New Position Initiated - NXY (Nexen Inc.) October 25th, 2011

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

It has been about six months since I last posted a trade in the OnlyDoubles Blog. There have been many trades that have come and gone in the interim but because of my family's crisis I took a pause from posting. I am pleased to announce that I have resumed the service and will post when-ever I see a trade that couple double in value come along. The junior stock market has been horribly hit over the summer and as a result, many of my picks are sitting at or near entry levels. Should we get a move to a double point on any of these names I will post an exit blog entry. 

This post, as I expect will be the case for some time, revolves around options. Specifically, Call Options (which make money when an underlying asset goes up in price) are today's trade. 

While doing our 'First two weeks of the Quarter analysis' in the middle of the month, one specific trend jumped out at me. The Energy and Basic Materials sectors were going to outperform the broader market for Q4'11. The XLE (Oil sector ETF) rallied almost 14% over the study period and far exceeded every other sector measured. Indeed, since that report, Crude Oil itself has moved another 6% higher (as measured by the oil ETF, USO) and looks to be trying to compete a short term bullish flag pole formation which ought to take prices up into the $37 area (which happens to be right around the 200 day SMA). To back up this notion, a report was issued today suggesting funds are buying commodities in size (news link).

So that brings us to today's trade. Nexen Inc. is one of Canada's leading integrated oil companies. It has major operations world wide and follows the broader energy market closely. 

Fundamental analysis: The whole market went into free fall over the late summer and I believe this is one company that is trading at ridiculously low valuations. From the July peak to the October trough the company fell by almost 45% [(25-.13.88)/25] of its value. Indeed, the company has been so hard it that it currently trades at a paltry 1.05 times book value. This literally means you are buying the company's assets at cost. Considering the substantial rise in energy prices themselves (over the past few weeks) is it realistic that this company should see a bump too? Insiders seem to agree considering they bought more than 20 million shares, or about 4% of the companies outstanding stock, over the past few months (news link) . Additionally, JP Morgan recently came out with a research note (news link) on October 6th (stock closed that day at $15.85) suggesting Nexen offers "the most attractive combinations of upside to price targets, downside protection, upcoming catalysts and growth in production." Earnings for Q3 are due out on the 28th and it is interesting, as one analyst put it, "The EPS estimate for the company's current year increased from 2.02 to 2.07 over the last 30 days, an increase of 2.48%. This increase came during a time when the stock price changed by -23.54% (from 20.26 to 15.49 over the last 30 days)." (news link). One has to argue that fundamentally, this company is ok. It is trading at the intrinsic value of the company, It is growing its earnings and insiders are are buying.

Technical analysis: A technician often looks at a horible price chart and sees opportunity. A stock that is sitting near its 52 week high seems dangerous to the technician while a stock sitting near its 52 week low seems potentially attractive. This I think is the case with NXY. The stock that was trading at $28 in March and they cut it in half over the period of six months. While I am not screaming BOTTOM, the stock is putting in higher highs and higher lows and momentum has confirmed the price action. But a trending higher market isn't enough for us to justify risking our hard earned money. The next question is of targets going forward. The 1 year 50% level currently is $20.91 (27.94+13.88)/2. More recently, the free-fall from the broader market late-summer sell-off cut the stock by 45%. A 50% retracement of that move would bring prices back into the $19.40 area. And lastly (which further bolsters my believe we will see higher prices in the not too distant future) there is a gap that ought to be filled at $19.10 that was left during the panic selling just a month ago. These then will be my targets going forward ($20.91 to $19.10).

The Trade: The issue for us short term traders is always one of time, or lack of it. To get the biggest bang for our speculative buck we have to limit our time of ownership. Since Options have monthly expiry's, we can buy a short amount of time in the hopes that our target will be hit before expiry. This then is what I have done today. Since we know there are catalysts coming for the company (earnings/exploration/crude prices moving) I am willing to get into the November calls in the hopes that the trade will develop over the coming month. These options expire the Third Friday of November so at the latest I will be out by the end of the first week beginning of the second week of November. If the trade is working I may just roll the position out into a later month.

