Imagine winning the Nobel Prize…with scotch tape.

Although it sounds unlikely, researchers beginning in 2004 did just that.

In fact, their groundbreaking research — using ordinary scotch tape to make one of the biggest metal breakthroughs of the century — has set in motion a storm surge of new technologies. More important, this breakthrough research has created a massive profit opportunity for early investors.

Andre Geim and Kostya Novoselov, Russian scientists working at Manchester University, extracted single-atom-thick graphene from bulk graphite, using regular scotch tape.

Unbeknownst to them, the scientific community had been trying to isolate this super-material, to no avail, for years. Fast-forward six years — years where hypothesis became reality in many small labs around the world — and the two Russian scientists earned themselves a Noble Prize for Physics in 2010.

Today, the technology is finally getting in to full swing — something that you’ll soon see in a store near you…

CNET declared graphene “holds the potential for profoundly transforming materials science — everything from computer chips and flexible displays to solar cells and lighter aircraft.”

The Guardian and The Huffington Post report that it could “revolutionize everything from nanosurgery to homebuilding”… and even “change the world”…

This one material alone could prove more revolutionary than — and soon replace — plastic, Kevlar and the silicon chip… all in one fell swoop!

For instance, think about:

• HD TVs as thin as wallpaper
• Mobile phones that bend without breaking
• Pills that eradicate cancer

Industry breakthroughs are really starting to snowball, too.

“Korea’s Samsung has invested heavily into graphene research,” the BBC reports, “and the Finnish firm Nokia has just announced its plans to team up with partners — among them the two Nobel-prize winners — to explore graphene opportunities.”

The potential for graphene applications is endless. It’s already proving to be an amazing substitute for flat screen technology. Samsung is currently using graphene to create a virtually indestructible, and flexible, screen on its “Galaxy Skin” phone.

But cell phones and durable screens aren’t the end of it. Battery technology could be immensely enhanced. Creating potential to make a standard-sized battery hold a charge for 10 times as long.

And you better believe the medical community is testing graphene for its potential game-changing technology, too. Indeed, we’re on the cusp of something real big here.

And to be honest, for graphene to take off it only needs one of these factors to go its way — but right now the sky is the limit. There are countless breakthrough technologies that are set to hit the market, which means great things for graphene — but maybe even more for producer of graphite. Especially if you have a top-quality deposit.

You see, it takes a very pure, rare form of graphite — called “highly ordered pyrolytic graphite” (HOPG) — to affordably and “easily” produce high-quality graphene.

And up until now, almost all the graphene that’s ever been produced has been made using a very difficult, very unpredictable chemical process (called chemical vapor deposition).

All of that is about to change, though. And it should quickly benefit investors on the right side of this play…

Sincerely,

Byron King
for The Penny Sleuth

The One Mineral That Will Advance Our World was originally featured in the Penny Sleuth.

How do you trade binary options “at market”?

Binary prices can swing rapidly, and it’s not unheard of for a price to drop or soar $10 or more in a matter of minutes.

Because of this, it’s best to act on a trade quickly to get a jump on the sentiment waves we expect — generally before noon.

When you open the Nadex Ticket window, it will show the current bid and offer price for the binary. When you select a Direction (“Buy” or “Sell”), the Price will automatically display the market price. To make sure, simply see if the “Price” equals either the offer price (when buying a binary) or the bid price (when selling a binary) and hit the “Place Order” button.

The bid and offer price will be updated at the top of the Ticket window as they change. If that happens before you hit “Place Order,” you will need to adjust the Price to the current bid or offer. Otherwise, you will automatically place a limit order… one that will not trigger unless the price hits the price you specified.

If that happens, you can click “Working Orders” at the top of Nadex’s platform screen to amend the order to the current market price.

Also, if you buy multiple contracts, say 10 or more at a time, it may make sense to space out your trades. Like, buy half and wait a few minutes. This allows you to get into a price zone and sometimes benefit from a pullback. These are not momentum trades, they are directional trades — and therefore are not that sensitive to price movements.

How do I track the binary’s underlying instruments?

