It’s business as usual for all of our Bull List stocks. There has been no notable news as of late, and the rebound last week was more than welcomed. Earnings dates are starting to trickle in, and it’s looking to be a pretty busy November on the Premium end in terms of reporting.
However, this week was a pretty exciting one for those holding crypto assets and some of our watchlist stocks. Both of which we’re going to talk about today. I will speak on Good Natured Products (Dan) before transitioning to Mat he speaks on the crypto surge and speculative holding exit strategies.
Notable news on Good Natured Products
If you’ve been a member here at Premium for a while, you’ll know that Good Natured Products (TSEV:GDNP) is a major holding of mine (Dan). We added the bioplastic company to the watchlist in the $0.35 range and it went on a parabolic run to nearly $2 in very short order.
It has since settled and has been impacted significantly by the small cap sell off. However, my conviction in this company has remained the same, and in my opinion the sell off was, and still is, overdone.
This week shareholders were given some pretty significant news on the company. Good Natured has partnered with a major US food producer who is transitioning from petroleum based packaging to bioplastic. The company also issued a $15M offering of convertible debentures, along with an additional $35.8M in financing.
First off, a simple explanation of the debentures
If you’re unaware of what a debenture is, it is very similar to a bond, but with a critical difference. That difference being a bond is secured to a physical asset from the company. If the company were to default (fail to pay) on the bond, the asset would be liquidated. A debenture on the other hand is unsecured, meaning it is not tied to any of the company’s assets but simply the company’s promise to pay.
Naturally, although still low risk, this makes debentures the riskier asset of the two. If you were to loan a friend $10,000, would you be more comfortable if they were willing to give you a possession worth $10,000 if they weren’t able to pay, rather than simply a promise to pay you?
This often results in bonds offering lesser interest rates than debentures, as they are more secure. “Bond” is the universal term used, however the most popular options for companies to issue are debentures, and it is not uncommon for debentures to be called bonds, even though this is technically incorrect.
In Good Natured Product’s situation, it issued convertible debentures at a price of $1.06 a share. What does this mean? It simply means that the holder of the convertible debenture has the right to convert that debenture to common shares. A basic example: A $10,000 debenture would be allowed to convert to $10,000/$1.06 = 9433 shares.
There are a plethora of conditions set on these convertible debentures, including specific times when they can be converted, but this should at least give you the basic idea of what is going on.
Finally, the company is also negotiating a new credit agreement for an additional $35.8M in financing.
If we look to past moves, it’s likely the company utilizes the capital for more acquisitions. Last time the company raised capital, it used the money to fund an acquisition that nearly doubled the overall size of its business.
In addition to this, the company made some moves that reduced the overall interest rate across its current debt facilities by 2.37%. This is a strong sign lenders are becoming more confident in the company, and are willing to charge less of a premium for borrowed capital.
Major food producer agreement
Good Natured has also confirmed the company has started commercial shipments of product to a large US food producer. It is expected to sign a multi-year relationship that would produce $13M USD in revenue in the first year.
This is a significant move by the company. Good Natured is expected to generate $58M CAD in revenue in Fiscal 2021, so you can see how impactful a $13M USD revenue increase is.
Overall, the small cap sell-off has not been kind to Good Natured nor many other small cap stocks.
However this remains a speculative, yet fundamentally sound company. One that I plan to continue holding for the next 5+ years.
Bitcoin & crypto stocks surge
As Bitcoin broke through the $60K USD barrier once again, stocks in the industry were equally on fire. One stock that had a particularly good week was Tokens.com (NEO:COIN) which trades on the NEO Exchange.
As a nano-cap stock, Tokens.com doesn’t fit the requirements of a Bull List stock, and is even too volatile for it to be featured on the watchlist. Before its recent runup, it had a market cap of just over $40M.
About a month ago, I (Mat) initiated a speculative position in the company and posted in the Discord #cryptocurrency channel my reasons for doing so. At the time, I felt it was undervalued based on the company’s underlying digital assets. A fancy way for saying crypto holdings.
