The Microcap Speculator

On October 19th, I wrote that the long rally in dry bulk shippers was likely to end. I was a few days early, but today it did just that. On RealMoney.com, Tony Crescenzi explains why: “there is a lot of chatter today about a decline in shipping rates. Panamax rates are said lower and mid-size dry bulk tanker rates are said to be sharply lower compared to the previous quote. The Baltic Dry Shipping Index will likely reflect this chatter when new data are available.”

Shares of Excel Maritime [[EXM]], of which I am short, dropped 20% today:

DryShips, another dry bulk shipper, dropped 17.5%:

My experience is that such violent moves at the end of a long rally usually signal substantially more weakness to come. Also, the expected Chinese efforts to improve air quality by slowing factory production in the months just ahead of the Olympics should also weigh on the dry bulk shippers.

DISCLOSURE: Short EXM. No position in DRYS.

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I have been a fan of the dry shippers in general, and Excel Maritime [[EXM]] in particular, for almost two years. As the Baltic Dry Index of spot prices doubled and doubled again, the dry shippers started to print money, and their shares shot up. Excel Maritime, for example, surged from around 11 when I first bought shares, to over 77 today (unfortunately I did not remain long through the entire rally).

A reversal appears imminent, but has not yet been confirmed. On this particularly ugly day in the markets, dry shippers lost more than most. Excel Maritime lost more than 5%, DryShips [[DRYS]] lost nearly 9%. What to watch: The recent spike in most of the dry shippers began shortly after the Baltic Dry Index crossed its 20-day average, and I will consider the trend finished when that average is broken to the downside (see chart below, courtesy of InvestmentTools.com).

On this weakness, I opened a small short position in EXM, which I will close if the Baltic Dry Index or EXM hit new highs.

DISCLOSURE: Short EXM. No position in DRYS, GNK, EGLE.

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When I first profiled dry shipper Excel Maritime (EXM) (articles), I said that I would keep the trade on so long as the trend remained in both EXM stock and the Baltic Dry Index of freight rates. EXM is still trending, but it looks like the Baltic Dry Index is turning down. That was my signal to take profits. I am now out of the dry shippers. Perhaps the move was a bit early, but dry freight rates are quite volatile and can plummet in a heartbeat.

If the index turns up again, I’ll take another look. Thanks to InvestmentTools.com for the excellent chart.

DISCLOSURE: I have no position in EXM. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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One of the biggest misconceptions about microcap stocks is the notion that traders should avoid mainstream analytical tools and instead base trading decisions on rumors, tout sheets, and inside information. I think that is a big mistake. Conventional tools are the core of my microcap trading arsenal. Here’s how I use them:

Tear sheets: I occasionally look a company’s description page on the Bloomberg terminal, but more often than not I just review the Profile, Key Statistics, Headlines, and Insider Sales pages on Yahoo! Finance. Put these together with a basic chart and you have all the information in a broker’s tear sheet.

Industry analysis: Yahoo! also makes it easy to examine a stock’s industry. Are most competitors doing well or poorly? Start with the Industry Center, such as this one for shipping I use to explore the business environment for my holding Excel Maritime (EXM).

Pricing surveys: Sometimes generalized price information is available for a particular industry. For Excel Maritime, I look at the Baltic Dry Freight Index, posted to the right courtesy of investmenttools.com. I know that if freight rates drop sharply, so will EXM’s revenues.

Analyst industry reports: Most microcap stocks are not followed by credible analysts, but careful review of industry reports will give you valuable clues. For this, look at the periodic industry reports from top brokers or the business environment discussion in reports on larger companies within the industry.

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For example, today Bill Cara was kind enought to post this huge report from UBS on commodities in the year ahead. On page 32 I learned that: (1) UBS expects bulk freight rates to fall more sharply than consensus because of China slowing; and (2) iron and steel use in China are the key factors to watch. I incorporate that information in my trading by keeping a vigilant eye on freight rates via the BDI index and setting up a news search for Chinese steel/iron stories.

SEC Filings: These are free and searchable on the SEC’s EDGAR site.

Trend analysis: For several months I have been tinkering and backtesting trailing stop techniques. All of the techniques I have examined were designed for largecap stocks or futures, but a few work quite well for microcaps. None are perfect, but neither am I working on a discretionary basis. For a stock like Excel Maritime (to the right), I only want to be in it as long as it is trending. These stops, along with the BDI and other tools, will make sure I do not overstay my welcome.

Once you are accustomed to these tools, it takes no more than an hour or two to get a good read on most stocks.

DISCLOSURE: I am long EXM. Not a recommendation to buy or sell any security. For informational and educational purposes only.

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