Currency binaries are based on the spot exchange rate of the currency pair. There are several sites where you can follow the exchange rate. The easiest is Yahoo! Finance. Just type the currency pair into the search box (ie., EURUSD) and press “Get Quotes.”

Finding quotes for the underlying index and commodity binaries is a little bit trickier. These binaries track futures prices, but the specific future contract being tracked changes from month to month. To see which futures contract you need to look up, look for the name of the month in parenthesis in the binary’s name.

Try this example. Germany 30 binaries have “(Jun)” in their name, meaning they track June DAX futures.

Of the sites that offer futures quotes, barchart.com is probably the most user-friendly. In this case, go to the site, type DAX into the “symbol search” box and select DAX Index June 2012. You’ll get a current quote, highs and lows, even a chart. Compare the current price of the future against your binary strike prices to see if you’re in the money or out of the money.

(Remember, it’s possible your binary could be in the money but still show a loss currently. Don’t fret — the only thing that matters is where prices are when the binary expires.)

How can Canadians trade Nadex binaries?

Right now only U.S. citizens can open and use Nadex accounts. Its parent company, IG Markets, offers binary trading in other countries — but their binaries may not operate the same way as they do on Nadex. And at this time, Canadians are completely cut off from Nadex trades.

Trust me, I wish this wasn’t the case… I think everyone needs to trade binaries at least once in their lives. Also, quite frankly, it’s frustrating from a business angle — we’re missing out on lots of potential readers and traders. Nadex knows this, too, I’m sure… so I can only assume their hands are tied.

There is some hope, however. A broker called PFG Best — which is open to international clients — currently offers daily Nadex binaries. And they tell me they are working on a technology interface that will be able to offer the weekly binaries.

So hopefully there will be good new soon.

We received other great questions in the survey, of course, so we might highlight more of them in the near future.

Sincerely,

Abe Cofnas
for The Penny Sleuth

Your Three Biggest Binary Questions… Answered was originally featured in the Penny Sleuth.

Finding support and resistance on a stock chart takes just a couple of minutes. You can make the annotations on your computer, or you can print out the charts and mark them with a pencil and ruler.

Three minutes of work can save you from making a mistake that would potentially cost you thousands of dollars.

Today, I’m going to make a few quick annotations to some of the charts you’ve sent in this week. I’ll then tell you whether I would buy or sell the stock in question.

Let’s get to it…

I purchased the Canadian stock Enerplus which is now down almost 50%…I know that natural gas is deeply depressed, probably resulting in the terrible drop of Enerplus. What I want to know is whether the stock has any possibility of recovering? Also, is it worth buying in more shares at this very depressed level?

— M.J.

Here’s a look at Enerplus Corp. (NYSE:ERF):

Sure, there’s a possibility that the stock will recover — at some point. But at this point, it’s important to get defensive. The market is falling, commodities are out of favor and this chart is terrifying. The breakdown in price accelerated in early April when ERF broke below horizontal support (blue line).

Also, I never recommend buying more shares just because a stock has dropped in price. It’s a dangerous tactic that’s more trouble than it’s worth. Don’t do it. The red line is resistance in this powerful downtrend. Even if the share price recovers to $16 from here, the downtrend remains in force. Yes, the stock is technically oversold. But it has been oversold since $21. It can easily move lower from here.

I’m thinking of buying 500 shares of Prospect Strategy Group (NASDAQ:PSEC). It’s a BDC. I believe this is a strong buy for at least the next 24 months. Could you give me your advice on this stock?

— J.P.

Prospect Capital has held up well during the recent market turmoil:

The stock has consolidated just below $11 since late February. On the chart, you can see how PSEC has registered a series of higher lows, indicating that buyers are stepping in at higher and higher prices every time the stock dips.

I can see why you’re interested in this stock. Judging by a quick look at the fundamentals, PSEC looks dirt cheap. It’s trading right at book value, its multiple is less than seven and I see plenty of insider buying recently.

