born fruit though.  I wrote up EGT.V when it was 14 to 15 cents and it got up around 40 and is still trading in and around 28 to 30 cents.  And HMPR was at $1.81 when I expressed my reasons for being bullish and it just closed up over $1.90.

Hampton Road Bankshares is actually a company that I truly believe has the potential to deliver long term shareholder value.  That's not to say it is without risk, but to my eyes the fact that they are turning  a profit gives them a lower risk profile as compared to companies using their shares as capital to stay afloat.

Ultimately I think its every bit as important to know what to avoid as it is to know what to look for. Who wants to pay $6+ for a stock like KTOV only to have half your money wiped out in a matter of weeks.  

I've also mentioned some stocks that have come down, RVX.TO is one that I wrote about when it was trading at $1.34 and this past Friday it closed at $1.23 for a drop of 8.2%.   With RVX though I haven't seen any suspect pumping and table pounding all over social media....if that happens my opinion will change in all likelihood.  And if that does happen it might be reasonable to expect to see the PPS climbing well above even $1.34....only time will tell.  Ideally I'd like to see them succeed with the Phase III clinical trial.  

News Hype and Promotion boys and girls.  In my opinion that is the Unholy Trinity of the stock market that should be avoided.  Beware when something looks too tempting, things are not always as they appear.

Hampton Roads Bankshares (HMPR) A great play for retail investors?

All stocks are speculative in nature.   Whether its a penny stock with 100,000,000 or more shares issued and an accumulated deficit in the hundreds of millions, or a profitable dividend paying company included on a major index. 

Speculation centers around the share price.  Just because a company has never achieved positive earnings doesn't mean its share price can't soar.  And likewise just because a company has a history of profitable operations and perhaps even pays dividends, that doesn't mean that its PPS can't fall. 

For my own part I view speculation as being a matter of degree.  A company with actual profits I view as being less speculative than a company that is currently losing money.   But from my experience its typically companies that have the worst histories in terms of bottom line performance that experience the biggest gains.  However those gains often evaporate within a very short period of time, often in just a few weeks or a couple months, and sometimes in mere days.

The difficulties for retail investors are numerous when dealing with highly speculative stocks.  The volatility can be both exhilarating and devastating, with retailers almost feeling the need to babysit their investment, watching it in real time every trading day.  That kind of attention isn't easy, even in our hyper-connected world.  And it plays on people's emotions in classic market fashion, alternately triggering greed and fear.

Let's say its a penny stock that was bought at 10 cents that goes up to $1.00 for an eye popping 1,000% gain.  Imagine you bought 50,000 shares at a dime for total investment of $5,000 + brokerage fees.  The stock goes to a buck meaning that $5,000 has turned into $50,000....But what if you're in a meeting, or at an appointment when it hits that dollar mark.  And what if instead of closing at $1.00 it finishes at 85 cents for the trading day.  You still have an awesome gain if you sell for 85 cents, but instead of getting $50,000 for your shares you have to be willing to "settle" for a mere $42,500.  

Now let me be clear here, turning $5,000 into $42,500 is awesome, but $42,500 isn't $50,000....and its greed that so often nabs retailers and leaves them holding the bag, even when its overflowing with profits.  

Which brings me to Hampton Roads Bankshares, HMPR.  Yes I know my musings have a lot of preamble, but that's a function of my age.  I'm a long winded old bastid...un vieux schnook comme on dit en français.  

If you've been tracking this nearly invisible and pathetic little blog, or if you followed me over at SeekingAlpha then you should know my style.  I'm not about to start pounding the table screaming buy Buy BUY with lots of hyperbole about "OUT SIZED GROWTH POTENTIAL" or any of that other crap, because that's exactly what it is....CRAP.

HMPR represents a speculative investment for me, but comparatively speaking I consider it much less risky than many companies out there because it has positive earnings.  

If you're looking for a stock with a big following with millions of shares trading each day, then you're not gonna like HMPR.  On stocktwits where I post as growacet you won't find thousands of users following HMPR like some cash burning speculative biotech.  There are only 70 or so IDs watching it. If you check the Yahoo Message boards for pumping and bashing, you'll see me...krill66 offering up an opinion every now and again, and one other user telling me I'm an idiot and that HMPR is a waste of time.  

As far as I'm aware there are no email blasting chop shops hyping it, or any stock promotion IR firms working to attract investors.  But that shouldn't come as a surprise.  When a company is losing money and is using its shares as capital to keep the lights on and pay salaries, then engaging in promotion makes a lot of sense.  A company like HMPR that has + earnings doesn't need to play those games.

Besides, as per Nasdaq's Site almost 65% of the outstanding shares are held by institutions.  

Those who read my most recent blog posting, Why short interest matters - The danger of betting against Dah Bears, will probably want to know the degree of short interest.  As per WSJ its not much, just 2.16 million or less than 3% of the outstanding, that number is current up to April 29th 2016.   

A note of caution though about the low short interest.  With 3 month average volume of just 120K or so per day, it doesn't take a lot of volume to push HMPR around.  The public float here is only about 77 million shares, and if a big player is looking to inject a little fear into retail longs, then raiding 1,000,000 shares and selling them short could have a big negative impact on the PPS.  I don't think the chances of that happening are big, but I do think its possible.

As regular readers know (all 3 of you) I'm not big on fundamentals, viewing it as old data which is already priced into the stock.  While past performance does provide a guideline its no guarantee about the future.  As I noted HMPR is earnings positive with a significant number of shares in the hands of institutions.  

What do shareholders have to look forward to going forward?  

There's a pending merger with another Virginia based bank, Xenith Bankshares, that was announced this past February. (NEWS STORY HERE).  Of course that news is months old and constitutes part of the fundamental picture, so I assume it to be already priced in.

In my opinion the greatest potential for HMPR rests with the possibility of a return to paying dividends.  HMPR used to pay a quarterly dividend, but that ended in 2009 in the wake of the Great Financial Crisis.  From the GFC forward HMPR entered survival mode, suspending dividend payments and effecting a reverse split.  

Even without a dividend HMPR offers great risk vs reward potential to these eyes.  After years of rate cutting we have finally entered a period of climbing interest rates in my opinion, and I consider the banking/financial sector to have excellent prospects for growth going forward.  Interest rates have been so low for so long that many US regional banks like Hampton Roads had to struggle to survive, and many didn't.  

In my opinion HMPR has emerged from that cloudy period with the return to positive earnings and the lifting of regulatory restrictions which prevented them from paying shareholders in the form of dividend distributions.  There is no assurance that they will once again start with distributions, but with the restriction removed its at least possible now.  

I will end this blog posting with the chart.  I consider a long flat base to be an excellent indicator, and in my opinion the longer the base the better in terms of the potential for an eventual breakout.  This is a 5 year chart showing a 3+ year base pattern.  If it does play out and does break out from this base pattern it might not be for a while, but in the interim I don't think HMPR will see any wild swings downward.

As always take note of the disclaimer at the bottom.  I have been holding and buying HMPR for almost 3 years now so my opinions are extremely biased.  I eat my own cooking in other words, and sometimes I cook up masterpieces while other times I burn the food to a crisp.  Here's hoping HMPR is a slow cooked succulent delight.