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-- Posted Thursday, 3 March 2011 | | Source: GoldSeek.com
Independent investor Chen Lin takes advantage of high metals prices by investing in companies with the financial strength to stay the course until the resource is in production or can be expanded, making the company an attractive takeover target. For metal miners, the sustainability factor is critical because it can take years to get a mine to cash flow-positive status. Chen shares several of his strategies for finding significant returns in this exclusive interview with The Gold Report.
The Gold Report: How important is technical analysis for you? Is it more useful as an entrance or exit point for a stock? Or, do you use technical indicators as a longer-term approach?
Chen Lin: That's a very good question. I know technical analysis pretty well, and I watch a lot of indicators. Technical analysis probably helps most when entering or exiting a stock. You can also see some pretty good entrance points. Technical analysis also helps when the technical indicators improve and a lot of new technical buyers come into the picture; you can predict the stock will do well. But fundamental analysis is always most important for me, and value is the most important factor.
TGR: What indicators do you use—moving averages?
CL: I don't follow those too closely; I look at the chart and I can see the trend. I set up an alert at my Fidelity account to email me whenever gold is crossing certain moving averages, such as the 200-day moving average. I use these as reference points to see the general trend for the stock. I also use Relative Strength Index (RSI) as a good indicator to see how a stock is overbought and oversold.
In general, you want to start selling when a stock is overbought and buy when it's greatly oversold. But the company's fundamentals are the most important. If it's undervalued, it may still rise—like one stock I own that recently had a 90 RSI—which is extremely overbought—but is going higher still because the stock is undervalued from any perspective. It just rose so sharply, I had to sell some; but I'm keeping a lot of shares.
TGR: After a stock is fully valued, do you attempt to ride it as a momentum play to squeeze out more juice? Or are you just happy to take your money off the table and use it to enter another value play?
CL: Usually when a value stock reaches its valuation, it rides higher than its valuation and tends to get overvalued. Day and momentum traders rush in; so, stocks actually appreciate a lot in a very short period. Then I just start selling and taking profits gradually. Sometimes it will get a very big pop in one day when I'm selling, and I use those indicators to sell more. But in general it's very hard to catch a peak. So, taking profits is a process instead of a one-day event.
TGR: You play anywhere from penny stocks in the single-digit millions up to the $3–$4 billion market-cap level. That's a real advantage for an independent or non-institutional investor. Even most hedge funds don't have that luxury. Obviously, liquidity issues don't scare you. How do you manage those situations when a stock may not be marketable?
CL: I generally follow different rules, but first you have to know where the market is going. If the market has just started to rise, you can get into illiquid or risky stocks because, as the market rises, liquidity will come and illiquid stocks will become more and more liquid. But if the market is getting more mature and dangerous, you might want to sell them; for example, back in summer 2008, I sold all my junior stocks. For every stock, I set a rule for when I would sell. When they got to a certain level, I got out. By the end of 2008, I started to buy junior stocks—illiquid stocks.
TGR: You buy when you see activity in very small stocks?
CL: Activity is a good indicator, but it's not the only indicator. I'm a value investor, so I look mostly at the valuation. But in general you want to invest in companies with rising volume and increased trading activity. That means more people are interested in the stock. So, if you believe that liquidity will be on the rise, then you can take a heavy position in a small-cap stock.
TGR: How do you start when you're looking for a metals stock versus, let's say, an energy stock?
CL: Metals stocks are very different in valuation from energy stocks. I generally like a metals stock with a world-class asset or potentially world-class asset. For an exploration company with 5 million ounces (Moz.) gold or gold equivalent in a desirable location that a major might be interested in taking over, you can put a value on the company. That's because we know what price majors are paying for the gold.
The most recent takeover was for almost $1,000/oz. in the ground. Of course, there's a potential to expand the resource too. For production companies, you look at the production profile. You look at the average cost, the cash flow and the balance sheet. A production company can immediately leverage to higher gold and silver prices. Use those numbers to calculate cash flow, and you have an objective valuation of the company.
TGR: Chen, do you currently favor silver over gold? Is there more upside, percentage-wise, to silver than there is to gold?
CL: Yes, I think so. I probably have a little more silver than gold because silver started relatively late and is just coming up. Gold starts first, and silver always outperforms gold in the second half of a bull market. That happened in the '70s, and I think it could happen in this round.
On February 18, the margin of silver reserve requirements for silver contracts was increased by the exchange. Silver exploded because funds were betting heavily against silver, and they had to cover their shorts. It could easily go to $40/oz. and to $50/oz. There's still a big short position in silver, and it could outperform gold.
TGR: Where would you be investing today if commodities weren't in an upswing?
CL: If the underlying commodities were not in an upswing, I would be more focused on stocks with high liquidity—those with strong balance sheets and strong cash flow. When they generate cash flow, they don't need to come to market to raise money. So, then they're relatively insensitive to commodity prices. Another very important factor to consider is the cost of producing the commodity. That's also in the cash flow model. If the commodity price stopped rising, or started to go down, I would invest in those stocks.
TGR: Thank you, Chen. This has been very informative.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc., publisher of J. Taylor's Gold, Energy & Technology Stocks newsletter and Roger Wiegand's Trader Tracks. Using his wife's Roth IRA account, Lin invested $5,411 in December 2002, and by December 31, 2010 it was worth $1,188,993—with no cash added. You can see his portfolio chart here.
A doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. Chen worked in the Internet and computer area where he founded a few start-up companies. After the tech bubble burst of 2000, Chen was able to move his technology portfolio into the resource sector with considerable success. Chen employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis. To subscribe to Lin's What Is Chen Buying? What Is Chen Selling? newsletter click here, or call Claudio Bassi at (718) 457-1426. Streetwise - The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Thursday, 3 March 2011 | Digg This Article | Source: GoldSeek.com
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