Stock Trading – Entry 4

In the previous article, I identified a maximum stock price of 20 cents per share. Now what?

The year was Y2k. Moores was a somewhat new store selling good suits to men across Canada and I saw them as always busy with customers no matter where I was or the day for a long time. The stock price then was $8 per share. Less than two years later it was $32. I was not surprised. A decade later, it was not as popular and the share price was much lower than $32. The point is, if you don’t know at least something of what’s going on inside, stock investing is a shot in the dark, but having an insight can be very easy. What I will show you next is how I discovered a bunch of simple ways to screen companies in or out in a matter of minutes.

Remember, I was only looking for a total of two companies who were not in the same sector (AND I didn't want a full-time job doing market analysis).

First, I needed to generate a list based on the question: which stocks are listed on [Canadian] stock exchanges that are within your per-share price? (I stuck with my country of residence to avoid having to figure out tax treaties at this point.) This list of stocks is easy to generate using a stock screener. To set up the search on this stock screener, I selected the following filters:

• Under company basics: sector, stock price, and filing status is current
• Under trading: volume 90-day average

If you use that stock screener, be sure to click on the + ADD FILTER(S) button on the bottom-right every time you select one option on the list of check boxes. This will auto-populate a section immediately below the checkbox area called ‘Edit filters below to build your Stock Screener’.

When selecting the sector, I did not put a check mark beside the industries I identified as a ‘no’ in the first article in this series. The process of elimination was already at work.

The maximum stock price I set to $0.20 as per my rationale above. I also set the minimum stock price to two cents. Why? To eliminate companies who are, let’s face it, very likely on their way out or those who can’t seem to even get off the ground. That is neither a simple analysis nor will it likely yield a lot of possible results – besides, there are many other stocks to choose from!!

Is this penny trading? No. Penny trading involves trading every 15-30 minutes in massive volumes to capture an investment gain of 1/100th of a penny (or less). It is independent of the purchase price of the share. If the price of an individual share in Company X is $100 and you buy a million shares and the individual share price goes up by $0.001 (one-tenth of a penny), then you made about $1,000. That’s penny trading: capturing gains of a tiny fraction of a penny with massive trades. (On a side note, many have informed me that penny trading has a batting average of about 50%, meaning you lose on half of the trades you make!) Anyway, the stocks on the list I generated are affordable for me and that is what matters.

I also eliminated stocks that have not filed their financial reports recently, which are due once per season/quarter. I don’t want to invest in a company that is on their way out or one that needs extra time to cook their books.

I also eliminated stocks that had been traded A LOT recently. In that case, it means some very big shake-ups could be happening with key shareholders or lots of penny trading distortion. Either way, that’s a ton of insider info I will never have and since I can’t navigate that, I am out. The somewhat arbitrary volume range I set was 275,000 (ish), which for me meant people were interested in buying (and holding) it. I also set the minimum to 10,000 (ish), meaning at least some people were actually willing to sell some of the shares at recent prices as opposed to everyone only willing to sell way above my price range (via unfilled orders). Newsflash #3: Just because the company is listed, doesn’t mean people want to sell it!

By clicking on a company on the resulting list, I saw a graph. In 2023, I could easily see how a company fared pre-Covid, during Covid, and post-Covid by selecting the 3Y (three-year) button at the top-left of the graph itself.

If there is a drastic increase in the stock price during Covid and a sharp decrease afterwards, I took that to mean the company was likely sensitive to the pandemic, but not a more normal situation (metals excluded). I didn’t want to have to analyze how likely the market would adopt their products or services again gradually in the years to come. I eliminated those due to the required extra analysis and the likely slow growth.

The other thing I looked for in this graph is to see where the floor is using the 5Y (five-year spread) in order to see if the current price is about right.

The floor is a low price where the market doesn't seem to want it to go any less. When a stock price hits the floor, people tend to snap it up because it's either in a strong place to go up or they think it is undervalued and can penny trade. The floor is not rock-bottom. It is more of a protected/popular base price within a set period (of any duration). Just use a straight line and your eyes with a graph a stock screener will generate instantly for you (example below).

