Trader’s Narrative

A while back, I mentioned I had an investment (not trading) position in Liquidation World. Since then, I’ve continued to hold the position and watched as price has meandered down from its swing high in April 2006. Here is a chart of LQW showing insider selling:

Source: Ink Research

One officer has sold more than $370,000 into the market within about two weeks. This is a tiny amount but given that this stock is a micro-cap and highly illiquid, it does have an effect.

Of course, I’d prefer to see insider buying but it doesn’t bother me to see this insider selling. This is because insider selling after a price increase is not that bearish. Insider selling after a price decrease, on the other hand, is very bearish.

In the meantime, I’m watching the technical levels on the weekly chart and will trade off of it - given no news or other extraordinary events.

I don’t usually trade based on fundamentals but recently I saw an opportunity that is quite rare. I found a Graham and Dodd value stock. Or atleast I thought I did. It was Liquidation World, a micro-cap stock on the Toronto Stock Exchange. Here is their profile:

LIQUIDATION WORLD INC. is a company specializing in marketing merchandise from distress situations, such as bankruptcies, receiverships, closeouts, inventory overruns and insurance claims. The retail outlets are located in Alberta, B.C., Saskatchewan, Alaska, Montana, Idaho, Manitoba, Ontario and Washington State.

I only noticed the stock because I’ve shopped at their store and been consistently astounded at their prices (yes, I’m a penny-pincher). What I saw was a company with almost no debt that was being valuing by the stock market as worth less than its inventory.

I did a bit of due diligence and came to believe that the market was wrong. Now, those words are difficult for me to say and even more difficult to believe and act on. So believe me when I say that this was a very unusual trade for me.

Well to be honest, I didn’t approach it as a trade but a long term investment. I knew that if I was right, then the value would be unlocked, sooner or later. The chart looked horrible, of course. But that was the point.

So what did I see that I liked, other than the valuation? Well, they were being run by the founding family and run quite badly. Thankfully, this was changing with the arrival of a new CEO. I emailed him and to my surprise he emailed back. He seemed like a very intelligent person who knew what a mess he had inherited. I liked the plan that he outlined. I also checked the Canadian small cap messageboards and was delighted to see that no one even wanted to hear any mention of this dog.

I took a small position around $3.40 in mid-September (2005) and waited. Almost immediately I was underwater! Ouch, that hurt. I consoled myself with the thought that this was a longer type play and that the value was there. Finally in October 2005 it bottomed.

As you can see, since then it has cut through resistance faster than a Jewish mother through self-esteem. I’m astounded at the performance so far and wouldn’t mind if it pauses here to catch its breath. At the upcoming Q2 conference call (May 9th) we’ll see if they can deliver some more good news to fuel a continued upmove.

Original mention on EliteTrader.