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 MARKET REPORTS |
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Stocks
Stock of the week – Panoramic Resources
October 13, 2008
Tim Morris, wise-owl.com analyst
Company: Panoramic Resources Ltd
Code: PAN
Recommendation: Update
Market Cap: $190 billion
Pain…our most dreaded emotion, has been almost impossible to elude for anyone invested in the stock market during 2008. As share indices slumped to new lows during the week, the hurt has no doubt intensified. The gloom has seen long term investing come into the spotlight, although in two quite contrasting forms.
We have been advocating the traditional type of long term investment - buying quality blue chip stocks at depressed prices. Our long term portfolio has been steadily building, and we expect the market’s latest downward retreat to provide a flurry of new opportunities over the coming weeks…
On the other hand, we have also witnessed the rise of a less amiable form of long-term investment – the short-term investment gone wrong! In other words, a stock that has been purchased in anticipation of short term gains, but has been relegated to the ‘bottom drawer’ as its price moved in the opposite direction to what was expected. That’s right….give yourself a proverbial slap on the wrist, forget about it, and hope for the best. While ‘moving on’ in this manner often comes naturally, it is usually easier on the mind than it is on your wallet.
Granted, if your bottom drawer is full enough, one of those share certificates may become valuable in future years. However such stories of share price resurrection are likely to be far outweighed by the losses accrued in the interim.
Some losses are an inevitable part of the game of investing, however one of the keys to success on the share market is preventing these losers from becoming ‘real stinkers’. While we are happy to buy in and take a long term view on a quality stock that has been sold down heavily, we are not inclined to see a short term bet that the stock will continue to notch up capital gains turn into a long term stinker.
Central to our prevention strategy for shorter term recommendations (12 months or less) are stop losses. A stop loss is a predetermined price at which you sell a stock in the event that it doesn’t perform as expected. It is essentially the price at which you admit you were wrong, and unemotionally sell out to preserve capital for better opportunities. The unemotional nature of a stop loss system is important because selling is one of the hardest decisions an investor has to make.
In addition to a stop loss, knowledge of the risk factors which can turn a share price against you makes the decision to sell and minimise losses a whole lot easier.
Panoramic Resources provides a humbling example of how to use these forces effectively. Operating two nickel mines in WA, the stock was recommended in January this year. After falling heavily from its 2007 highs over US$20/lb, the nickel price was showing signs of stability around US$7.50/lb, and Panoramic a mix of growth and value traits. On the growth front, the company had plans to double production to 24,000 tonne's of nickel by FY09 and was achieving exciting exploration results that could boost its reserve base, with nickel grades up to 10% reported at its Lafranchi project.
On the value front, the stock was trading on a PE of 10, one of the more attractive in the nickel sector. The balance sheet was also looking strong with minimal debt and cash plus receivables of $122m. Adding potential upside was the company’s takeover potential, with the newly merged Oxiana-Zinifex making public its desire for nickel acquisitions.
While the stock initially rallied following our ‘buy’ recommendation at $4.34 in the months through to May, it fell just short of our profit targets, which hindsight has revealed were a little too ambitious.
As the stock fell from grace our stop loss was activated at $3, which coincided with a fresh wave of weakness in the nickel price, one of the key risk factors highlighted in our recommendation. With this key risk factor moving against us, taking the 31% loss was a prudent measure. As it happened, the breach of our stop level and our sell signal to members preceded further falls in both the nickel price and the stock. Nickel is now trading at US$5.30/lb, and the stock has slumped from highs above $6 to lows below $1.
The company’s market cap is now $190m, which places very little value on its mining assets considering its $110m cash balance. Its net tangible asset backing of $1.21 paints a similar story. Although the stock represents a potential value play, nickel prices at current levels could have a severe impact on mine profitability. As more certainty emerges about its operational health at current prices, the stock may be worthy of another look.
However for now we are happy to have exited when we did. Although losses are not usually worth writing about, in this case we are in a much stronger position having taken a 30% hit, than be staring at a paper loss in excess of 70% at current prices.
Where the stock heads from here is likely to hinge on the nickel price, and its operational performance under current conditions. However with the stop loss having preserved our capital, we are in a position were we could buy in again at these cheaper levels, should the risk to reward proposition turn favourable.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
More articles from this edition of CompareShares:
Global crisis: Was buying that stock a big mistake?
Stocks: Broker Recommendations October 13th – 6 to BUY, 6 to SELL and 6 to HOLD
Market meltdown: When the fear index peaks, brave contrarians start buying up fast
Market Crisis: Fund managers buying conservative stocks
Stocks: Investors flock back to banking stocks
Stocks: Stock of the week - Panoramic Resources
Trading: The top 5 technical indicators to trade commodities
Market Crisis: Time for govt hand in markets
Market Crisis: Crisis plans face acid test in Asia
UK Banking Crisis: UK govt to take control of two big banks
Market Crisis: G20 commits to tackling financial crisis
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