PGL suspends its phase III trial for PI-88 today and the share price dropped more than $0.62 to close at $0.58, more than 50% drop. For a biotech to fail a trial at such late stage, it will no doubt bring on these dramatic fall in its share price.
I hinted at the more than likely possibility of failure of this drug back in my Feb 26 blog this year.
http://ozstock.blogspot.com/2008/02/analysis-pgl-progen-pharmaceuticals.html
In my analysis of PGL on 26 Feb, various of the indicators (financial, product pipeline, management) suggest that PGL is a very attractive stock trading at $1.62. However, it turned out to be a classic example of the case where even if every indicator is good, success is not guaranteed. I did point out caution on PGL and the likelihood that PI-88 may not succeed, even though it reached Ph III. It was after careful examination (beyond all the optimistic jargon) of the history of its product, in particular PI-88, it was found that the same compound had failed in previous applications. This was what raised my doubts on PI-88.
In conclusion, it pays to read between all the glossy annual report and get a real feeling of how the products are actually performing. I may do an update analysis later when the aftermath of this latest news has been properly digested.
Wednesday, July 23, 2008
Saturday, July 12, 2008
The 9 Golden Rules according to Lincoln
This list is a set of 9 so called rules to decide if a company is worth investing in.
Rule 1. Financial Health
Lincoln suggest to invest in companies with Financial Health ratings of Strong or Satisfactory. Unfortunately, this rating is only available from the Lincoln Stock Doctor. However, we can do our own assessment in determining financial health. Some of the indicators that may be helpful are: debt levels eg. debt to equity < 1, current ratio > 1.5 (for retail companies), ability to service loans -> Interest cover (receipts to interest payments) > 3, cashflow history, and so on.
Rule 2. Management Assessment
Lincoln measures management using ROA and ROE, thought I don't believe this is a good measure. For biotech companies for example, ozstock uses the qualifications of its management team and directors. Back to Lincoln; they suggest ROA > 8% and improving is good. In addition EPS > 8% for last 18 months is good. For bank and insurance companies, Lincoln suggests ROE > 14% and improving, as well as EPS growth of > 12% (>8% over past 18 months)
Rule 3. Share Price Value
Lincoln suggests a PE ratio less than industry average may be underpriced and so a buying opportunity. When the PE is greater than industry average, they suggest using PE/EPS growth ratio where PEG < 1 is good.
Rule 4. Liquidity Volume
Liquidity level is to ensure that you can sell your stock when you need to. Lincoln suggest the average daily volume traded should be 5 times of your exposure level.
Rule 5. Share Price Trend / Sentiment
Buy when the trend is positive. Never buy when a stock price is "screaming down hill".
Rule 6. Market Capitalisation / Size
Large companies, ie those with large market capitalisation, are seen to be less volatile and have greater liquidity, i.e. higher traded volume. Lincoln considers stocks only if they have market capitalisation > $100m
Rule 7. Company Activities
Have a basic understanding of the company's activities, potential opportunities and threats that can affect future earnings of the company or industry.
Rule 8. News and Announcements
Lincoln suggest to look for positive announcements as this generally improve share price of company. Ozstock believes that the market tend to overreact quickly with good news and may overprice a stock. On the other hand, in the current bear market, it looked like even genuine good news may still result in share price dive - be careful in bear market. Lincoln also suggest that investors beware of negative news or announcements. Again, ozstock has found that once negative news hits the press, the shares would have dived already.
Rule 9. Follow all the above rules
Apply the above rules in a consistent manner.
Rule 1. Financial Health
Lincoln suggest to invest in companies with Financial Health ratings of Strong or Satisfactory. Unfortunately, this rating is only available from the Lincoln Stock Doctor. However, we can do our own assessment in determining financial health. Some of the indicators that may be helpful are: debt levels eg. debt to equity < 1, current ratio > 1.5 (for retail companies), ability to service loans -> Interest cover (receipts to interest payments) > 3, cashflow history, and so on.
Rule 2. Management Assessment
Lincoln measures management using ROA and ROE, thought I don't believe this is a good measure. For biotech companies for example, ozstock uses the qualifications of its management team and directors. Back to Lincoln; they suggest ROA > 8% and improving is good. In addition EPS > 8% for last 18 months is good. For bank and insurance companies, Lincoln suggests ROE > 14% and improving, as well as EPS growth of > 12% (>8% over past 18 months)
Rule 3. Share Price Value
Lincoln suggests a PE ratio less than industry average may be underpriced and so a buying opportunity. When the PE is greater than industry average, they suggest using PE/EPS growth ratio where PEG < 1 is good.
