The Effect of New Information
Every now and then you've got to eat crow. Yes, it's unpleasant, and I hate getting those feathers and tiny bones stuck in my teeth (sorry PETA members). But I have to admit, I'd rather be wrong by telling you to wait for a small-cap stock to pull back before buying shares, than advise you to jump on a high-flyer only to watch its wings get clipped and plummet back to the earth. So I'm eating crow for breakfast this morning, but it's not all that bad.
In last Monday's issue of Small Cap Investor Daily, The Rise and Fall of Oil Prices, we took a close look at Houston American Energy Group (NASDAQ: HUSA), an independent oil and gas exploration company with big exposure to Colombia's massive oil fields. After reviewing the company, which was trading at $7.67 a share and at 51-times forward earnings, I wrote:
"The bottom line for Houston American is this: I'm not a buyer of shares here, but I'm definitely watching the company. The stock has run 300% since July 1 2009, a nice return. But given that the market has been volatile lately, it's not the best time to jump in on high-flying stocks, and Houston American is definitely flying high right now. But behind the expensive stock is a company with potentially great prospects in a country that is rapidly growing its oil and gas industry."
Now I'm eating crow because yesterday Houston American's stock rose yet another 17% to close at $10.01. That's 30.5% higher then when I said to sit pat just over a week ago. This stock is on a tear, although the reason behind yesterday's ramp higher was indirectly related to Houston Americans current operation.
Shares of the company are benefiting from a report that a drilling site near some of its properties are literally gushing with oil. Petrominerales Ltd, a Colombian company that is 66% owned by Petrobank Energy and Resources Ltd. (TSX: PBG), recently reported that its Candelilla-2 well was producing 15,800 barrels per day of oil. Investors drove up Houston American shares on heavy volume in anticipation of similar drilling success on its properties.
***Now I don't like to be proven wrong on my recommendations. But it does happen, and when it does I'll stand up and face the fact that I missed a profit opportunity. But it's also important to look at a missed profit opportunity as an opportunity to learn.
This particular example raises an important point that individual investors need to keep in mind. And that is the positive effect that new news can have on a stock's price. This is precisely why we need to be invested in stocks – if we're not invested, we don't have the potential to benefit from new developments. Keep that in mind when stocks are selling off like they were over the last four weeks. If you get out of stocks, you don't have the potential to benefit from good news.
In Houston American's case, I was clearly unaware that a report was soon to be released showing that nearby wells were gushing with oil. But they were, and when the news came out the stock rallied. The new information caused the stock to pop, and if you held shares you are sitting on a nice gain. Of course, yesterday's broad-based rally fueled by a falling dollar and rising oil prices didn't hurt.
There are literally thousands of small-cap stocks out there that benefit from new information every day (of course, there are those that drop because of new news as well). This is what is generally referred to as an efficient market – stocks will move as new developments becomes public (as opposed to an inefficient market where only some people are made aware of the news). Investors can only benefit from these new developments if they hold shares prior to the news release. Usually it's too late to benefit after the fact, at least from that particular event.
The punch line is this: you need to be invested in small-cap stocks to benefit from positive developments. Houston American was a missed opportunity, at least in the short-term, and I own that. But there are unlimited opportunities out there that have yet to pan out. And if you're not invested, you don't have a chance.
Here in Small Cap Investor Daily I'm constantly on the lookout for the next profit opportunity. We've done well on Lancaster Colony (NYSE: LANC) which is up 18% since I recommended it. We're also doing well with National Presto (NYSE: NPK) and Peet's Coffee & Tee (NASDAQ: PEET) which are up 21% and 25%, respectively, since I recommended them.
And subscribers who have followed my recommendations in Small Cap Investor PRO are sitting on handsome gains of 78%, 56%, and 39% with small-cap stock investments. You can sign up for a no-risk trial to that service by clicking here.
What has been your most profitable small-cap investment? How about your biggest missed opportunity? I love to hear your investing stories. Send me yours and I'll include it in a future issue. My address is: editorial@smallcapinvestor.com
