When Kogan’s (KGN) stock was plummeting in mid-March through $4, who knew where it was going to go? It might just as likely have gone to $2 or as high as $6 in the short-term. You just have to look at the changing moves in substantial shareholders to know that fund managers didn’t.
Trading ASX Small Cap stocks in small bites
Under the Radar Report advised Small Cap investors to buy Small Cap stocks in Kogan in small bites. As a Small Cap investor, you have to make sure you can handle price drops and not go bankrupt or worse, put yourself in a bad mood (don’t borrow whatever you do).
In the eye of the COVID-19 induced storm Under the Radar Report recommended a number of speculative Small Cap stocks to buy and Kogan was one of those. As it happened, our recommendation picked some Kogan stock up at its absolute post-COVID-19 low at $3.50.
Timing is key when trading ASX stocks
The fact that we got the price right was complete luck. The fact that we got the timing right was not. Who knows at any point where the price will go, but everyone knows when there is market panic. We put a take profits rating on the stock at $7.21 and as you would be aware, this has proven to be too early with the stock trading well over $10.
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The effects of a bull market on trading ASX stocks
The stock market has gone on a bull run since central banks around the world started pumping record amounts of stimulus into securities. The crowding out effect it’s had on fixed interest markets has caused zero to negative interest rates causing Small Cap investors to rush for risk assets, the most popular and easiest to buy being listed stocks.
Valuation at the centre of ASX stock trading decisions
The value that we were finding on Small Cap stocks to buy in mid-March is now much harder to find. What do Small Cap investors do? For one thing, we remain interested in putting valuation at the centre of our portfolio decisions. Flying under the radar means there are routinely Small Cap trading opportunities that have been ignored. On the other hand, we’re not averse to taking advantage of the big moves on the market on stocks like Kogan as Small Cap investors rush in and out of stocks as if they were ATMs. Which, to some extent they are. In the depths of the financial crisis, one of the only sources of cash was the stock market. This is an important point, which I’ll go into in a second.
Three trading opportunities for Small Cap investors
Amid this volatility there are stocks like Kogan that represent trading opportunities for Small Cap investors. I’ll talk about why they are and what buy and sell signals to look for. It’s a high risk, momentum based game, but the rewards are there for those brave enough to handle the associated pain.
Volume is key when trading ASX stocks
The first thing you need in a stock is volume. If you don’t have enough buyers and sellers then you can’t get in and out quickly and most importantly, cheaply. This might rule out many Small Caps, or stocks with market caps below $600m right now, but you have to remember that some stocks in consideration were valued at below those levels when the market hit the skids in mid-March, which brings me to the second requirement.
This is a stock to buy whose price has been shoved violently up and down by sentiment; remember Kogan. They can be growth stocks whose valuations aren’t anchored to traditional metrics for earnings and hence become barometers for the market. The discount rate is unknowable; the growth rate is unknowable; sentiment is critical.
From a share price point of view, for many stocks you are looking at the post COVID-19 crash range. I’m talking about when the stocks got smashed on or around 23 March to the quick rebound, which is normally near current levels. In many cases this range will hold until you get enough fundamental information (real sales, profit margins, dividend news) on which to generate an idea of what the real valuation of the company is the present value of future cash flows).
ASX Stocks tradable in the current market
Two other stocks we rate as tradeable for Small Cap investors in the current market are: Seven West Media (SWM) and the BuyNowPayLater operator Zip Co (Z1P).
SWM whipsawed between 6 cents and 12 cents in April as sentiment ebbed and flowed and currently sits at the mid-point. A legacy issue is that it did have over $600m in debt versus a market cap of $125m. This creates opportunities to trade. Remember, in finding stocks that are candidates to trade we’re not necessarily looking for great companies, just ones that move up and down a lot. On the debt issue, the company has had something of a reprieve, having paid off $120m and doesn’t have to pay off any more until November next year.
Zip Co is likely to trade in line with sentiment in the same vein as Afterpay (APT). Both are subject to similar forces. Zip Co has a post-COVID-19 trading range of $1.13-$3.74, achieved on very heavy volume. The individual characteristics of each are critical over the long-term but when you’re trading, you’re interested in the next move in the stock. Both Zip Co and APT have bounced very hard, which is why we’re not recommending either at current levels. But things can change very quickly.