Finding Invisible Stars
By Jason McIntosh | Founder, Motion Trader
What’s your view on Lark Distilling Co. Ltd?
You know the one. The award winning Tasmanian Whisky producer.
Really, you’ve never heard of it.
Then what about Jumbo Interactive, the digital lotteries business?
You don’t know that one either?
Don’t worry, you’re not alone. These stocks aren’t exactly household names. There’s every chance your stockbroker won’t know much about them either.
Like many growing companies, these stocks have a visibility problem. They’re simply lost amongst the 2,000 or so ASX listings. Finding them could be almost impossible.
Well, at least for most people…
In a moment, I’ll tell you 3 of my favourite momentum plays. Chances are you won’t know them — most people don’t (at least not yet). But they all have significant upside potential.
So how do I know about them?
Well, I identified them using a set of momentum detecting algorithms. The stocks triggered the algorithmic sensors that I use to analyse the market each day.
I’ll tell you the 3 stocks in a minute…
But first, let me tell you about the power of momentum.
How Do You Find an Invisible Star?
Analysing a company can be a laborious task. Once you identify an interesting candidate, it could then take hours of research to form a view on its potential.
And that’s just for one company.
What about the other 2,000 plus ASX listings?
This is where algorithms come in. They provide a means to analyse an almost endless number of stocks. Not only can this save time, it could also give your portfolio an edge.
Let me explain…
The ASX has over 2,000 stock listings. The vast majority of these aren’t even in the All Ordinaries. That leaves a lot of potential outside the main benchmark.
Now, think for a minute about managed funds. Many local managers focus on the big end of the market. Even those with a smaller focus typically have limits on size.
Take the ASX Small Ordinaries for example…
It represents all the companies in the ASX 300, but excludes those in the ASX 100. Fund managers use this as the benchmark for small cap local equity portfolios.
But remember, the ASX has over 2,000 listings.
The Small Ordinaries only goes as far as the 300th company. That leaves most stocks without much (if any) analyst coverage. It’s as if they don’t exist.
You're about to see something fascinating… I’m going to show you how momentum can help identify hard to find opportunities. I call these stocks "invisible stars".
And to make this even more interesting, I’m not going to give you hypothetical examples. You’ll see actual trades from my own portfolio. Yes, these trades are the real deal.
After you see these real life investments, I’ll show you 3 recent algorithmic finds.
Okay, so let’s roll into it…
The first example is Bravura Solutions Ltd [ASX:BVS]:
Meet Jason
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.
I want you to start by looking at the blue circle. This is a key area on the chart. It’s the point where Standard & Poors announced that BVS would be entering the ASX 200.
Now, entering the ASX 200 is a big deal. This is when a company comes to the attention of many traders and investors. The mainstream media also pays more attention.
ASX 200 inclusion often opens the door to more investment dollars. This is because many funds can’t buy shares in companies outside the index.
Now, getting back to the chart for BVS…
My entry point was at $2.75 on 21 March 2018. This was 204 days before the stock’s ASX 200 inclusion. By the time of the announcement, my holding was already up 38.5%.
Look at it another way…
By acting on the stock's momentum, I effectively got an “early-bird” discount. ASX 200 watchers, on the other hand, had to pay a lot more to buy a stake.
Here’s another example:
My momentum scans were onto this one early. I suspect few people knew of lithium miner Kidman Resources Ltd [ASX:KDR] at the time I got my entry signal.
Standard & Poors announced KDR’s inclusion in the ASX 200 on 8 June 2018. But the horse had well and truly bolted. The shares were already 287% above my entry price.
Also notice how I let my profits run. I use another algorithm to calculate a trailing stop for all my trades (see the red line below the share price), and this led to a big gain.
In this case, all the gains were made prior to index inclusion. KDR began a deep correction just after the announcement. Buying on the news doesn’t always pay-off.
And this isn’t unusual…
You see, the “smart money” is often a few steps ahead of the mainstream. And it’s the activity of these savvy players that momentum can help you detect.
Flickering lights
Okay, let’s expand our search zone…
This takes us outside the reach of the ASX Small Ordinaries Index.
It’s like leaving the inner Solar System and traveling to the outer planets. Next stop is a group of companies where research can be hard to find… if it can be found at all.
Here’s the first outlying stock:
Jumbo Interactive Ltd [ASX:JIN] is a digital retailer of government and charitable lotteries. If you don’t know its name today, just think how unknowable it was back in 2017.