In this case, the technical can provide a solid backstop to your fundamental research. Buying shares between $10.50 and $11 is not a bad price for a longer-term timeframe (you mentioned a 2-year holding time). I would also look to add a stop loss between $10 and $10.25. Look for this stock to break out if it can close above $11.25 on strong relative volume.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Reader Mailbag: Buy or Sell? was originally featured in the Penny Sleuth.

These are called oversold rallies. If you can learn how to predict these counter-trend moves, you could book significant gains in just one or two days.

Here’s what you need to know…

First, you should keep a close eye on a weekly sentiment reading, such as the AAII US Investor Sentiment bullish and bearish readings. Sentiment indicators like the AAII gauge how market participants view stocks. For the bullish sentiment chart below, a higher reading indicates investors are more optimistic about the market’s prospects, while a lower reading indicates market pessimism:

As you can see, the sentiment reading is a fairly straightforward look at how investors are feeling about the market on any given week. But it’s important to note that extreme readings on any sentiment indicator should be viewed as a contrarian signal.

Think of it this way: when the crowd alligns itself on one side of the market, chances are very good that you will see a strong move in the opposite direction.

The peak in these recent readings occurred around mid-February. Investors had already watched the market’s strong start to the year. They were feeling more confident since the turmoil from the eurozone sovergien debt crisis had slipped from the headlines. Stocks were moving higher — and investors were convinced that it was safe to buy.

We now know that the market’s upside move was running out of steam exactly when the majority of investors were becoming bullish. And if you turn toward the moments of extreme pessimism, you can see that the current reading on the far left is even lower than bullish sentiment readings from back when the market was in free-fall in August 2011. This alerts us to a possible bounce in the making…

Now let’s take this data and see where these extremely low bullish readings appear on a chart of the S&P 500:

The red arrows on this S&P chart link up with the red arrows on our sentiment reading. Now, we can use a momentum indicator (in this case, RSI) to act as confirmation for our sentiment readings. Extremely bearish sentiment readings coupled with extreme oversold levels will give us a higher probability of a bounce.

In hindsight, you can see that the first low sentiment reading from July 2011 would not have offered a significant bounce. Our momentum indicator was still bullish (above 50; first blue circle). It did not confirm the necessary oversold conditions.

However, the second low sentiment reading coincided with an RSI reading below 50 (center blue circle). Our momentum indicator was just coming off an extremely oversold reading (below 30) in August, making this a slightly better confirmation than our July signal. It’s not perfect, but it did coincide with the October bottom that began an impressive move higher. If you bought in late September, you had the chance to have a very nice fourth quarter.

Fast-forward to present time and you will see the strongest buy signal on the chart. The sentiment reading is at its lowest level in months. And RSI just bounced off extreme oversold conditions during yesterday’s rally.

Since sentiment and momentum confirmed a potential bounce early Monday, the S&P has risen nearly 2.5%. I’m not predicting an extended move higher just yet. But with these readings, it’s entirely possible that the market continues to push higher in the short-term to alleviate oversold conditions.

Sincerely,

Greg Guenthner
for The Penny Sleuth

How to Predict an Oversold Bounce was originally featured in the Penny Sleuth.

Today, I’m going to show you how you can use two separate timeframes to fine-tune your market analysis. Checking out the context of the shorter-term move could save you heartache when the pattern follows the big picture story in the charts. It might even help you discover a hidden trade that would not have been visible on a daily chart…

Let’s begin our analysis with a chart of the Russell 2000. It looks pretty nasty:

The chart above is a daily candlestick chart of the Russell. And some pretty interesting things are going on here…

For those who aren’t familiar, the Russell 2000 is an index made up of a group of two thousand small- and mid-cap stocks — when the Russell makes moves, it’s often a hat tip that the broad market is about to do the same thing. And if you’ve been watching a chart of the Russell lately, you’d know it’s crashing.

Frankly, all of the indexes have been falling lately. In fact, with the Dow Jones Industrial Average down 12 out of its last 13 sessions at Friday’s close, the blue chip index was seeing its biggest losing streak since 1974 until today’s bullish open. But none of the indexes were as clearly bearish as the Russell.