I have bought 10 of the November $18 calls on NXY (US listed) at $.30. This works out to a risk of just over $300 on the trade. Upon notification of my fill, I placed an order to sell half of the trade (5 contracts) at $.60 to get my original money back in my pocket as quickly as possible. I will let the remianing position ride until either just before expiry (and I have to roll the position out to a later month) or the upside target is hit. I will risk 50% on the trade ($150) or down to $.15 on the option.

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

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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

Reiteration of Existing Position - PRC.V (PanTerra Resource) February 17th, 2011

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

This post has more to do with a reiteration of how much I like one company rather than an entirely new stock. The company specifically is PanTerra Resource (traded on the Cdn. Venture exchange, symbol PRC.V)  

Fundamental criteria

The stock first came to my attention when the company announced they were going to roll their stock back on a 1:15 basis in October, 2009. (news link). 

The company has recently announced substantial grant of options to directors at $.25 in November, 2009 (news link), $.24 in September, 2011 (news link) and again at $.21 here in January, 2011 (news link).

Currently (at $.25) the company is trading at a rediculous .325 price to tangible book value. Today they announced they have a 90% increase in NPV from a little over $6 million to now over $11 million (news link) 

Technical Criteria

 The charts really speak for themselves. It looks like there is a serious pivot on the stock at $.25. Considering the fact that so many directors are long from in and around that area, I am more than happy to go bottom fishing here.

Momentum looks text-book here. The market is working a double bottom from today's break above $.25. The last piece of the puzzle here is volume. Should buyers come along in size - look out...

Fortunatly or unfortuantly (I don't really know) many popular investment sites (like stockcharts.com) havn't taken into account the roll-back so their weekly charts are totaly wrong. This could work in our favor but I really don't know at this time. Anyway, the above chart is from the TSX themselves so I feel good it is ligit. As one can see, this stock tanked in the 2008 bear and never came back. While I am reluctant to suggest we are going back to $11/share, technically speaking, this stock will eventually want to get back to the multi-dollar area. As well, they always say, the longer the base, the bigger the run. If that is the case, this one has got a long way to run!!!!

Summary

Based on the fact that the company is trading at a huge discount to their asset base and the fact that the company has been slowly loading the insiders pockets with stock over the past year, I am more than comfortalble to suggest there is solid fundamental reason to be in PRC. Additionally, the technical picture supports higher prices going forward, with a near term target in the $.355 area and a long term target well north of that. 

I will submit that I have been buying this little one along the way for some time now and my cost is about $.21. Considering the double bottom breakout on the news today, I would be more than happy to add to that position. And while it is tough to make the technical argument for $.50 in the near term, I have no problem shooting for that some time over the coming spring rally. Similarly, if you consider yourself a slick trader, work open orders in and around that $.21 area and see if you can pick up some panic/month-end selling pressure stock.

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

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

New Position Initiated - ZN.V (Zinccorp) February 09th, 2011

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

New trade for February 9th, 2011.

Every once in a while you come across a story that literally gets better and better the more you dig into it. Today we have to fortunate opportunity to learn of just such a story (have I got your attention, yet?). Here it goes...

The company specifically is, Zinccorp Resources (ZN.V). Currently CRI has been accumulating at or near $.16. The market is actually lower then where I bought it, but for disclosure purposes that is where I am long. And after we do the analysis, you will understand why I am ok with that cost.

Fundamental background

Zinccorp, like so many of the junior resource sector, is completely reliant on financing and more specifically flow-through financing (to learn more about why flow-through financing is so important to the Canadian Resource sector, I suggest you go here: link) to fund operations. Since we know the market is reluctant to finance companies with large share counts, we can make our lives much easier if we focus on resource related companies with low share counts. With this in mind, ZN has a total of 18 million shares outstanding (relatively low - keep in mind our VCIM model looks for stocks with less than 20-25 million shares out). As rediculous value hunters, we hate to pay more than book value for an asset. Ideally we would like to pay a fraction of book value for assets (to learn more about why book value is a good measure for the actual value of a company, I suggest you go here: link).ZN currently is trading at .50 tangible book value per share. This literally means for every dollar you spend in the market, you are buying two dollars worth of company.....HELLO!