While it has been on a multi-week uptrend, this was a particularly good one. Tokens.com soared and returned 50.67% over the past seven days. So what did I do?
I sold half my position to recoup my initial costs as I was sitting on gains in excess of 100%
The purpose of this piece is not to promote COIN or to pump my tires, but to explain the importance of having an exit strategy. I’ve answered several Q&As about this topic, but we’ve never put out an official Stocktrades Premium piece that discusses exit strategies – which are an important aspect of portfolio management.
This is especially true for those who are investing in speculative and high growth stocks. For the purpose of this piece, we are going to focus on these areas. Why?
While still required, exit strategies are less critical for Foundational Stocks and solid, blue chip dividend companies. These are more “set and forget” type options, building the core of your portfolio.
In the future, we will do another piece about when to sell a stock, and the thought process we use to determine when it’s “time.”
So let’s circle back to speculative and high growth stocks. First, if you’re investing in these you are likely to have a higher risk tolerance. These stocks can be highly volatile and will induce plenty of emotions.
As we’ve mentioned numerous times, when emotions enter the fray, that is when retail investors often start to make mistakes.
Emotions can lead investors to sell into weakness when they should be holding or buying. It can also lead to investors holding or buying into strength when they’d be better off selling and recouping all, or partial profits. It all boils down to risk management.
This is why it is important to have a plan BEFORE you buy a stock.
Since everyone has a different risk tolerance, plans will be individualized
Case in point, Dan is younger and has a higher risk tolerance than I do. So he tends to hold his speculative and high growth stocks for much longer. Going back to our discussion on Good Natured Products, I actually recovered my initial capital from my investment in GDNP and my position consists of profits now, while Dan kept his entire position. In fact he added more shares at $1.30.
When I buy a speculative position like COIN, I always go into it with a plan.
Depending on the volatility of the stock, I’ll usually take profits and recoup my initial capital when I hit 100% returns. The more volatile the investment, the earlier I’m likely to make my exit.
With COIN, I knew that I was going to start looking at exiting my position when I hit 100% gains. That happened on Friday, and mid-day I booked my profits by selling half of my position.
In certain cases, I may let the stock run a little longer if there is positive momentum. I’ve done that with many of my stocks, but I’ll always set stop losses to protect that 100% gain.
I know what you might be asking – why didn’t I hold on to COIN since there was plenty of strong momentum?
Since crypto is highly volatile and trades 24hrs 7 days a week, so much can happen over the weekend. The price of Bitcoin and cryptos in general could crater which would likely kill momentum and lead to a much lower open on Monday.
Had we not been heading into a weekend, I may have held a little longer to take advantage of momentum and as mentioned, set a stop loss to protect those 100% gains.
While I am not recommending this strategy to anyone, it is one that has served me well over the years. I’ve used this same exit strategy on many stocks. There are times where it works out in my favor – examples like BNXA, GDNP, GRN, DOC, where I recouped my initial costs at prices far above where they are today. Other times, one might expect that I have a certain level of regret selling early on stocks like SHOP, LSPD, WELL, and DND.
Do I have regret? Never. I made money on all those early sells and continue to hold them today. So I am still making more money – I’m just investing on house money so to speak.
I’ve also re-deployed that initial capital into other positions. Case in point, I first had WELL. Then I deployed my WELL gains into DOC, which was then redeployed into others. The point here is that not only does booking gains play a part in risk reduction, but it still has a compounding effect moving forward.
By removing emotions from the equation, I am more effectively able to manage my portfolio. I’ve slipped at times – let emotions take hold – and while it doesn’t happen often, when it does it usually leads to mistakes. I’m not perfect – no one who invests is. Anyone who tells you otherwise, is flat out lying.
The key is to limit your mistakes and make sure your good decisions outweigh the bad ones.
By building out a strong “set and forget” core and establishing an exit strategy on your speculative and high growth stocks, you are likely to limit those mistakes. Today, I focused on my exit strategy when stocks are on an uptrend.
Next week, I’ll talk about my exit strategy when things are…not so good.