In the above chart, the pattern to watch is a head and shoulders top. It’s formed by two intermediate peaks at around the same level (called shoulders) separated by a higher peak called a head. The pattern indicates exhaustion among buyers. Because of its unique look, it’s a popular setup for newer traders.

The break below the neckline at 780 last week was a sell signal for the index…

And now, with our momentum gauge (RSI) pushing into oversold territory, things aren’t looking great for stock investors.

The market looks vulnerable right now. But becoming super bearish could be a mistake —even for a swing trader. In order to develop a better picture of the market’s

A glimpse at a second timeframe for the Russell reveals something interesting going on in the longer-term:

This second chart is still the Russell 2000, but it’s a much longer-term timeframe. Here, every candle marks a whole week’s worth of trading instead of just a day.

In the long-term, things are looking a whole lot less scary. In fact, they’re looking downright positive — that’s because the R2K index is forming a bullish inverse head and shoulders pattern (the opposite of the pattern in the first chart) at the same time. In the context of this bigger setup, the bearish head and shoulders top in the first chart is just forming the right shoulder of the bigger-picture setup.

And when it comes to technical trading patterns, the big-picture setup always wins out…

Looking at the daily chart of the Russell, it’s tempting to go out and make a bet against the index — but the R2K is starting to catch a bid at support just a few points from the price objective that the topping pattern spit out. That means that we could be in store for a stop to the selling this week. Looking at the longer-term picture provided clarity that the more common short-term trading picture couldn’t.

For investors who were quick to act, there was money to be made in the short-term drop, but now it’s likely run its course. Now, a more interesting setup is what happens in the weekly chart if shares can breakout above resistance at 850 — the same price objective rule applied to the upside in the R2K puts a price target at 1050. That’s a 23.5% upside possibility when it happens…

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Use These 2 Charts to Play the Market Drop was originally featured in the Penny Sleuth.

If you were paying attention to the big momentum plays this quarter, you could have pinpointed when the market was ready to turn lower.

Now, with short-term losses mounting, you might have the chance to spot the first buying opportunity by monitoring these very same stocks. When the momentum names begin to catch a bid, we could see the beginnings of an oversold bounce that would send stocks higher in the short-term…

During the first half of 2012, investors fully dedicated their efforts to Wall Street’s momentum darlings. These are the “hot stocks” in the midst of multimonth bull runs. Expectations run high with these momentum names. Valuations run even higher.

It is a ridiculous notion to wait for a correction (or even a pullback) before buying these red-hot stocks. After all, the share price will never fade. Or so the frenzied logic goes…

It’s probably no surprise to you that Apple was the de facto drum major of the momentum marching band. Apple shares shot up more than $230 between Jan. 1 and mid-April — when the furious momentum rally finally topped out.

Apple’s pullback — and the eventual pullbacks in several other overhyped stocks — was inevitable. Apple was displaying all of the classic signs of a blowoff top. The investing public was convinced shares could go nowhere but up. Analysts and the financial media joined the party with their own irrational expectations, including $1,000-plus price projections and declarations that any fund manager who didn’t own Apple should be immediately fired…

But just when the stock appeared to be completely unstoppable, shares abruptly reversed.

The selling wasn’t outright panic. As of this writing, it remains orderly. The market didn’t take an ax to the Apple tree. It only shook it a bit.

It’s how turning points are born. Shorts shake the branches to see if any weak hands fall from the tree. They’re after the low-hanging fruit. These are the folks who bought shares near the height of the rally. Their conviction is far weaker than that of the long-term investors sitting on substantial gains. So they sell. The selling puts enough downward pressure on the price to convince other longs to part with their shares.

Of course, disbelief prompts many buy-and-hold investors to hold shares of a falling stock much longer than they probably should. There are (and will continue to be) many investors who will stand by Apple — even if its decline accelerates. After all, Apple is a great company that makes interesting, in-demand products. But even if expectations from Apple faithful remain high, we doubt the stocks’ incredible performance during the first half of 2012 will be matched anytime soon…

It wasn’t just technology or high-priced stocks that caught the attention of momentum investors.