So lets dig a little deeper shall we. The company describes itself as "a member of the Hughes Exploration Group of companies. A recently formed, tightly held junior mineral exploration company. The Company had a zinc/lead/silver discovery on the Michelle Property, one of its four highly prospective properties in Yukon, Canada in 2007, 2008 and again in 2009. Zinccorp has recently expanded its exploration profile into the prolific Timmins / Larder Lake mining camp adding a new gold dimension to its exploration portfolio." (company website). Frankly, I was not impressed when I went to the site. It is poorly laid out and way out of date. And this may be one big reason why the stock is so un-followed (if that is a word?!?) and trading at such a huge discount. In this modern day and age, you gotta be up to speed or you will be left behind. Having said that, this to me represent a potential opportunity. The company is trading at .5 time price to book so they must have something. Indeed, they do have two signficiant plays going. 100% interest in the Michelle Project in north-central Yukon Territory (zinc, lead, silver and gallium...news link) and 100% interest in newly acquired Timmins / Larder Lake property (news link). Something doesn't make sense here, right? When in doubt I always pick up the phone and so that is exactly what I did. I was very fortunate to be able to get a hold of a company executive and have a nice chat (he shall remain anonymous for this post). It turns out that yes both properties are going well and plans for a 2011 exploration budget and exploration calendar are being put together. Additionally, he told me that the company is drilling on the Timmins property as we speak. WHAT?!? I asked him why the TSX for example didn't have the news and he said that the person handling the IR left the company at the end of the year and hasn't been replaced. Can you believe that!?! If you can't please feel free to call the company yourself and do your own DD (Telephone: 604-685-2222).

So here is a poorly followed company with horrible IR. They are trading at .5 times price to book and only have 18 million shares outstanding. The last question that needed to be answered was where were the insiders of the company long? To answer this I had to do some serious digging. It turns out that way back in July 2008 (when the Yukon deposit was first discovered) the company granted 3 million options to directors at $.15 good through 2013 (news link). BINGO!

Technical picture

The technical picture is almost as compelling as the fundamental; here then are the daily and weekly charts for ZN (since the stock is poorly followed Stockcharts.com won't even carry it so I have included the basic TSX charts (link).

The daily chart has yet to bottom in earnest so any buying right now is 'dipping our toes' kind of buying. Having said that, the current 1 year 50% level is $.325 and the three year 50% level is currently near $1.33. This literally means that if we buy the stock for less than $.1625 we can realistically expect a double at our initial target. Once we have some free stock we can shoot for the $1.33 as our ultimate target. 

Summary

With the above mentioned in mind I feel like this company is extremely undervalued and can realistically double from current levels. The stock has not put in a technical bottom so I am not looking for it to take off tomorrow. Considering the low share count, the fact that the company is drilling and we are heading into a seasonally very friendly time for the stock market, I have gone ahead and 'dipped my toe' at $.16. Upon a respectable double bottom (our classic W pattern) I will add to the position. Hopefully that will still be below $.16 but one can never know for sure.

So the question for your is how do you read the next line:

opportunityisnowhere

Since you are a subscriber, I think we know the answer....

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

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

New Position Initiated - RIP.V (Ripper Oil & Gas) January 13th, 2011

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

New trade for January 13th, 2011.

When running our weekly VCIM screens we sometimes come across some not so ordinary situations. And while one of the primary criteria of the model is 'rolled-back' stock, that doesn't mean we won't take a real good look at an on-going concern with less than 20 million shares outstanding. Indeed, today's purchase is along these more abstract lines. Once we delve into the fundamentals, I think you will see why CRI thinks this little company is rather compelling at these levels.

The company specifically is, Ripper Oil & Gas (RIP.V). Currently CRI has been accumulating at or near $.13.

Fundamental Background:
RIP is in the Cdn oil & gas business with several properties across western Canada. Previously, the company was heavily tilted towards gas rather than oil. The company has been in the process (over the past two years) of divesting many of its natural gas assets. So much so, that now the company is basically 50/50 Oil/Gas.

