Canadian Stocks, etc.
Below is my response to a friend of mine who asked me why I got into InterOil before last week's breakout even though I don't trust Canadian companies in general. He is an expert in oil and gas development who did an excellent due diligence on InterOil.
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My distrust of Canadian companies is mostly based on my own personal experience and seems consistent with the views of many investors in US. Most of these companies trade on Toronto or Vancouver Stock Exchange and also in one of the US stock exchanges. The Canadian stock exchanges, especially the one in Vancouver, are more lax in controls as you said, resulting in frequent pump-and-dump scams. Many commodities/resources companies are traded in Canada. You probably still remember Bre-X Minerals.
My very first stock investment was a Canadian company (Luminart?), in 1995 or 1996. The company disappeared a couple of years later.
During the last couple of years, I've followed a couple of other Canadian stocks. Why I do I follow them even though I distrust them? ... because they regularly show up in my screening results, and the stock patterns were compelling sometimes, as was in the InterOil case. In these cases the price actions were so obviously pointing to a imminent breakout, I view them as a short-term opportunities but usually cash out when the "official news" is out. [I would say Syntroleum is a similar example: I knew for long time that it IS a risky business but the STORY sells! Now that the price of SYNM is below $3. Should I buy it? No! The trend is not there. The story is over.] Another approach to this kind of companies is to stay aside. But the most important thing is that you should not short it against the trend even though you believe it is a fraud!
On getting into InterOil: I forgot how exactly I became aware of this stock more than a year ago. It could have been the result of my regular stock screening. Or it could have been a big price jump that caught my eyes in a market down day. I have kept it in my "Watch List" since then. During the past year the company has released numerous drilling reports. One time it reported it encountered "gas" and the price shot up $7+ in one or two days. Days later the "gas" is said to be just "background gas" that is commonly seen in wells in that region. The latest well "Elk-1" was drilled six months ago and people have been more cautious about its potential. Now people seem to accept that this is a discovery but, as you pointed out, its economic viability is not certain. Should I short the stock based on the uncertainty ahead? Absolutely no! The company/government/Merill Lynch are all pumping the potential and the up-trend may continue (just as short covering to shares of a bad company can last a long time).
Of course trading on these tricks won't make us a billionaire. However little things (aka "data") and their interpretation can very often mean gain or loss, or whether a trend is about to start. The analogy to oil development is: Using only decline-curve analysis to define a production trend won't make us become another BP or Exxon, but for a small independent oil producer, it may be a critical tool! Note the analogies here:
- DATA: Price/Volume Action =~ Production rate/pressure/etc.
- ANALYSIS: Technical Analysis =~ Decline Curve Analysis
- UNKNOWN: Company Fundamental =~ Geology/Fluid Distribution
It has been a while since I came to this observation: baring a sudden market collapse and assuming a portfolio is properly diversified, it is hard for a small investor to loss a lot of money if he/she can identify and follow a trend. [Some day I may want to write a program to "prove" this using historical or simulated data.] Now the question is: Is it easy to pick a trend? Based on my own experience, the answer seems to be "yes if you have the time and inclination to do it".
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