Smith & Wesson Holding Corp. (NASDAQ:SWHC) — which I recommended to my premium readers in December 2011 — was swept up in the rally that began on Jan. 3.

I didn’t somehow predict the buying frenzy would begin as soon as we recommended the stock. We knew Smith & Wesson shares had held up well during the height of the European crisis last fall. And we had multiple fundamental reasons for picking up shares when we did.

From a fundamental perspective, Smith & Wesson was improving its operations. Management had already started the process of unloading the company’s underperforming security division. Revenue and guidance strengthened as management concentrated on building the company’s core gun manufacturing business.

Gun sales were growing across the board. In fact, gun sales actually booked a one-day record the day after Thanksgiving 2011. The FBI reported a record number of background checks, adding up to nearly 130,000 gun buyers on the day. The old record was set in 2008 — at only about 98,000.

Stories highlighting record-breaking sales throughout the gun industry began to gain traction in the media shortly after our initial recommendation. Attitudes regarding firearms ownership were improving. More and more women were taking to gun ranges across the country. These tangible stories took hold with investors — and the trend that initially pushed shares of Smith & Wesson above $4 in December began to accelerate. A momentum play was born.

By early April, Smith & Wesson shares more than doubled, to $8. With the successes of high-priced momentum plays fresh in their minds, traders and investors jumped at the opportunity to own shares of this fast-moving stock.

But Smith & Wesson was not immune to the momentum sell-off. Shares gave back more than $1 in a matter of hours in early May as new concerns over the economy and eurozone surfaced. Shares have recovered somewhat. And we’re still hanging onto open gains of approximately 95%. But the warning bell has sounded. It’s time to be extra vigilant as skittish investors rush to raise cash during uncertain market conditions.

While the secret of Smith & Wesson’s potential is now more widely known, the stock has a much better chance at weathering the momentum sell-off than some of the more closely followed names on the market. Traders shook Smith & Wesson’s tree. But investors have stepped back up to the plate and bought back shares.

Only time will tell if the stock will consolidate and move higher from here. If Smith & Wesson and other momentum names catch a bid, we could get our first signal of a move higher.

Sincerely,

Greg Guenthner
for The Penny Sleuth

How to Time the Market with Momentum was originally featured in the Penny Sleuth.

If you don’t, you will probably lose money this summer. It’s as simple as that…

After a furious four-month rally, traders are selling stocks again. It’s a buy-and-hold investor’s worst nightmare. No sooner do stocks begin to move higher than the surge is cut short by volatile trading and fear.

No wonder so many people are walking away from stocks…

“Even though American stocks have doubled in price in the last three years, investors and traders large and small keep giving the market the cold shoulder,” declares The New York Times.

The fact is the average investor wants little to do with a stock market that has burned him one too many times over the last decade.

The numbers don’t lie. Trading on all U.S. exchanges has yet to recover since the 2008 financial crisis. Just last month, the average daily trades in American stocks remain about half of what they were before the financial crisis — 6.5 billion shares, compared with 12.1 billion. That stands in sharp contrast to the market shocks of 1987 and 2001. During these two events, normal trading levels resurfaced within two years of the initial crisis, according to The New York Times. Any way you look at it, the recovery in trading activity this time around has been painfully slow.

The Old Gray Lady isn’t the only mainstream news outlet latching onto this story. Even USA Today is chiming in. In early May, the paper forked over front-page real estate to a story about everyday investors shunning the stock market.

Are these front-page declarations that the market is a dead zone true contrarian signals? If so, is the market set to embark on a new epic bull run, due to the magazine cover indicator?

It’s possible. But from my vantage point, it’s simply too early to declare that the market is ready to charge sharply higher. It can be maddening to try to play these huge shifts in sentiment — especially when economic news and data both at home and abroad continue to unnerve investors. So instead of fixating on the stock market as a whole, I want to cut through the noise by focusing on the individual names that have the best opportunity to outperform their peers.

It’s no secret that we’re dealing with a tough buy-and-hold environment — that much we’ve already said. It’s why a carefully planned approach to small-cap investing is so important. More specifically, you should be concentrating on evolving your strategies to insure you will stay ahead of the market.

