Speculative stocks seem to be an area of the market that attract many investors; especially those who have decided to forgo a broker/adviser and invest on their own. Often times I’ll speak of investing in speculative stocks metaphorically as “swinging for the fences.” You’re looking to hit a home run with your investment selection or strikeout; the middle ground with such investments is often rather narrow.
If you have your eye on speculative stocks, how can you lower your risk and thus move the odds in your favor?…Not totally, but more so than it would be, all else being equal. I have a simple strategy that you might be able to utilize when you’re planning on purchasing a speculative stock.
The strategy that I am about to describe is narrow in its application. By that I mean it is contingent up on certain characteristics being in place. First, the speculative stock you’re considering cannot be widely known. If a group of analysts are following the stock and Jim Cramer is touting it on his Mad Money show, the strategy is doomed. Second, you must be able to identify an event in the future that will significantly impact the course of the company and be able to anticipate when the event will occur.
The strategy: 1. Identify a speculative stock that interests you. 2. Identify a future event that will directly impact the company either for good or worse. 3. Identify a time-frame in which you expect this event to occur or outcome to become known. 4. Watch the stock’s news-wire like a hawk. 5. When the news breaks – read, process and make a decisive action (buy, sell, stay on the sidelines).
I will illustrate my point through Nevada Geothermal (NGLPF) & and the breaking news of their loan guarantee by the Department of Energy (DOE) on September 7th of 2010.
For months it was widely known that NGLPF had applied and received a conditional affirmation that they would be receiving a DOE backed loan for their geothermal development plans. It was only a matter of time before they would find out if they would receive the money (in part or in full) and the rate at which they would be able to borrow funds. Much of NGLPF’s current money was locked in at 14% (high!).
Waiting, waiting, waiting. The day finally came. At 6am on 9/7/10 a press release was made stating that the DOE was going forward with the loan to NGLPF for the $78.8 mil at a rate of 4.14%. BINGO! The news is out and it’s good news. For a small company this is huge!
What did the market (stock price) do upon the news breaking? Look at the graph below and see for yourself. The stock hardly moved. If you were on the ball, you had a chance to get in before the crowd arrived.
NGLPF - Stock Chart
One speculative stock I currently have on my radar is GelTech Solutions, Inc. (GLTC). The reason why it may be in a very similar situation compared to NGLPF soon is because it has a product, FireIce, that is currently being tested by the U.S. Forest Service. In December (this month) or January testing is supposed to conclude & GelTech will discover if they will be on the approved list for the U.S. Forest Service. This would be a major step in the right direction for the company.
I would expect positive news to decrease uncertainty, as well as increasing anticipated sales. Thus, pushing the stock’s price to new highs. Upon the news being released a window of opportunity may stay open for a little while before the majority react.
Disclosure: Long NGLPF