Rule 4. Liquidity Volume
Liquidity level is to ensure that you can sell your stock when you need to. Lincoln suggest the average daily volume traded should be 5 times of your exposure level.
Rule 5. Share Price Trend / Sentiment
Buy when the trend is positive. Never buy when a stock price is "screaming down hill".
Rule 6. Market Capitalisation / Size
Large companies, ie those with large market capitalisation, are seen to be less volatile and have greater liquidity, i.e. higher traded volume. Lincoln considers stocks only if they have market capitalisation > $100m
Rule 7. Company Activities
Have a basic understanding of the company's activities, potential opportunities and threats that can affect future earnings of the company or industry.
Rule 8. News and Announcements
Lincoln suggest to look for positive announcements as this generally improve share price of company. Ozstock believes that the market tend to overreact quickly with good news and may overprice a stock. On the other hand, in the current bear market, it looked like even genuine good news may still result in share price dive - be careful in bear market. Lincoln also suggest that investors beware of negative news or announcements. Again, ozstock has found that once negative news hits the press, the shares would have dived already.
Rule 9. Follow all the above rules
Apply the above rules in a consistent manner.
Ten simple rules to avoid large trading losses (with CDFs)
This article is published by CommSec and is intended for CFDs. However the techniques seem to be quite useful for other derivatives and even trading stocks directly.
"Avoiding the commitment to failure
In theory, when a trader experiences a decline in the value of an investment the desire should be to exit the position. But often the opposite occurs. A behavioural concept known as ‘escalating commitment to a chosen course of action’ can be the downfall of a trader, especially when using a leveraged product such as contracts for difference.
Forced compliance studies induced individuals to perform unpleasant or dissatisfying acts in the 2003 text The Social Psychology of Organizational Behaviour, edited by Leigh Thompson. Because the individual could not undo the consequences of the act, it was found that the individual biased his attitude towards
the experimental task so as to reduce any negative outcomes resulting from the behaviour. By justifying prior behaviour the decision maker increased his commitment in the face of negative consequences and the higher level of commitment in turn led to further negative consequences.
Probably the most famous example of escalating commitment to a chosen course of action was the Vietnam War. In a 1965 memo from former Under Secretary of State George Ball to US President Lyndon Johnson, Ball wrote “Once we suffer large casualties we will have started a well-nigh irreversible process.
Our involvement will be so great that we cannot - without national humiliation – stop short of achieving our complete objectives.”
In the trading world, once a trade turns bad a trader can rationalise his bad decision and increase his commitment by either staying in the position as losses grow or by adding to the position in what is commonly known (with long positions) as averaging down.
When a losing trade is not exited quickly, because of the leverage factor, losses can mount exponentially. Nick Leeson’s futures trading in Singapore in the 1990s was an example of an escalating commitment to a chosen course of action in a leveraged product. But small private traders managing less spectacular
amounts of capital should also be aware of the phenomenon because it is not uncommon for small traders to end their trading career with a single catastrophic trading loss.
Some simple rules can help you to avoid the big loss and stay disciplined:
1. Trading is a 50-50 prospect. A trader can win less than 50% of the time and still be profitable. Success or failure is not due to the amount of winners you pick but rather the dollar return on winning trades versus losing trades. In other words, be consistent with your risk amount and stop losses and aim to make your wining trades larger than your average losing trade.
2. Markets don’t behave rationally therefore sticking to a losing trade can never be rationalised. Prepare mentally and financially for both scenarios before you enter the trade - winning and losing - by placing stop loss orders and identifying possible price points where the trend may become exhausted.
3. A study of multiple choice examination habits has shown that going back and changing answers increases the chance of being wrong. Never move a stop loss level once it is set, unless it is in the direction of the trend you are trading.
4. Moving a stop loss order with the trend will help you maximise profits because you are changing your exit level in accordance with the market direction. Some experts advocate never exiting a trade unless it’s on a stop loss order – any other approach is effectively picking a top (or bottom).
5. Always aim to place a break-even stop-loss order after your initial stop loss order. A break-even stop is a free ride. No one ever went broke from not taking losses.