Ask yourself — What’s working right now? Which strategies will continue to work if the market moves lower — or when economic and market conditions begin to improve?

Obviously, staying ahead of the market should be the primary goal of every long-term investor. And I’m confident that with a little planning and foresight, we can continue to deliver market-beating results, despite uncertain economic conditions.

Here’s how a longer-term investor should be approaching the market right now:

Value: Many smaller stocks are expensive. You should turn to shares you can acquire at a substantial discount. During the first half of 2012, investors fully dedicated their efforts to Wall Street’s momentum darlings. These are the “hot stocks” in the midst of multimonth bull runs. Expectations run high with these momentum names. Valuations run even higher. But over the past month, these stocks have performed poorly. Avoid them. While the market’s trend is in flux, look for an extra margin of safety. These are the stocks with the fundamental backing to weather a storm of selling. Chasing the popular stocks with inflated multiples simply isn’t working in this environment

Timing: If the markets continue to fluctuate, timing your entries into new positions could be the difference between a losing trade and a great investment. You must use all the tools at your disposal to pinpoint ideal entry prices. If a stock’s chart isn’t backing up the fundamental story, move on to other options. There’s just too much risk in trying to guess when a crashing stock will stabilize. Unless you can target a low-risk entry point, walk away. Don’t try to catch falling knives.

Portfolio Management: When the market gives you opportunities to book profits, you take them. On the flip side, when the market warns you that one of your stocks might underperform, you should sell. What’s left is a lean portfolio containing the stocks that offer the best chance to lead you to profits. There’s nothing wrong with taking profits on a name you really like — even with the intention to buy it back when the dust settles.

Sincerely,

Greg Guenthner
for The Penny Sleuth

3 Ways to Survive a Volatile Market was originally featured in the Penny Sleuth.

Liquidity is one of the most overhyped of modern financial ideas. In the context of the stock market, all liquidity means is that you can buy and sell easily. Lots of liquidity means lots of trading volume. It means the bid-ask spread is narrower in a liquid stock than it is in one that is illiquid.

As it turns out, the best opportunities are often the most illiquid. In what follows, we’ll take a look at illiquidity as an investment strategy.

Markets are more liquid than ever these days, but that is not all a good thing…

Back in 1960, investors held their stocks for an average of seven years. No one complained about a lack of liquidity. Today, people hold stocks for on average for four-eight months.

The ability to get in and out of a stock quickly means you have lots of sloppy owners. As Lowenstein points out: “Those who expect to sell out quickly and cheaply are more likely to buy for speculative or foolish reasons and to act as uninformed owners in between times.”

An illiquid stock is, by its nature, more likely to attract a smarter shareholder base. This is simply because the people going in know they can’t get out of it as easily, so they are more careful about how and why they get in.

This may have something to do with the outperformance of illiquid shares.

Roger G. Ibbotson and Wendy Hu of Zebra Capital Management studied the performance of liquid stocks against illiquid ones. They found that illiquid stocks tended to trade at a discount to more-liquid stocks. “Investing in less-liquid stocks thus pays,” they write.

Moreover, they found that less-liquid assets tend to become more liquid over time, thus helping to erase that gap.

Ibbotson and Hu also note that investing in less-liquid securities as a strategy has an advantage in that it “avoids, or invests less in, popular, heavily traded glamour stocks and favors out-of-favor stocks, both of which tend to revert to more-normal trading volume over time.”

That’s all fine and makes sense. But you can really see it in practice by looking at portfolios investors construct.

Nick Padgett and Stephen Mack are the managing directors of Frontaura Capital. The fund invests in frontier markets such as Cambodia or Mongolia. I’ve never met them personally, but hope to someday. I was introduced via email by my friend Doug Clayton at Leopard Capital. They share their shareholder letters with me, and the latest one had an interesting observation on this liquidity idea.

