Who would have thought?

  • Picking the winners from a struggling pack
  • Your investment strategy into early 2017
  • Forward strategy

Trump is heading for the White House. The world may be in for a cold snap. And iron ore is back above US$70 per tonne.

Who would have thought?

Well, one man, actually. Our in-house resource expert, Jason Stevenson.

You may know Jason as the resources analyst for Resource Speculator or as the editor of our free daily e-letter, Money Morning. If so, you’ll know that he may well be the most bearish resource analyst in Australia. Sure, he forecasts blue skies and soaring share prices for quality resource companies…just not yet.

As Jason sees it, there’s a tough slog ahead for the resource sector before the next bull market properly takes off. This rather brutal honesty has made him less than popular with some of our copy writers and the sales team. After all, he is the editor of our resource focused advisory service. A service which promises to deliver at least one new ASX listed resource stock recommendation to you every month.

So what gives?

I’ll get back to that in a tick. First, to the markets…

Markets

Overnight, the Dow Jones Industrial Average gained 54.37 points, or 0.29%.

The S&P 500 closed up by 16.19 points, or 0.75%.

In Europe, the Euro Stoxx 50 index added 9.92 points, for a 0.33% gain. Meanwhile, the FTSE 100 gained 0.59%, and Germany’s DAX index climbed 0.39%.

In Asian markets, Japan’s Nikkei 225 index is up 203.19 points, or 1.15%. China’s CSI 300 is down 0.06%.

In Australia, the S&P/ASX 200 is down 2.60 points, or 0.05%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$45.81 per barrel. Brent crude is US$45.23 per barrel.

Gold is US$1,230.12 (AU$1,629.05) per troy ounce. Silver is US$16.84 (AU$22.31) per troy ounce.

The Aussie dollar is worth 75.5 US cents.

Picking the winners from a struggling pack

So how do you go about making 12 or more resource stock recommendations in one year when your outlook for the entire sector is…shall we say…gloomy?

In today’s guest essay, Jason explains his approach to narrowing down his stock selection to the most promising few. Now, he’ll be the first to admit that no amount of research, analysis, and hard earned knowledge is guaranteed to churn out a winner. But it can certainly stack the deck in your favour.

And the results he’s had in 2016 tell you more than I could in a thousand words. Just this year he’s recorded gains on six stocks he recommended to subscribers of Resource Speculator.

The smallest of these gains was 64%. The largest? 242%.

That’s right, you would have made well over triple your initial investment if you’d bought when Jason tipped the stock and sold when he recommended getting out.

How does he do it? You can find the answer in the title to his service. When the wider market is going nowhere — or indeed backwards — look to the speculative end of the market. Small, unproven companies, flying below the mainstream radar. These kinds of stocks can see their share price skyrocket with a single successful drill target.

The trick then, of course, is uncovering which of these speculative companies looks set to do just that.

Which sees me bow out and hand you over to Jason Stevenson.

By the way, if you haven’t checked out his work yet, what are you waiting for? Just click here.

Cheers,
Bernd

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Your Investment Strategy into Early 2017
By Jason Stevenson, Resources Analyst, Resource Speculator

Due to popular request, today I’ll explain the process I go through to identify and evaluate stocks before I recommend them to my subscribers.

To begin with, I implement a ‘top-down’ investment approach. This means stock fundamentals, while important, come last.

I spend most of my time analysing the ‘macro playbook’. Without a worldview, how can you possibly know where to invest? My goal is to avoid sectors that are destined to collapse. This should help protect your capital, allowing you to play the game for another day.

If you follow my work, you’ll know I’m probably the most bearish resources analyst in the world. But this doesn’t mean we can’t make money buying resource stocks — far from it.

It just means, unlike the majority of analysts, I have nothing to gain from selling a bullish tale. I’m here to give you straightforward, honest advice. And when the commodities outlook looks grim, I’m not going to sugar coat it.

Investment banks and brokers use the ‘bottom up’ approach. This mainly focuses on fundamentals and valuations, often neglecting the bigger picture. These analysts nearly always show you ‘rosy’ stock valuations. If they aren’t bullish, their clients — ASX-listed companies — will shop somewhere else. They mostly make money by raising capital and assisting with mergers and acquisitions. There can be a strong self-interest, tainting their analysis.

Investment bank forecasts are notoriously horrible — they were bullish heading into the Global Financial Crisis of 2008/09, losing their clients more than just their shirt.

Of course, my track record isn’t perfect…whose is! But I’ve worked hard, strengthening my top-down approach over the past year. The majority of stocks on the Resource Speculator buy list are now in the black. Plus, we’ve bagged multiple 70–200%-plus gains this year.

I attribute a lot of that success to correctly forecasting the big picture.

All of last year, I argued the resources bull market would return in the second quarter of 2016. I revised this argument in late February/early March.

Based on my analysis, instead of launching into another bull market now, I forecasted a second quarter bounce. This is what we’re seeing play out on target. You should know, I do not expect this bounce to last.

Only after I have the big picture sorted — which involves technical analysis — do I turn to fundamental analysis.

I use an extremely rigorous process when analysing and selecting stocks. I hunt for stocks which are typically trading under the radar. I like companies with plenty of near term activity, quality geology (i.e. high-grades, lots of nearby discoveries, attractive rock characteristics), good cash flow potential, strong balance sheets…the list goes on.

Once I’ve found a good company, I examine its enterprise value (market cap, plus debt and less cash). I don’t care for valuation techniques such as discounted cash flow (DCF), net present value (NPV) or asset risk weightings. These techniques — and many more — are subjective and use far too many assumptions, most of them linear.

The world isn’t linear — it changes. This is why having a macro view is important.

Referring to enterprise value, I like buying speculative stocks worth less than $10 million. Of course, there are some situations when I don’t mind paying a bit more. But there’s definitely a limit, which is why I stress the importance of buy-up-to prices.

Remember, a share price is just a number. The enterprise value tells you how much you are truly paying for the stock. Don’t pay too much. If you miss out, there’s always another day and another stock to buy for the right price.

With this in mind, I’ll explain how you can manage your portfolio during the tough times ahead.

Forward strategy

I’ve implemented a 30% stop-loss policy for quality stocks in the Resource Speculator buy list. This is based on their buy-in prices. Quality stocks are developers and producers.

My stop-losses don’t apply to speculative stocks — companies without proven assets. In most cases, they’re looking for the mother lode. If they find it, regardless of market conditions, you could make huge profits.

Many speculative stocks don’t work out. This is why I always say punt no more than you can afford to lose on any speculative stock.

Speculative stocks offer a big reward when they pay off, but they are extremely risky. So don’t get emotionally attached! If I recommend a speculative stock and it doesn’t work out, I’ll cut it immediately. Based on experience, this could be at a 50–75% loss.

Some of my readers have told me they’re not interested in speculative stocks. I understand this. But it’s not time to buy the best resource stocks. The best resource stocks could crash by around 50–75% into early next year. When I believe they’re near the bottom, I’ll strategically recommend the best of the lot to my subscribers.

In the meantime, your best bet is sticking to speculative stocks.

I run my investment newsletter like a business, hanging onto the winners and cutting the losers — quickly. This style might not suit everyone. That’s fine. If you’re not comfortable, stay out of the market until early next year. If you want to have a punt, understand the risks for each stock.

I do my absolute best to recommend only the winners, but at the end of the day I’m only human.

If you’re interested in learning more about how to pick the best performing resource stocks on the market…and in fact learning which stocks those are…you can do so here.

Cheers,

Jason Stevenson