6. Choosing not to trade can be more difficult than taking a trade. When there are no good trading opportunities it’s best to sit on the sidelines.
7. In a bull market your goal is to make money from the upside and in a bear market your goal is to make money from the downside. In other words, it’s smarter to look for short trades in a bear market.
8. The middle of the trend is the “meat in the sandwich”; the beginning and the end of a move are inconsequential. If you want to be profitable only trade the middle of the trend.
9. The bull market for stocks has created a bullish bias. Therefore stocks that are breaking down can do so more quickly than rising stocks as the majority of traders exit long positions. Be prepared to act quickly in a falling market.
10. Information such as technical indicators and economic news can be used to justify a losing position. Price is the ultimate arbiter of value. Follow the price. "
As with all other articles on this blog, this article is not considered financial advise, but merely for thought and discussion.
"Avoiding the commitment to failure
In theory, when a trader experiences a decline in the value of an investment the desire should be to exit the position. But often the opposite occurs. A behavioural concept known as ‘escalating commitment to a chosen course of action’ can be the downfall of a trader, especially when using a leveraged product such as contracts for difference.
Forced compliance studies induced individuals to perform unpleasant or dissatisfying acts in the 2003 text The Social Psychology of Organizational Behaviour, edited by Leigh Thompson. Because the individual could not undo the consequences of the act, it was found that the individual biased his attitude towards
the experimental task so as to reduce any negative outcomes resulting from the behaviour. By justifying prior behaviour the decision maker increased his commitment in the face of negative consequences and the higher level of commitment in turn led to further negative consequences.
Probably the most famous example of escalating commitment to a chosen course of action was the Vietnam War. In a 1965 memo from former Under Secretary of State George Ball to US President Lyndon Johnson, Ball wrote “Once we suffer large casualties we will have started a well-nigh irreversible process.
Our involvement will be so great that we cannot - without national humiliation – stop short of achieving our complete objectives.”
In the trading world, once a trade turns bad a trader can rationalise his bad decision and increase his commitment by either staying in the position as losses grow or by adding to the position in what is commonly known (with long positions) as averaging down.
When a losing trade is not exited quickly, because of the leverage factor, losses can mount exponentially. Nick Leeson’s futures trading in Singapore in the 1990s was an example of an escalating commitment to a chosen course of action in a leveraged product. But small private traders managing less spectacular
amounts of capital should also be aware of the phenomenon because it is not uncommon for small traders to end their trading career with a single catastrophic trading loss.
Some simple rules can help you to avoid the big loss and stay disciplined:
1. Trading is a 50-50 prospect. A trader can win less than 50% of the time and still be profitable. Success or failure is not due to the amount of winners you pick but rather the dollar return on winning trades versus losing trades. In other words, be consistent with your risk amount and stop losses and aim to make your wining trades larger than your average losing trade.
2. Markets don’t behave rationally therefore sticking to a losing trade can never be rationalised. Prepare mentally and financially for both scenarios before you enter the trade - winning and losing - by placing stop loss orders and identifying possible price points where the trend may become exhausted.
3. A study of multiple choice examination habits has shown that going back and changing answers increases the chance of being wrong. Never move a stop loss level once it is set, unless it is in the direction of the trend you are trading.
4. Moving a stop loss order with the trend will help you maximise profits because you are changing your exit level in accordance with the market direction. Some experts advocate never exiting a trade unless it’s on a stop loss order – any other approach is effectively picking a top (or bottom).
5. Always aim to place a break-even stop-loss order after your initial stop loss order. A break-even stop is a free ride. No one ever went broke from not taking losses.
6. Choosing not to trade can be more difficult than taking a trade. When there are no good trading opportunities it’s best to sit on the sidelines.
7. In a bull market your goal is to make money from the upside and in a bear market your goal is to make money from the downside. In other words, it’s smarter to look for short trades in a bear market.
8. The middle of the trend is the “meat in the sandwich”; the beginning and the end of a move are inconsequential. If you want to be profitable only trade the middle of the trend.
9. The bull market for stocks has created a bullish bias. Therefore stocks that are breaking down can do so more quickly than rising stocks as the majority of traders exit long positions. Be prepared to act quickly in a falling market.
10. Information such as technical indicators and economic news can be used to justify a losing position. Price is the ultimate arbiter of value. Follow the price. "
As with all other articles on this blog, this article is not considered financial advise, but merely for thought and discussion.
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