Frontier markets can be very illiquid. It can take weeks, maybe months, to buy even small positions in Mongolian stocks on the Mongolian exchange, for example. This means frontier markets are cheaper, but not always. Frontier markets have some liquid stocks. And the valuation disparity between the liquid and illiquid is great. The most-liquid stocks can trade at the same price-earnings multiples as S&P 500 stocks like Wal-Mart or Intel.

“Thus,” Padgett and Mack write, “those willing to invest beyond the most-liquid frontier stocks could have a performance advantage, provided they remain patient and committed during difficult market periods, when less-liquid stocks may perform worse.”

As evidence of the disparity, consider the MSCI Frontier Markets Index. It is made up of the largest and most-liquid frontier companies. Padgett and Mack don’t own a single stock in this index. “Many of these stocks are good companies,” they write, “but they do not trade at the most-attractive valuations.”

At the time of their letter, Frontaura’s portfolio had an average price-earnings ratio of 6 with a price-to-book ratio of 1 and a yield of 5%. By contrast, the MSCI Frontiers Markets Index had a PE of nearly 11, a price/book of 1.5 and a yield of 4%. Frontaura’s valuations are cheaper in the less-liquid names.

I offer another exhibit of an absurdly cheap illiquid stock: Siem Industries.

This trades on the Pink Sheets under the ticker SEMUF. Siem is a holding company in the oil and gas, marine transportation and shipping industries. Siem owns pieces of Subsea 7 S.A., Siem Offshore and Star Reefers. Siem Industries is another stub play, as these three companies are all publicly traded.

The stake in these three companies is more than double the market cap of Siem Industries.

Siem Industries owns other stuff, too. It owns 100% of Siem Car Carriers, which owns ships that carry cars. It has a stake in a private equity fund that owns a variety of Scandinavian companies. It has stakes in a potash mine and an insurance affiliate. None of this is counted above.

The catch?

The shares don’t trade much. Over the last three months, the average trading volume was 945 shares. That’s a daily volume of about $60,000. And that overstates it. I checked over the last 16 trading days and found that on 11 of those days, no shares traded at all. Not a single share. On many days, you’ll see 200, 400 or 600 shares trade. As I write, the bid-ask spread is enormous. You pay $74 per share to buy and get $63 to sell.

That, I think, is the big reason for the discount. But this is not a situation that will persist forever. In the meantime, there is a whopping discount to the patient shareholder, and probably a rewarding ending.

Note: Siem Industries is not an official recommendation. I think it’s too illiquid for me to recommend here. Too few would get in on the trade.

In any case, liquidity as an investment strategy is a useful idea, as these examples show.

Sincerely,

Chris Mayer
for The Penny Sleuth

Liquidity, Crack and the Quest for Better Returns was originally featured in the Penny Sleuth.

It doesn’t matter if you’re a long-term value investor or a short-term trader. When you’re dealing in stocks, timing isn’t everything — it’s the only thing.

As I was sorting through the mailbag this weekend, I found that many of your questions were about when to buy into a stock or a big investment idea. Today, I want to look at some of the potential trades and investments on your collective radar. I’ll analyze the charts and tell you if you’re looking at a solid buying opportunity — or a potentially disastrous trade…

Let’s get started:

What do you think of Cisco Systems (NASDAQ:CSCO) and Silvercorp Metals (NYSE:SVM)? Is now a good time to buy shares of both?

— S.R.

Here’s what Cisco looks like right now:

Yikes. Cisco is more or less a household name. But this chart is just awful. No one wants to own this stock — and with good reason. The company issued terrible earnings just last week — as evidenced by the massive gap down from $18.50 to $17.25. This gap will now act as resistance. So even though we’re seeing a decent rebound today to the high $16’s, I wouldn’t count on this stock recovering past the mid $17s anytime soon.

Any way you look at it, this thing is toxic. I would avoid it at any price.

Next is Silvercorp:

Here we see a very similar chart — minus the big gap lower. Still, a strong downtrend remains intact. Before you pull the trigger on an investment, draw a line connecting two or more peaks in the price. That’s where you’ll find resistance. Until your stock can break out of its downtrend, chances are it will continue to move lower…

Both of these examples could be considered falling knives. Neither CSCO nor SVM has indicated that it has put in a solid bottom. The important takeaway here is that an out of favor stock needs to time to consolidate after a move lower. Unless you see legitimate signs of life, the stock will probably see additional downside/sideways action before it begins to recover.