What is most interesting is how they went about it. The company recently announced they has closed the sale of a substantial portion of their natural gas assets, coal bed methane assets to be exact (news link) for a little more than $13,000,000. Through the sale, the company was able to strategically reposition itself as a 50/50 producer and pay off all its debts. At the same time, the company distributed a portion of the cash to shareholders in the form of a dividend. Lastly, because of the dividend the company canceled 450,000 options to directors (new link) suggesting there is little stock overhanging the market.

Once all the dust settled the market has been left with a very interesting little company. Currently RIP is trading at an incredible discount of 0.189 price to tangible book value. Their latest quarterly report details the fact that the company has a number of producing assets and over $700,000 in cash (news link). And since they company still has only 20 million shares outstanding, any property aquired with that money could be subject to flow-through financing down the road.

So a producing asset with cash in the bank and trading at a huge discount to book value, sounds interesting to say the least. Now lets go take a look at the technical picture

Technical Backgrownd:
5 year price chart

RIP has been heading down for quite some time. The stock topped in 2004 just above $2.00/share when natural gas was all the rage. As natural gas prices have steadily fallen, so too has RIP's stock price. While I am reticent about declaring an official 'bottom', it is interesting to note that the stock did origionally bottom near $.11 back in 2009. After an almost 6 fold increase (up to $.60) the stock sold off on the recent dividend payout back down to the $.11 area. Considering the substantial book value of the company and the fact there are so few shares outstanding, I wouldn't be surprised if $.11 is a floor once again. So if we can see some sort of daily bottom come in over the coming days/weeks - from a weekly perspective we could easily see this stock rally first back to the $.60 area (test those recent highs) and then ultimatly to the 5 year 50% level at or near $1.00.

6 month price chart

Taking a little closer look at RIP we can clearly see the negative impact the dividend had on the stock price. But interesting here, momentum and money flow have moved up since the initial collapse even though price hasn't. Here too, we see that a 50% retracement of the horrific fall would bring price have up into the $.35 which happens to be more than double current prices. Because of this fact CRI has gone ahead a bought a small position in RIP to get started. A move above $.15 would register a double bottom buy price pattern and shall be my trigger to add to the position.

Once filled I will immediately place an open order to sell half of the position at double the purchase price (in this case at or near $.30).

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

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

New Position Initiated - JOR.V (Jourdan Resources Inc.) December 30th, 2010

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

New trade for December 30th, 2010.

This stock came to CRI's attention lately from a desire to take a position in the 'rare-earths' metals market. The fact that there are many suggesting there is a bubble forming in the rare earth metals market to this investor suggests that to the contrary, there is plenty more room for appreciation. Couple this un-euphoric investment atmosphere with an insatiable consumer demand/appetite for Lithium as an alternative power source and with what appears to be a growing political chess piece and you have the makings for a serious supply squeeze at some point down the road.

The real trick with these types of investments however is to be constantly hunting for signs of value as once these markets get going in earnest, the concept of 'value' quickly disappears.

With the above in mind, we come to CRI's latest acquisition, Jourdan Resources Inc. (JOR.V).

While doing a recent VCIM screen, JOR quickly jumped out as a potential candidate. The stock was the subject of a 4:1 roll back in October (news link). The stock currently has 19.5 million shares outstanding and is trading at .94 price to tangible book value per share. Their assets are 100% owned exploration rights to uranium and rare earth metal properties in and around Quebec (web site). First Gold recently discovered a major rare-earth deposit in the area and Jourdan happens to have staked the property right besides them. While this is no guarantee of finding anything, they often say the best place to look for a mine, is right beside another one.

While I don't expect the moon, a typically healthy stock can trade up to 3 times book value or in this company's case, close to $.40 per share. So what is going to get the company there? In Canada, we have government sponsored exploration tax credits that must be used on an annual basis (known as Flow-through financings). While too complicated to get into in depth here, just take away for this that there must be work done on a Canadian property, in the subsequent calendar year, in order to qualify for the tax credit. To this end, the company recently raised a little more than 1 million dollars (through a flow-through financing) that must be spent directly on their Canadian properties. The company has indeed stated that there will be major work done on their Lithium property in the coming months (news link). Lots of catalysts..

