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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 28 October 2014

Sirtex Medical - Another Home Run

Shares race

A few months of water under the bridge since I took part in the Sun Herald share investing competition back in May/June.

Of course, it's not really an investing competition at all. It's actually a very short home-run hitting competition, with excellent potential to make one appear remarkably foolish. 

If your life depended upon you winning the competition you would pick simply ten "penny dreadfuls" or micro cap stocks in the hope that one or two of them double in price in order that you could thus take home the spoils.

Naturally such an approach introduces an equivalent risk of a couple of your share picks halving in value.

Since few of us want to risk looking a complete dingbat through being annihilated by the selections of a dartboard and an astrologer respectively, entrants tend to play it a little safer by taking some kind of middle ground.


In my case, I picked half a dozen relatively boring cyclicals (listed property trusts or "REITs", mainly) which have all fared solidly enough.

For my "home run" picks I went for four small- and mid-cap stocks in industries which I felt should have decent prospects - the month of May being the time of the budget, I plumped for the infrastructure and healthcare sectors - and strong "technicals", since in such a short competition you have to go for something with momentum behind it, and ideally with some blue sky potential.

80/20 rule

If you're familiar with Pareto's Law or the 80/20 Principle you might expect that 80 percent of my gains in a ten stock portfolio would be gleaned from only 20 percent of my ten picks i.e. two of them.

And so it has been.

Sirtex Medical ($SRX) which I picked largely based upon a quite beautiful technical breakout combined with blue sky potential (and more specifically, thanks to a nailed on trading tip from share trading legend Assad Tannous of Asenna Wealth - bang tidy, cheers buddy!) has proven to be one such home run.

After a blistering set of full year results with sales revenue +34 percent and NPAT up by more than +30 percent, SRX today is a very expensive growth stock. 

With a market cap of nearly $1.3 billion the expanding company is trading at close to 50 times earnings, with a very handy 50 percent return from the entry price inclusive of the full-year dividend.

Transfield Services ($TSE) has also recorded a stunning turnaround on last year's trading losses and snared a couple of major contracts leading to a $1 billion takeover offer from Spanish suitor Ferrovial. 

As a result of the $1.95 per share takeover offer, my selection has also seen a return of well over 60 percent on this trade since May.

The portfolio of ten stocks which I picked is up by 11 percent, which isn't a bad effort for 6 months, being a return of well over 20 percent on annualised basis.

It could have been a lot better, to be sure, but I also had a couple of pretty ordinary picks including Downer EDI ($DOW) which, true to form, continues to disappoint shareholder and market expectations alike, almost like clockwork...for year after year.

Come to think of it, I don't know why I even picked DOW at all. A combination of vague familiarity (being a former audit client of mine, from many years ago) and a mistaken belief that all infrastructure companies with the potential to win government contracts might benefit equally from the budget, I think.

Whereas in the event Downer lost a major $360 million BHP Billiton coal contract which was cancelled in the month of June.

I should have known much better, in truth, since I've been warning of coal mining industry doldrums on this very blog throughout the year myself, in particular questioning property expert recommendations to buy in coal mining regions, which seems unnecessarily risky.

Trading approaches

The approach to share trading described above is probably closest to that described in William O'Neill's classic book How to Make Money in Stocks.

That is, through rigorous ratio analysis to identify small- to mid-cap companies with strong financials, great medium term earnings growth potential and promising technicals, in order to hit some massive home runs.

To be enduringly successful using such an approach, traders need to snap the losing trades off quickly and relentlessly, perhaps using stops to cut off loss making trades of 6 or 7 percent, while letting the big winners run.

Pretty simple in theory, but much harder to pull off when you are reading the charts from left to right rather than looking back at what has gone before. There are apparently a million experts in reading the charts from right to left.

Harder than it looks!

Of course, if life were that easy we would all be heroes and the market would be totally cornered by trading programs and algorithms, and there would be few profits to be made from trading at all.

Instead what most beginner traders do is snatch at profits in order to "lock them in" and let the losing trades run and run in the vain hope that they might "come back" to somewhere close to a notional break even point.

Moreover, during each share market cycle the market tends to be chock full of amateur traders who think they are pretty smart when the market is going up, but have little or no protection on the downside and no workable strategy for when the market reverses.

In each dramatic market correction or secular bear market they get wiped out and the cycle rinses and repeats.

In my experience most expert traders who succeed over the long term, including the proven successful traders such as Assad himself, have only become so through learning their lessons in the markets the tough way, by losing some trades in the bear markets in their early days and resolving to learn from the mistakes.

They generally know how to deal with bear markets better the second time around, and the third time around they are making decent money on the way down as well as on the way up.

Only those with a clearly defined strategy and the iron clad discipline to learn money management skills will continue to make profits in both "good" markets and in "bad". Most will be flushed out and give up well before they reach that stage.


Disclaimer - these are not share trading tips and I don't recommend individual stocks. Always consult a licensed professional before making financial decisions.