But the stock's gathering momentum drew my attention.
Now, you may be thinking JIN must have been a micro-cap business… just a small speculative play that took off… not the sort of stock you’d usually consider.
But hold on a minute…
At the time I bought my stake, JIN had a market cap of close to $170 million.
Despite its size, JIN didn’t get an ASX 300 berth until March 2019. The company’s market cap was then closing in on one billion dollars (and my shares were a lot more valuable).
Another example is Calix Ltd [ASX: CXL]:
Calix is amongst an interesting group of stocks… large enough to qualify for the All Ordinaries (the top 500 companies), but outside the ASX 300.
Many people don’t have this group on their radar. While the companies are large businesses by everyday standards, they lack the market presence of the big names.
But a big profile isn’t necessary if you can analyse momentum.
I do this through the use of algorithms. They crunch the numbers on practically every ASX stock after the close each day. And this can uncover some amazing finds.
Calix is a case in point. I bought a stake on 1 September 2021. (I also profiled it on Ausbiz in February). A year later I'm up 315% in a stock that few people knew about (as at 31 August).
The key was finding Calix amongst more than 2,000 stocks.
And thanks to a set of motion sensing algorithms, this wasn’t a problem.
The final frontier
So what about outside the All Ordinaries index?
And to be clear, we’re talking about stocks that don’t make up the top 500. This is the ASX equivalent to crossing into the darkness of deep space.
Coverage beyond the top 500 is largely non-existent. Yet you could find some highly profitable opportunities in the furthest reaches of the market.
Check this out:
Universal Biosensors Ltd [ASX: UBI] is a medical diagnostic business. You probably haven't heard of them, but their technology platform has delivered more than 10 billion diagnostic tests to patients worldwide.
So how did I find UBI?
With an algorithm, of course.
There’s almost no way I would have found a stock like this on my own. Even if I went through the ASX listings one-by-one, I’d unlikely dig deep enough to find UBI.
Opportunity like this often require an algorithm’s help. And if you have the ability to use algorithms, you could have a huge advantage over those who don’t.
UBI is up by 240% from my entry in July 2020 (as of 31 August 2021)
Okay, I’m about to reveal the 3 potential invisible stars.
But first, I have one more real-money investment to show you. It’s another stock that my momentum algorithms found in the darkness of the smaller ASX listing.
Have a look at this:
Lark Distilling Co Ltd [ASX:LRK] was virtually unknowable… a small company on the fringes of the broader market. I’m sure few stockbrokers would have even heard the name.
But this needn’t be a problem… the algorithms I use are an all-seeing motion detector. They don’t need broker reports. They just need the price data.
You see, even small stocks make ripples when they move. And a momentum algorithm can pinpoint the faintest price shifts. They could then bring these to your attention.
Lark Distilling is just one example… there are many more.
My stake in Lark is up 330% in a little over a year (as of 31 August 2021). Not a bad return from a stock that isn't even in the All Ordinaries.
“Invisible stars” of tomorrow?
Okay, you’ve now seen what an algorithm can do… it’s able to analyse the faintest ripples of data, and identify opportunities you probably wouldn’t find otherwise.
So let’s move onto some recent algorithmic discoveries. These are not mainstream ideas — I'd bet that relatively few investors would be aware these stocks exist.
Here they are:
#1 Atomos Ltd [ASX:AMS]
Market cap: $335 million
Index: Outside the All Ordinaries (top 500)
Atomos is an emerging technology company and a leader in digital imaging. It has a market cap of around $335 million and sits just outside the All Ordinaries.
It produces 4K and HD Apple ProRes monitor-recorders that connect to a user’s camera. The technology allows for faster, higher quality, and more affordable content creation. Popular uses for the content include social media, YouTube, TV, and cinema.
A key growth driver for the company is through Apple’s ProRes RAW technology. It essentially takes large video files and compresses them to produce high quality output. Atomos is the only company licenced to record natively using this technology.
Atomos says that nearly all the major camera makers are embracing the ProRes RAW format. And as ProRes RAW increasingly becomes the industry standard, they expect the market for their devices to continue growing.
Financially, the company is making strong progress.
Management recently reported record sales of $77 million for the 2020/21 year. It also highlighted a strong second half result of more than $44.2 million. This is a 275% increase on the corresponding period, and is the strongest half in the company’s history.
