New Position Initiated - COD.V (Chalice Diamond Corp.) April 27th, 2011

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for April 27th, 2011.

The cliche is so hard to resist...today's pick is literally a diamond in the rough - and an interesting story in itself. The company is a diamond in the rough in that it, Chalice Diamonds, is in the diamond mining business, because I feel that this company is trading at ridiculous valuations and finally because, technically, it looks ready to go. So lets get right to the good stuff...

Fundamental Background (VCIM screen)

COD first came up on our screens back in late 2010 when the stock meet our first criteria in VCIM - that being a recently 'rolled-back' stock (newslink). The company now has a little more than 10.9 million shares outstanding. While I haven't seen specific news about insider positions I thought it was very interesting to see the company has made dramatic changes to its board of late (newslink)- are options to directors soon to follow? While not a text-book test of intrinsic value -  there still exists a relatively high insider option position (a little over 1.4 million shares - 14 million shares on the pre-rolled back stock) that may be forced-to-exercise at $.15 if the current operators of the stock can run it above $.185 for 10 consecutive days before the end of June (newslink). That option will expire worthless at the end of 2011 regardless. Our last compelling reason to own this company from a fundamental perspective is in it's current price to book value per share. Currently, the company is trading at .30 price/book. In essence, for every dollar you spend in the marketplace right now (at $.15) you are buying more than $3 worth of assets......Not bad......Not bad at all......

Technical Background (Double bottoms & 50% rules)

The stock has taken a pounding and is dead - or is it? This is a classical case of glass-half-empty vs. glass-half-full. 

Since we already understand that the stock (from a fundamental perspective) is actually quite good right now, it really shouldn't surprise anyone if this little guy has a nice rally from these levels. Our technical 'buy' signal has come in on a move through the February peak at $.14. (A-B-C-D Double bottom price pattern). Coupled with a very good looking double bottom in price has been a much improving momentum situation. you will notice that both the MACD Histogram and the (7)RSI have been moving higher of late even though the price hasn't. This 'bullish divergance' is exactly what chart readers want to see and implies that the internal momentum of the stock is a lot stronger than what the price is telling us. The last piece of the puzzle is volume. While not bullish yet, there are hints that a floor is trying to be established. It does look like the sellers have sold - can the buyers take over now???

As for technical targets going forward; initially I would expect the stock to run up to the one year 50% level. Currently, that level sits at $.27 ($.12 or 80% above current levels). While not a strict double, I don't think anyone could be unhappy with that return. Having said that, I do believe there is lots more room for that double. Indeed, If one looks back a couple years we see the high is actually at $.90. Using that high in our 50% rule calculation, we come up a target just under $.50. Should the stock go there, that would be well north of a triple from current levels. While the percentage moves seem large, I don't think its too unrealistic given the significant highs from late 2009 through early 2010 where in and around these levels.

Summary

This is one really good looking company. It is trading at a fraction of its intrinsic value. While we have yet to see significant insider positions taken we have a company with little to no stock outstanding and an option position (a little more than 10% of the company) that has performance incentives and will expire at the end of the year.  Technically speaking, there is both a bottom in price to work with and very realistically achievable upside targets. I am long from $.15 and would be more than happy to pick more up on any pullback. I would seriously re-examine the trade if we moved below the winter lows of $.09.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com