With the rollback now done and a significant financing taken care of, this company is currently in the best position an exploration company could be in. They have to property, they have the cash and they have a year to do something. In essence, this is a new stock that is trading at a discount to the actual assets of the company just waiting for any good news to 'pop'.
  
3 month price chart

 

A look at the past three month's price action in Jourdan suggest that the stock has cleaned itself up and establishing a base. Considering the substantial financing recently announced at $.15 and $.20 (flow-through) it is understandable why this stock would be putting in a 'floor' in and around these levels. Additionally, a 50% retracement of the substantial rally in October would have brought prices back into the $15 area. That has happened and one might argue that while the correction has taken place, the stock has been under accumulation.

3 year weekly chart

While not as compelling as the daily chart, there are a few interesting things oing on here too. Firstly, a 50% retracemtent of the 2010 bear run would bring prices back up into the $.22 area (or 37% higher than current levels). While not a double, the mere presence of this fact suggests the stock has the proverbial wind at its back rather than in its face. Additionally, while not yet confirmed, a trade above the fall highs would imply a bull flag formation while would imply a price target near $.28 (or 75% higher than current levels). Lastly, it is worth mentioning that at current levels there appears to be a base forming from a volume perspective and momentum (while not trending higher) is no longer overbought.

Summary
As both an industrial and political component , rare earth metals (and in particular Lithium) are still very much in the world's spotlight. Jourdan is an example of a Canadian exploration company with Canadian rare earth metals properties (including Lithium) that will be doing work and producing news in the coming quarters. Technically, the stock has recently consolidated a substantial move higher seen through the fall. One might argue that through the consolidation the stock has been under accumulation. Considering too the seasonality of the market, a typical spring (May/June) top should produce healthy returns if aquired in and around current levels. As well, because of the recent financing at these levels, there ought to be a risk 'floor' established here until the hold period expires (April 1st, 2011).

CRI feels there is a good chance to double invested dollars at or near $16 and as a result is buying. Once filled, orders will be placed to sell half of the position at $.32 working on an open ticket...

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

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

New Position Initiated - BYM.V (Baymount Inc.) December 13th, 2010

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

New trade for December 13th, 2010.

The venture exchange keeps powering its way up to the Point & Figure target of 2600 area.

(stockchart.com P&F chart link)
My hunch is we will take at least the next six months to work our way up there. But hey, who's complaining. In fact, after two and a half years of almost no trading, penny stocks are back in vogue and we are going to take advantage of it.


CDNX Venture Capital Investment Model (VCIM) Trading Tip for December:


December is usually a great time to go shopping in the venture capital market. Why, you ask? One reason and one reason only, tax loss selling. This is the process where an investor sells a stock at a loss and is given a capital gains tax credit to use either now (to offset a capital gain elsewhere) or at some point in the future (to offset a capital gain at that time). Depending on jurisdiction, these capital losses can be carried forward for years so it is in an investors best interest to book a loss if capital recovery isn't realistic.

With most large cap stocks there is always a chance price will come back if earnings recover down the road. So while there is an element to tax loss selling here, it isn't as significant as elsewhere. By contrast, many venture capital stocks (that either didn't have earnings or never had any prospects for earnings) can go down and literally never come back. The way the market handles this situation is with the dreaded 'roll-back'. A consolidation of a stock is in essence the final defeat of a venture. Even the most conservative purchases prior to a roll-back can become disasters after.

This brings us back to December and tax loss selling. Those investors who had to endure a 'roll-back' over the course of the prior year have a lot of incentive to sell a stock & book the capital loss. Watching this kind of loss materialize is not only a financial blow but it can also be a psychological blow too. Investors will often want to get rid of dogs so they don't have to be reminded of their mistake and tax loss selling season was designed to do just that*. Out with the old, in with the new.

*Since they now have only a fraction of the number of shares they began with, their average cost on the position is usually much higher than current market prices. In essence, the stock will need to increase many fold just for them to get back to break-even. So, if they happen to have a capital gain tax liability (from the sale of an asset somewhere else) they can sell the remaining position (usually a small odd-lot) and offset the capital gain liability with the newly created capital loss. 
 

