LMI – Lonmin – what I should have done

I bailed out on platinum miner Lonmin awhile ago at around 26p – a huge loss on my original purchase price of 173p. I see that Lonmin is now around 15.4p, which is a very significant further fall. My decision to sell looks “good” right now, insofar as taking a hefty loss can ever be “good”.

It is entirely possible, of course, that we are in a capitulation phase for resource stocks, and that bottoms are being put in as we speak. Or, it could be that the old adage “it’s never too late to buy, it’s never too late to sell” holds firm. I simply don’t know.

But I will tell you how I could have played this far better. It’s simply this: stop trying to catch falling knives. Just because something looks cheap doesn’t mean it can’t get cheaper. Way cheaper. I think it is better to try to catch a share on the rebound, when there is some market strength, rather than guess (and let’s face it, it is a guess) where the bottom is.

I have been thinking about how one might do this:
* use Stockopedia to look for near year-highs. You can create a screen where “% vs 52w High > -5”, for example. That should be close enough. 52-week highs have been shown to be a good proxy for momentum.
* just use the Stockopedia Value-Momentum screen for a list of candidates. The screen has an annualised return of 22.2%. What are you waiting for?
* look for shares that are in the top quintile for momentum over a 6-month period, but appear to have bombed out over a longer term, say 5 years. A good rule of thumb is that if a company has a relative strength of 20% or more over a 6-month period, then that should put it near to the cut-off point for the top quintile. As near as, anyway.
* look for shares on their 52w lows (e.g. at http://www.investorsintelligence.co.uk/uk-equities/uk-equities-52-week-lows/), and then set an alert on Stockopedia or IG for when it hits its 52 week high. That way, you’ll obtain a list of candidates that are “bombed out”, and then you just wait until they are in recovery mode.

None of this is guaranteed, of course; it’s just an approach for what is hopefully a better strategy than catching all the falling knives. It should definitely help you avoid the Marconi’s and Woolworth’s of this world, that went down and down until they reached zero.

I still think you need to exercise selectivity. I think AIM shares are always going to be tricky. Try to look for the fully-listed companies; cyclicals making a comeback or recovery shares that look like they’re in with a fighting chance. You could have used that strategy on, say, Thomas Cook a couple of years back, when there were plenty of gains to be made despite reaching a 52-week high.

Just something for you to think about.

Update 08-Dec-2015: Soon after I wrote this, the share price rallied to 41.25p quickly. It looked, on the face of it, that the market had capitulated, as I speculated. However, the rally stalled, and the share price resumed its decline. It now sits at 1.02p. This is due to a highly dilutive rights issue in which shareholders were, more-or-less, wiped out.

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About mcturra2000

Computer programmer living in Scotland.
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