Thursday, 2 December 2010

Investors prefer turn around stories to solid track records

Technical analysis is usually aimed at market timing and determining entry, exit and/or stop-loss levels. Some volume driven technical indicators are also useful in more historic perspective for investment analysts involved in investor behaviour studies. Two of those indicators are the ‘On Balance Volume’ (OBV) and the ‘Price Volume Trend’ (PVT).

OBV is an incremental indicator that adds the volume traded with a higher close and subtracts it with a lower close. The PVT is also incremental, but it multiplies percentage gains or losses with volume traded. None of the indicators has a monetary value and for both, the shape of the graph – when compared to the stock price chart ­– is what makes it interesting.
Both OBV and PVT will typically rise when there is buying into strength and lose ground when there is selling into weakness. PVT will move faster when gains or losses are important, while OBV will react more when stock prices are trending gradually under high volume.
Following graphs combine time series of stock price, OBV and PVT.

Genco Silvermex Resources

Figure 1:    Genco / Silvermex Resources (using adjusted pre-merger Genco stock prices); data series runs until Nov-23. Click to enlarge.
Genco/Silvermex is a typical turn-around story worth discussing: the stock is about back where it was over six years ago. OBV and PVT rise with the initial run up in 2005-06, but fail to go much higher in 2007, while the stock price doubles, apparently under light volumes. A severe mid-bull correction in 2007 brings the stock back to below C$2. It is obvious in the PVT, but much less in the OBV. A high volume sell off has been triggered by poor results and a troubled outlook upon metallurgy experimenting in the production chain. In the first half of 2008 a proxy contest opposed rivalling shareholder fractions. A majority of shareholders voted in favour of a management change: a small revolution. See the Full year 2008 Management Discussion & Analysis.  Arguments on the public scene leading to the management change had provoked a significant swoon, nevertheless PVT and OBV held relatively firm; both technical indicators give way in summer 2008, but not to the extent of the stock retreat.
The former management, dominated by geologists, was mainly concerned with expanding the ‘resource base ': exploring new mineral deposits and recording of concessions. The new team sold exploration activities in a (complex) equity and cash deal to Andover in order to focus on the exploitation of the "La Guitarra" silver mine.
It requires the October 2008 collapse for PVT (and much less OBV) to drop significantly. Moreover, adversities added up: after the stock market crash and the collapse of the silver price in October 2008, Genco faced a walk-out and blockade of its mine site, halting production. The cold calculating approach of the mining engineers (as opposed to the looser management style and flair of the geologists) was not well received by workers and the local community. The conflict got completely stuck.
Whereas major mining enterprises realized handsome gains in the 2009 recovery, Genco was to face the worst: the company ran out of cash following the production halt and needed to raise cash on unfavourable terms. New shares issued at less than 10% of the 2007 top prices with extra warrants at C$ 0.45 diluted existing shareholders. After raising capital, the stock price nevertheless gains back a dime and PVT swiftly jumps up, with OBV much less affected. Such behaviour is typical for a sudden price change with an opening gap up.
Later in 2009 it became clear that ongoing prospection work at “La Guitarra” revealed a much larger resource base than previously anticipated, leading to a favourable feasibility study for an almost tenfold ore treatment capacity increase with a new 3000 ton per day mill. The stock soared to C$0.80 intraday, with PVT and OBV leaving the 2007 top levels behind, while the stock price stayed dollars below its previous high. With expectations among stock analysts sky-high, the investor crowd bids up prices buying into strength. (Full year 2009 Discuss Mgt & Analysis).
Simultaneously the dispute concerning the blockade got resolved, which opened the perspective for resuming production. However, it would take until April 2010 before the mine could be started again. Meanwhile the enthusiasm had largely faded.
The first quarter results after the start-up were announced earlier this month. The stock was down because of poor operational results in the quarter it was resuming activity at its ‘La Guitarra’ silver mining site. What did you imagine, stellar profits for a mine put ‘under care and maintenance’ for over a year? Even the previous 2009 bottom of 0.25 C$(*) didn’t hold. At better silver prices a working (silver) mine was suddenly valued much lower than an idle mine anticipating a restart!
Despite the swoon, the PVT indicator held up relatively strong (with OBV losing more): an indication that there wasn't any panick selling. If some bigger investors went in too early on the initial good news about the increased reserve/resource base and potential production capacity at La Guitarra, they certainly didn't change course on the first poor quarterly result.
The end of summer once more brought some relief as investors returned to their senses. On September 20, trade was suspended as the news on a merger deal between Genco and Silvermex was to be announced. The stock closed at 0.44C$(*), up 24% for that day (see also previous blogpost). The deal was well received by shareholders of both enterprises, while the further run up in silver prices fuelled the rally. OBV and PVT went parabolic lately as there has been tremendous buying into strength. 
(*) Stock prices not adjusted for the 10:11 split.

Coeur d'Alène: more high expectations

Figure 2: Coeur d'Alène (CDE), mid-term graph: one of the silver miners remaining far below the 2007- spring 2008 highs, with PVT and OBV outperforming the stock price recovery. Click to enlarge.
Fig. 3: Coeur d'Alène (CDE): Long term graph reveals a history of poor performance and shareholder disappointment. Click to enlarge.
For Coeur d'Alène expectations are high, but operational results have not yet followed. In spite of historic poor performance, with long-term shareholders invariably incurring heavy losses, the hope for a turnaround is vivid. The OBV and PVT indicators are  outpacing the stock price recovery and are even reaching historic highs. Meanwhile CDE is nowhere as compared to historic (pre reverse-split) price levels.

Pan American Silver (PAAS)
A completely different story: PAAS is one of the top performing miners over the long run. Whereas it had not yet passed its previous 2007-2008 high by end November 2010, PAAS trades far above its historic price level of the early PM bull years. Unlike CDE, the post Oct 2008 recovery has been impressive.

Fig. 4 : Pan American Silver (PAAS). The technical volume related indicators OBV and PVT do not outperform the share price during the post Oct-2008 recovery. Click to enlarge.
Silver Wheaton (SLW)
We end with the example of outperformance versus its sector peers. Silver Wheaton is a royalty company: they buy silver streams and may participate in silver mines. It is not a miner as such.

Figure 5: The SLW share trades way above the 2007-2008 high and the Oct-08 crash seems but a distant nightmare. The technical indicators OBV and PVT don't quite follow. Click to enlarge.
I can only conclude that investors prefer turn-around stories to solid track records.

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