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Despite the well-documented laments from the market about woeful undervaluations and that many stocks are sitting ducks (as evidenced by takeover after takeover), there is still plenty of volatility and opportunities to trade. However, a knowledge and understanding of specific stocks is required in order to contextualise any new information.
For example, Oxford Biodynamics (OBD) has seen a rise of nearly 400 per cent in the space of six sessions. The catalyst? A news announcement informing the market that the company’s EpiSwitch prostate screening (PSE) test was 94 per cent accurate compared with the current blood screening test (the PSA) used in the NHS, which is only 55 per cent accurate, and “considered unreliable by many doctors”. The price jumped from a closing price of 10.5p to an intraday high of 39p within two sessions. A subsequent news release pushed the shares to a high of over 50p.
Prior knowledge of the company and its products (and what they do) is helpful here. While at first glance the news may be good, those who know the company well will have been in pole position to capitalise on the news announcement. This is why I believe anyone who wants to make a living from the stock market needs to professionalise their approach. It means becoming an expert in the market you trade, knowing the narrative of stocks in your market as well as what the companies do, and keeping on top of their journey. That way, when something truly game-changing appears, you’re ready to pounce and take advantage.
One such stock this week (that again I sadly missed) was Gulf Keystone Petroleum (GKP). We last looked at this stock in January 2022 (‘Gulf Keystone rising again?’). I had intended to trade this stock if it broke out of the 220p level, as highlighted in Chart 1. The stock did break out but failed to stay above this level and fell back to the support of the 200 EMA (pink line). After it had shaken some traders out, the stock then rallied to as high as 320p. I am often stopped out of a trade, only for the stock to print higher a few months later, but without me in it. I’ve often been asked: why set stop-losses if you think the stock will go higher? And my response is always the same: “But what if it doesn’t?” All that is necessary for an account to sustain some serious damage is one trade with uncontrolled risk.
Stop-losses have various benefits as well as protecting your downside, including emotion control. Trading can be emotional, and emotions such as fear and greed can cloud your judgment. Setting a stop-loss in advance helps remove the emotional aspect of decision-making. It enforces discipline and prevents impulsive trading decisions.
They also free up mental space. Constantly monitoring the markets without a clear exit strategy can be mentally exhausting (not to mention potentially catastrophic). Having a predefined stop-loss level allows traders to focus on other aspects of their trading strategy without being glued to the screen at all times. But more importantly, they enforce trading discipline and keep you in business for the long term, meaning you can take advantage of opportunities as they occur.
One such opportunity was presented in Gulf Keystone Petroleum this week when it was announced by a Turkish minister on Monday 2 October that the Iraq-Turkey pipeline would resume operation this week. The stock rallied more than 30 per cent within an hour, although this rally was then tempered by an Iraqi minister casting doubt on the situation.
If the pipeline does reopen, and oil can start flowing again for Gulf Keystone, then the stock may be in for an extended rally. The pipeline has been closed since 25 March due to an international arbitration court ruling.
The shutdown has harmed Gulf Keystone dramatically. The stock has fallen to as low as 82p from 173p since the pipeline was closed. The company has had to rely on growing local sales at a price of around $30 per barrel. In August it cast doubt on its ability to maintain operations and mentioned that due to the uncertainty the company may need to implement external financing.
Yet in 2022, the business paid out 80.82p in dividends. Contrast that with the current screen price of 115p, and it means a 70 per cent dividend yield. Of course, the stock won’t be paying anything like that in 2023, but this is the opportunity once the issue is settled and the pipeline begins to reopen.
Chart 2 shows the slump in price since the pipeline shut (marked with the arrow). Although 2023’s profits have been hammered, the business generated $264mn in net profit for 2022.
My belief is that once these issues are resolved, the share price will re-rate sharply and the dividends that have proved lucrative for shareholders in the past may return to the table. That said, the business is not without risk: it operates in the Kurdistan region of Iraq and payments from the regional government can be infrequent.
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