LGL - Volume Breakout Report: July 9 2022

• A discussion of atypical 2022 VBR winners and losers is laid out.
• Several potential trading strategies are explored.
• New buy signals are listed at the end of article.

This is my third VBR article. I thought I would explain some strategies on how to use the buy signals in trading. I have come up with two strategies. The first involves more of a buy-and-hold design, where losers are quickly sold, especially on bad news. The second is for full-time traders or those willing to put in extra work daily with preset sell levels to capture mild gainers, and roll over capital into the next pick.

If you have not read my opening articles, with more information on how VBR selections are made, the June 25th effort is linked here and July 2nd here .

The pickings were sparse again this week for VBR buy signals. So, I only have a few new suggestions to discuss. Bull markets definitely offer more opportunities for strong buys in the smaller and mid-cap areas of Wall Street.

Trading Strategy #1

The best way to explain swings in trading VBR picks is by giving some examples of two big winners in 2022 and one loser. The main idea for strategy #1 (or really any investment plan) is letting your winners run can produce huge profits over time, while cutting your losses on bearish changes in news flow will allow you to fight another day (conserve your capital).

Best-Case Scenarios

BP Prudhoe Bay Royalty Trust ( BPT ) is my prime example of how a major gain helps overall portfolio performance, where one winner can make up for numerous losers. Between the VBR buy signal in early January and early June’s peak, about five months later, the quote rose from $4 to $26. This represents a +550% gain (including dividends) and outperformance of the S&P 500 of close to +600%, pictured below. Theoretically, if you bought and held this trust, plus five other stocks declining to zero in price, the group would have still outlined a net gain for portfolio value. I do not expect many 500% advances in any year, but they do happen. The Volume Research Report is one tool to find them.

BPT is a unique royalty interest in 320 square miles of North Slope Alaska oil production. BP/Standard Oil sold the operating business on this acreage to Hilcorp Alaska, LLC in 2019. The trust doesn’t have much for assets or liabilities when crude oil prices are low. But when petroleum prices rise to a predefined formula level, royalty revenue on high-value production shows up. The massive spike in oil prices this year is allowing for monster royalty income for trust owners. The trust has paid $3.00 in cash dividends so far this year vs. less than $0.10 in calendar 2021 and $0.42 in 2022. If you will, it has traded like a call option bet on crude oil prices, without a short-term expiration date. So, in hindsight the jump from $4 per BPT interest is entirely logical and justifiable. High volume buying (fitting my proprietary formula definitions) during early January kicked off the tremendous rise in price.

Another example of what is possible with VBR picks is Turquoise Hill Resources ( TRQ ). Using my formula-derived system signal, I wrote an article on February 4th here . The long-term agreement reached between TRQ and the Mongolian government to increase production at its low-cost copper mine did not go unnoticed by operating partner Rio Tinto ( RIO ). A few weeks later, the positive news encouraged this leading metals mining conglomerate to announce a US$26.60 takeover bid on March 14th . The stock rose +70% in price over eight weeks after the VBR buy notice.

Expect Some Losers

Another direct pick that turned into a story on Seeking Alpha was Flexible Solutions International ( FSI ), posted on March 23th here . An ESG chemical company with decent financials quickly gained 10% after my article and VBR signal. Then, it morphed into a large 50% loser. The good news is you could have cut the position loose with limited losses, which I personally did. Why has it declined so much? On April 18th here , FSI announced a merger agreement with environmentally-friendly ingredient company Lygos . While Lygos is working on some interesting technologies, it is more of a startup enterprise with lots of risk (largely from an unknown sales future). Investors and analysts did not like the hookup news and have been selling shares since the announcement.

Trading Strategy #2

The Flexible Solutions trading action brings us to a second strategy for using VBR picks. Essentially, taking quick 10% or 20% gainers, by selling half or all your position, can reduce risk and help compounding rates. FSI could have been a nice winner for 1-week or 2-week turnaround speculators. Historically, smaller cap equities are more volatile over shorter periods of time. Why not use this volatility to your advantage? The goal of locking-in gains, then redeploying money into new buy signals as they appear, could be an extremely successful plan of attack in my back-testing research. This strategy may help create relatively consistent portfolio advances, as long as excessive losers beyond 10% are kept to a minimum.

For both strategies, keeping individual losses to a minimum is key. To a degree strategy #2 is like playing a statistical game of whack-a-mole, where your money isn’t sitting for long in any name. Note: this trading scheme would not be possible for small traders without zero or next to zero for trading commissions at your preferred online broker.

I suggest readers make an effort to do further research into any of the VBR selections that appeal to you, a function of your risk appetite or sector exposure needs in portfolio construction. Please understand small-cap picks should be a limited portion of portfolio design. Holding a diversified number of stocks is the prudent risk-adjusted way to play them. Volatile price swings are part of the investing process for smaller companies on Wall Street. Please consider using preplaced stop-loss sell orders to reduce downside potential in individual names. Depending on your risk tolerance, 10% to 30% stop levels are recommended.

New Buy Signals

Ormat Technologies

Ormat Technologies ( ORA ) is involved in building and owning renewable geothermal facilities that generate electricity for local utilities around the world. The more fixed-cost accounting nature of electricity generation, not requiring outside inputs fluctuating in cost like natural gas, uranium or coal, with almost zero pollution or carbon emissions is very desirable as we battle climate change. The company has not grown much the last five years, but that may be changing with the spike in costs for fossil fuels in 2022. ORA owns a fair balance sheet for a utility-style business model, and consistently delivers final profit margins above 10% on sales. The valuation does look stretched, but it has a history of premium pricing because of steady returns and its growth-oriented ESG future. A boring total return for shareholders of +15% over the last 12 months has beaten the S&P 500 by 30%, as stocks generally have declined over the same span. Its defensive ESG characteristics may be attracting large-scale buying by a hedge fund or brokerage trading group.

LGL Group

I mentioned The LGL Group ( LGL ) in my first VBR article, and it registered another buy signal this week. The company is based in Florida and manufactures infrastructure equipment for the telecommunications and computer networking industries. It designs, manufactures and markets frequency and spectrum control products sold throughout the world. LGL is a defensive holding trading close to cash liquid, almost zero liability, accounting book value of $10.34. After subtracting $8.50 per share in cash, investors are getting a slightly profitable operating business on the cheap.

Final Thoughts

Performance was pretty ordinary last week from the initial 10 picks in my VBR articles. Slight underperformance vs. the S&P 500 and Russell 2000 indexes was the rule. The whole group gained in price, but the minor advance was nothing to write home about, like the major U.S. equity indexes.

My goal remains to put out a Volume Breakout Report weekly, or nearly so. Hopefully, the market decline stabilizes and we can find numerous money-making picks in the months ahead. I am not overly optimistic or pessimistic on the S&P 500’s direction for the rest of the year. However, I feel the U.S. economy will become gradually weaker into Christmas, from the double-whammy on consumer spending of higher inflation and interest rates this year. I am most bearish on oil/gas assets, industrial commodities, and cyclical names until the Fed has finished raising rates, with a decision to lower than again. Such a change in monetary policy could take well into 2023 to become reality. In this environment, stock picking will be a critical component of future investor performance. So, the VBR list could be an excellent tool for readers going forward.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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