With risk appetite returning to the market, a growing number of investors are putting speculative stocks back under the microscope.
With this in mind, Novus Capital executive director of equities Steven Hing has established a portfolio of speculative companies that he believes could potentially reward investors willing to take on considerable risk. His portfolio includes Metgasco Limited, IFS Construction, Ceramic Fuel Cells, XRF Scientific, Imugene Limited, Prima BioMed, Citadel Resource Group and Flinders Mines.
Hing says energy company Metgasco Limited explores, produces, markets and distributes natural gas. It’s also focusing on developing coal seam gas in the Clarence-Moreton Basin in New South Wales. “Given the widespread interest in coal seam gas, Metgasco looks well placed to be one of the next up-and-coming producers following strong runs from the likes of Arrow Energy and Karoon Gas,” Hing says. “I have recently followed Red Fork Energy in this sector, with the stock going from about 20c to a $1.50 in a month.” Metgasco may rally quickly on a sniff of good company news or sector momentum.
Hing says industrial company IFS Construction Services is worthy of consideration as a producer and supplier of scaffolding in the construction industry. With an office in Singapore, Hing says the company is rapidly expanding through Asia and has close relationships with Bovis Lend Lease. “Given the stock recently floated at just two times price/earnings, it’s trading at a considerable discount and we see significant upside, particularly as it appears the construction sector is on the improve,” he says.
It’s essential to examine management quality before buying any stock, but even more so at the speculative end of town, where one bad decision can be fatal for a company. Hing says investors should check that senior managers and directors have an experienced background related to the company’s core operations, and can show an enviable corporate reputation. Hing says inexperienced and irresponsible management fail to keep the market fully informed about their company’s latest activities, costs and debts. “For example, even if there’s an inferred resource, there’s feasibility studies, extractions costs, shipping and demand for investors to consider,” Hing says. “Before buying a speculative stock, investors should ask themselves whether they’re comfortable with the company story, particularly if the company is yet to make a profit.” Hing suggests investors examine company earnings, prospects, sector, global outlook and political considerations before buying a stock.
Companies focusing on green technology may reap the benefits in a world seemingly committed to reducing carbon emissions levels. Hing says Ceramic Fuel Cells has developed a solid oxide fuel cell able to provide reliable, efficient and low emission electricity from natural gas and renewable fuels. The technology was developed in Melbourne about five years ago and has been subjected to pre-commercial production and testing. Hing says the company recently launched its BlueGen modular generator described as a “mini power station” for home and commercial use. It should be available in Victoria in 2010, and buyers can expect to cut greenhouse emissions and energy bills. Ceramic Fuel Cells was trading below 20c on August 26, well off its IPO price of $1 in 2004.
XRF Scientific, a precision instrument and technology company, floated in June 2006 and Hing says that after some initial board and integration issues, the business is profitable, the company has $5 million in the bank and continues to win contracts. He says the share price at 15c on August 26 means the company is trading on only seven times earnings. “The share price may go up quite quickly as mining activity increases and the sharemarket recovers,” he says.
Imugene Limited specialises in developing and commercialising animal health products, including vaccines, for the pig and poultry industries. Hing says the company is currently testing a swine flu vaccine for pigs in a global animal health market totalling about $US3 billion. He says Imugene reported a half-year profit of $1.9 million from revenues of $3.1 million. The company should increase sales going forward.
Bio-technology stocks are widely regarded as speculative as companies endure fierce competition, clinical trials and the US Food and Drug Administration process to bring a product to market. The risks and rewards are high for those investing in bio-tech stocks, particularly small-to-medium sized companies in a sector renowned for its high cash burn rate. Nevertheless, Hing suggests investors keep a close eye on Prima BioMed, whose lead product is the CVac ovarian cancer therapy vaccine to be administered after surgery and chemotherapy to delay relapse and to control metastases. In July, the company announced it had submitted its Investigational New Drug Application with the US Food and Drug Administration to evaluate the company’s core product.
Hing says investors buy speculative stocks “for spectacular gains rather than normal ones”. “However, you need to be aware of the main story behind the company and confident that management can carry out the plan,” he stresses. Hing says investors should constantly monitor the performance and prospects of speculative companies pinning their hopes on a significant resource find or technology breakthrough. The capital of speculative companies without reliable earnings can rapidly disappear amid a collapsing share price. “Trading speculative stocks is generally reliant on momentum, with many day traders taking the opportunity to make short-term gains,” Hing says. “However, if the story is solid, a share price can continue to rise or rally.”
Base metals explorer Citadel Resource Group offers three projects in Saudi Arabia. The company recently announced a $25 million capital injection and the signing of a five-year off take agreement for its flagship project at Jabal Sayid to mine and sell copper concentrate. Hing says the project contains a total resource (indicated and inferred) of 74.3 million tonnes at 1.34 per cent copper and 0.66 per cent zinc. He says it contains a potential 994,900 tonnes of copper and 448,000 tonnes of zinc. Hing says Citadel has a relatively big resource, and a growing market capitalisation is likely to attract attention from fund managers. “It’s one to watch or buy,” Hing says.
Another worthy of attention is Flinders Mines, a junior company based in the Pilbara region of Western Australia. It has a significant iron ore resource and close ties with Fortescue Metals, Hing says. Flinders Mines’ Hamersley project includes joint venture exploration licences with Prenti Exploration and Fortescue Metals, Hing says. He expects the stock to breach its recent high of 23c on any positive news flowing from its pre-feasibility study into its iron ore operations.
|Company|| ASX Code|| Activity|
Share Price Close
11 Sept 2009
|Metgasco Limited ||MEL || Gas||0.430|
|IFS Construction Services ||IFS|| Scaffolding||0.076 |
|Ceramic Fuel Cells || CFU|| Technology||0.240 |
|XRF Scientific || XRF||Technology|| 0.140|
|Imugene Limited ||IMU|| Animal Vaccines|| 0.100|
|Prima BioMed || PRR|| Cancer Treatment||0.100|
|Citadel Resource Group|| CGG|| Gold and Base Metals|| 0.380|
|Flinders Mines || FMS|| Iron Ore|| 0.130|
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