As far as questions go, I have one that may fall into your “it’s a bad stock, run away” category. Cameco (NYSE:CCJ), the world’s largest uranium miner. It got hammered after the accident in Japan, and I bought in about a week later. So, you can see what has happened since then. Personally, I still feel that nuclear power is an important cog in the energy machine, and I expect it to return. My question is: is that a rational view, and, if so, is it smart (for the long term) to even consider adding to the position?

— M.N.

Yes, you are expressing a very rational view. Unfortunately, there is nothing rational about the stock market.

Here’s a long-term look at Cameco:

I think you’re analysis is sound. Nuclear is and will remain an important source of energy. But this sentiment is not shared by the market right now. That’s your problem. While you are able to project a stronger future for nuclear energy, the market has yet to move past the events in Japan and the reactions that followed.

Solid analysis will occasionally produce substandard investment results. This is why timing is so important. In this case, you jumped back into nukes way too early. Think of it this way: the market continues to deal with the residual effects of the 2008 financial crisis to this day. And were’ only about a year removed from the nuclear crisis in Japan…

As far as adding to your position — I generally do not advocate averaging down. However, some longer-term investors are fine with buying more shares at lower prices in the hopes that the stock will eventually rebound. It’s more about your investing personality than anything else. As long as you can sleep at night without worrying about your portfolio, you’re probably doing something right.

Keep sending me your charts, questions and concerns to editor@pennysleuth.com.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Monday Mailbag: When to Buy Stocks was originally featured in the Penny Sleuth.

My portfolio has plenty of the first two categories. We have a handful of above-average utilities and energy stocks. But we have only one health care play. If you look at other income-focused portfolios, you’ll find a number of health care real estate trusts and pharmaceutical makers.

Now, we’re not unaware that changing demographics in this country and rapidly growing health care costs have made this a powerful sector. But the numbers are all wrong.

On the real estate side, there are still a number of issues concerning what the property should cost. So smart investors have to remain picky when it comes to hospital and retirement home REITs.

But when it comes to pharmaceuticals, we’re dealing with a whole other set of problems.

We have been covering the ongoing “patent cliff” in name-brand drugs for years now. Some $49 billion in annual pharmaceutical sales are at risk of losing their exclusivity.

And for a drug maker, that’s your most important asset…exclusive rights to make and sell your drugs.

This isn’t some far-off problem. Last year, industry leader Pfizer lost exclusive rights to Lipitor. That drug brings in — or, more accurately, brought in — more than $4.5 billion in annual revenues. That’s a sizable chunk of change.

Others have faced similar challenges. Eli Lilly lost exclusivity to Zyprexa — $1.9 billion in yearly sales. GlaxoSmithKline lost Advair — $4.7 billion in U.S. sales. The list goes on and on. There are also plenty of big drug patent expirations on the horizon. In fact, the majority of these problems are yet to come for most major companies.

Now that we are further along on this patent cliff, other potential plays are popping up. There is one company we recently released to our Lifetime Income Report subscribers…

Up until now, we’ve been a bit cautious to get into it, however. Its long and successful history didn’t give it a pass on this patent cliff problem. It was very much in trouble.

However, through all of this, the company still managed to generate $11.4 billion free cash flow and increase its earnings per share for the 28th year. It has been able to do that in face of some of the stiffest economic environments in history and its expiring patent issues.

And, it has ensured continued growth through their proactive portfolio transformations.

What really strikes us about this company’s approach is how, despite its long legacy, it refuses to be a dinosaur. Its current goal is to realize half of its health care revenue from products developed in the last five years. Considering the backward-looking industry it finds itself in, that’s great foresight…

Sincerely,

Jim Nelson
for The Penny Sleuth

A Crack at One of the Fastest-Growing Sectors in the Market was originally featured in the Penny Sleuth.