The company says that it’s structured for rapid expansion. It also has a strong balance sheet with $26 million in cash as of 30 June, with an additional $5 million in undrawn facilities.
The stock has a strong chart profile with increasing momentum.
#2 Novonix Ltd [ASX:NVX]
Market cap: $1.8 billion
Index: ASX 300
Novonix is another stock that I found via my momentum scans. And when you look behind a stock’s momentum, you can find some of the most interesting stories.
This stock is a case in point…
Novonix is an emerging player in the lithium-ion battery industry. It develops and supplies high-performance materials, equipment, and services to more than 14 countries.
The company has two primary operations…
Firstly, it provides battery testing services and equipment. This includes performance testing, development, demonstration, and sales. The company believes its battery testing technology is the most accurate in the world.
But the most exciting part of the business is the synthetic graphite anode operation.
An anode is a battery’s negative electrode. And in a lithium-ion battery, graphite is widely used as an anode material. Graphite can be either synthetic or natural. And it’s a key factor in battery reliability, longevity, and performance.
A key selling factor is that the anode material has high purity and high consistency, which is necessary for long-life batteries. And in testing, the company has demonstrated longer life batteries compared to other leading products.
Another positive for the company is that its production facilities are in the USA. This provides an alternative to synthetic graphite anode material that is currently entirely produced in Asia (mainly China).
Earlier this month, it was announced that Phillips 66 will buy a 16% stake in Novonix. Phillips 66 will be issued US$150 worth of shares. The funds will be used to fund a capacity expansion.
Phillips 66 is a diversified energy company with a market cap of US$68 billion. The news of the deal was the catalyst for the recent share price surge. Phillip’s entry price is around $2.67.
The stock may need time to consolidate after the recent rally. But the big picture trend and underlying story make this a high potential opportunity.
#3 SomnoMed [ASX:SOM]
Market cap: $190 million
Index: Outside the All Ordinaries (top 500)
SomnoMed is a medical device company with a market cap of around $190 million. Like many smaller companies, it has a relatively low profile and isn’t in the All Ordinaries.
The company provides treatments for sleep related breathing disorders. A primary focus is obstructive sleep apnoea (OSA), which affects around 9% of women and 25% of men.
SOM has developed a treatment called Continuous Open Airway Therapy (COAT). This is a clinically proven oral appliance that helps keep the airways open when the user is asleep.
And the potential demand for the product is huge. Management says the global addressable market for OSA is around $7 to $8 billion, with an annual growth rate of 6% to 8%.
The stock came to my attention in May during my daily scans. It caught my eye because it was beginning to regain upward momentum after a period of consolidation.
SomnoMed has high growth potential over the next few years. I believe the shares could rise significantly. It also has a strong balance sheet with net cash of $19 million (as of 30 June).
Important details
The examples you saw earlier are some of my best performers. There are also plenty of stocks that didn’t do as well. Many even lost money — that's all part of investing.
I believe the key is to maximise profits from your best investments, and minimise losses from those that fall. Unfortunately for many people, they get this the other way around.
No one knows how the 3 potential “invisible stars” will perform. Some could do extremely well, while other could fizzle out. We’ll only know in hindsight.
My strategy is to build a portfolio of many relatively small trades, not a few big ones. It’s all about increasing the odds of buying stocks like you’ve seen above.
The “secret” behind these trades is straightforward…
The algorithms identify trends with upside potential. They then apply strategies to help manage risk. The aim is to let profits run, and cut losses relatively early.
Think of it like this: A child’s height increases as they grow. Business is similar. Shares in smaller companies typically trend higher as they get bigger… it’s the nature of growing.
Using momentum to identify opportunities can be highly profitable. I believe the key is to have the right algorithms working for you. That’s something many people don’t have.
The ASX is just like space… there’s a lot going on outside the big names.
Hopefully I can help give you an eye towards the stars.
What to learn my investment approach?
My free video training explains the process I use to identify and manage high potential stocks. You'll learn a complete trading strategy for buying and selling shares with confidence. I'll also share real life examples to help you apply the knowledge and build a profitable share portfolio.
Where to invest now?
Looking for off the radar ideas most people don't know? My algorithms scan the stock market daily for medium term investment trends. I then tell members precisely when to buy shares. And most importantly, I tell them when to sell.
If you're ready to get started, try a no obligation one month trial of Motion Trader, and see what an algorithmic trading approach could do for you.