One short side note on floors before I continue. I selected the volume of trading as a filter because penny traders do a lot of trades in a short amount of time. A little of that, fine, it won't distort the resulting graph too much. A whole lot of that over months makes it more difficult to identify the floor.

The following graph was one I found for the stock price of a mining company (I did not buy) that clearly shows the floor:

See how the floor (the blue lines I drew) has moved up twice in the past five years? It seems to have stabilized after the spike in early 2022. If the floor was angling upwards (higher on the right / ), I would risk buying at a price that was too high (since I was not penny trading and only looking at the next 15 minutes). Buy and hold means I needed a positive trend to look forward to for more than five minutes. If you do some extra research and find such a trend will continue enough to make some money, then that might work for you. Also, why did that spike happen? Was it a good thing that could happen again or was the result of some problem that might repeat?

If the floor was on a downward trend (lower on the right \ ), that leaves questions. Is the floor being reset? Is the market correcting itself? Is the company freefalling into nothing?

My strategy was to find companies with a stock price with a stable floor AND would have something going for it. Enter press releases and my own internet research. One stock I bought was Braille Energy Systems, but only because they had something going for it. Who cares that they are doing batteries? Many start-ups are doing this at the time of writing this article because many governments are pushing hard in that direction! Ok, but their car batteries have been winning race after race after race.

There’s a difference between pushing the boundaries in an industry (which they were doing with car batteries) versus growing a company. If those fast car batteries were all they had, I would not have bought them. It takes a specific strategy to benefit from an innovative company bent on making only car batteries that outperform (AKA only pushing the existing boundaries of an industry).

Braille was growing because they were doing whatever on racetracks AND using their expertise to make batteries for businesses and homeowners to keep everything turned on during power outages and potentially making use of lower-tier electricity prices. (Charge the battery at night at a low rate and use the battery at mid-day when electricity rates are at their highest.) That’s a direction that can make a lot sense to a growth investor like me.

One thing I like to see but don’t put too much weight on are stock options and warrants a company has issued. It’s their way of showing people who invest that way that the company is going in a specific direction such that those investors will be able to sell shares at a specified higher price by a set date (usually within five years). An example I saw was one where the stock price would quadruple from the current value in two years. I like that accountants expect those kinds of valuations, but then, it could be a marketing ploy. I still like seeing it though, so I only awarded brownie points when I saw it and added it to my watch list IF I could buy well below the warrant price well before the warrants were due.

Now I was down to companies in my price range and sectors with a stable floor, something going for it, but did any have red flags?

This is also where press releases and my own internet search came in handy. I eliminated companies that had several board of directors replaced within the past six months. Shake-ups at the top are difficult to ascertain for me because I don’t know why the previous ones left, but I am forgiving if I can see the replacements are doing well on the job. This is something I don’t personally feel confident about when I see a significant number of C-suite executives (e.g. CEO) and vice-presidents less than six months on the job at any given company.

Also, if a company is in a lawsuit, no thank you. I don’t need that drama in my portfolio and I am not a legal professional that could estimate the verdict of those anyway.

For any companies in the financial technology sector, I opted to send emails to brokers and other financiers to ask them their very basic opinion on it. Why? Since those markets are heavily regulated in Canada, I needed to know the products or services of any company in that sector has a very strong ability to be used by many (AKA a 'use case'). Without that, such companies were eliminated from my list!

For minerals, I ended up choosing FE Battery Metals Corp. I chose them because their reputation was ok as a mineral extractor and they had mineral rights to huge swaths of land that included being near some areas already reported to be rich in lithium. With a little digging, I found they had two strategies if they struck it rich: sell to another mining company and make money that way OR their share prices would go up allowing the owners to cash in a little equity to mine it themselves. I really wanted a mineral in my portfolio, so that put them at the top of my list in that sector at the time of writing this article.

Alright, stocks were picked and the next thing I had to do was place the order. My next article will show you the step-by-step walkthrough with some screenshots of the process I used to buy my first stocks using Wealthsimple. So read on.