This brings us to CRI's latest acquisition: BYM.V (Baymount Inc.)

1 year price chart

3 year price chart

This company first came to CRI's attention when it announced an intended 'roll-back' of its stock in August, 2010 (news link). Indeed, the stock was rolled back on a 20:1 basis which at the time left a little more than 8 million shares outstanding. After the roll-back, and a further slide, the company now trades at a very paltry 0.34 times tangilbe book value per share. This literally means for every $.34 you spend, you are buying $1.00 worth of assets. What a discount!
So what does the company do?
Baymount is in the horse racing business and operates in Ontario, Canada. The company's primary development is its new Quinte Raceway and Slots (“QRS”) racino facility located in Belleville, Ontario.QRS will combine the entertainment of slot machines and dining with live horse racing. The company has received all necessary licenses and approvals for the project. The company recently brought in a development partner who, at closing, will have invested $4 million ($3 million invested to date) for a 50% stake in the QRS facility. QRS will be the 18th and final racetrack and slots development in Ontario, which hosts one of the most successful slots-at-racetracks program in the world. The QRS facility is scheduled to open in Summer 2012. Additionally (an in similar fashion) they have the rights to build the new facilities for Wheat City, Manitoba (upon government concent) and they own the rights to proprietary software designed to help betters make more informed decisions. While I myself am not a gambler (I have way more fun in the market!) I can see how this company has quite a few assets behind it and is very well positioned going forward. Their 'philosophy [is] to create [an] entertainment destinations for consumers' (link) and I don't see how (with government and institutional backing) they can't do just that.

The $3 million dollar investment by the institution is an interesting deal in itself (news link). The company floated a convertible debenture. The conversion price is $.15/share and there is a proviso in the deal that says that if the company can get their stock above $.30 for 20 consecutive days, they can force the early conversion of the debenture into common stock. The deal has closed so it is not like this might happen......it has happened. This company now has $3 million dollars in working capital (to build the facility) almost no shares outstanding (5 million in float) and if they can move the stock into the $.30 area over the next 36 months they can literally wipe out the $3 million dollar debt.

What this means to purchasers at $.075 or better. The institution has basically said it wants in at $.15. If  the IR firm the company just hired (most recent news) and the regular street crowd can run the stock up to $.30 (and with only 5 million shares in the float, I don't see that being a big problem) then this is a win for everyone. We (CRI-ODNT people) can sell half our initial purchase at $.15 for a nice little double and look to sell more up top. The company gets the institutional debt off its books, the institution has a double on its books ($.15 to $.30) and I am sure a few brokers will make a very tidy sum.

Now can you see why CRI is so excited about this trade from the fundamental perspective?

Technically, it is very appealing too. Refering to the charts above, the company's 1 year 50% level is currently near $.23 [(high of $.40 + low $.07) / 2 = $0.235] and its 3 year 50% level is currently over a $1.00.. Purchases in and around $.08 would realize an almost 300% return if a move back to the 1 year 50% level materializes and and unbelievable 1350% should the market move back to the 3 year 50% level. However, there is NO BOTTOM in price yet. We are still very much bottom fishing here. Considering the companies plan is to open the new facility some time in 2012, I wouldn't be surprised to see the stock 'pop' on that event. Nonethless, 1350% for a little more than 24 months of work, seems worth the risk to me.

Of course, once a double bottom comes in then we can start to expect higher prices but that may be afurther down the road. My hunch, we get our normal seasonal rally into May-June and at that time we will see $.15 area if not higher. This would give us a double in about 6 months time, which would be perfectly fine by CRI.

Summary
Baymount Inc. represents really good value in the eyes of CRI.'s VCIM. The stock HAS NOT bottomed yet but CRI feels small initial purchases are warranted at this time considering the very low share count, the 'guarantee' of being in the government authorized gaming industry and the circumstances surrounding this year's tax loss selling. Once a serious bottom comes in we can start to expect to see upside objectives hit but for now consider it an accumulator. Indeed, that is what CRI has done to today and will continue to slowly do into the end of the year.

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

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