Using Algorithms to Find Little Known Stocks

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Host: Switching gears to a quant conversation and our next guest has come along with three stocks to buy. If you know your candle sticks from bars, let’s find out what he’s buying and why Jason McIntosh joins us now from here in studio.

Host: Jason welcome to ausbiz. Thank you for joining us.

David, thanks for having me in.

Host: We’re gonna start off with… Maybe give us a bit of background as how you go and make your investments decisions? What’s the thesis to go pick the right stock?

So what I’m doing I’m using algorithms to scan the market and look, the great thing about the algorithm approach is that you can cover so much ground you can have so many stocks, so I’m able
to cover pretty much practically every ASX stock every day.

I run the data through the algorithms and I’m looking for trends in the market and I’m able to find ideas that otherwise I wouldn’t be able to, you know which otherwise would be pretty hard to find so give you an analogy… imagine looking at the clear blue sky and you’re looking for a jet aircraft
flying over at 30,000 feet.

And now, unless you know exactly where to look or you get lucky, you’re not going to spot it.

But now put a vapour trail behind that aircraft… then it’s easy spot straight away.

So this is kind of what I’m using the algorithms for. They’re looking for a stock’s vapor trail and the vapor trail a stock leaves is momentum.

So it’s not just an up day or an up week. There’s a bit more to it, and that’s basically the premise of it. You’re looking for the momentum in the stock.

Host: So no accounting for fundamental analysis you’re just not into that? It’s just purely algorithmic?

From my approach I’m just using the algorithms and relying on momentum and then risk management strategies to handle each stock.

But that said, a lot of people will use the momentum-based trending triggers to identify the idea, and then they’ll drill down on the stock and they’ll look for what might be driving that momentum,
and so you can do it both ways.

Both ways work. There’s no Holy Grail with investing, and what works is what sits best with the investor.

Host: So Jason you have got your algorithms out there scanning the market and you’ve actually come up with three stocks that are on the move and are ticking a couple of boxes right now? What’s one of stocks that I know you’re looking at right now?

Yes, so look, the challenge was actually narrowing it down to three stocks to talk about, because this is the thing, I’m getting signals for so many different stocks and I looked for three of the smaller ones
because the small ones are interesting because stocks where most people don’t know the name of
it’s you know there can be some fascinating businesses out there.

So the first one is a company called Apiam Animal Health and its market cap is around $88,000,000. It’s not in the All Ordinaries, so I think that probably takes it off the radar for most people, and it’s a veterinarian business and by that it’s not like the local vet, it’s regionally focused, so they look after the domestic animals. But then a big part of the business is the farm animals, the horses, cattle, sheep, poultry, pigs, and they’ve also got diagnostic and genetic services, so it’s all round comprehensive veterinarian business.

And so this stock listed on the market in I think it was 2015 and it had a really, really rough start. I think it fell something like 80% over the first four years and that doesn’t mean it’s necessarily all over for the company. See a lot of companies have a bad start but then turn themselves around, do well.

So you look at the fundamentals of this stock and its gross revenues is up 6% over the last financial year. Profit after tax is up something like 30%, they have margin expansion and they’re continuing to roll out their products and services.

For example, I just bought a veterinary operation in Dubbo so then for fast growing regional area and it’s part of the company’s growth strategy.

So look it’s ticking some fundamental boxes and it’s come to my attention because of the momentum. So it’s starting to trigger the trending indicators which puts it on my radar.

Here’s the thing with these smaller stocks. If you get in the right ones and you stick with them. I take a medium term approach, maybe one to three years, and you can stick with some of these ones. The ones that go can really run a long way and you get some really strong portfolio return, but it’s all risk management. If this stock doesn’t pan out, I won’t be hanging around for three years to find out, it’ll be rotate the capital into something else.

Host: Jason, do you apply any of your modelling to the US or some of the go-go momentum stocks like a Tesla for example?

Yeah, the strategies are completely transferable to any market I’ve used them to trade commodities,
international shares, my focus at the moment is the local market. I came to the conclusion years ago that there are more markets and more opportunities than I have either capital or time to follow.
So yes, I mostly look at the local time zone.

But something like Tesla, which I heard you talking about earlier. Yeah, it’s been the classic trend
following stock. it broke higher, I don’t remember the timing of it I need the chart in front of it but
you had a clear break out and there’s been no reason to sell.

I know people have been shorting it all the way up, but that’s fighting against the trend and fighting against the trend, it just often ends badly ’cause the market can run longer than people can imagine, so I’d let the stock run, I’d have risk management strategies to get me out when the stock turns lower rather than pre-empting the top.

Host: Does your modelling actually enable you to go short? So I mean once that momentum peaks and it’s starts that classic parabolic kind of blow off phase and then it reverses violently oftentimes we go back to 1999, 2000. I’m sure you were active in the markets at that time. I mean some of those classic reversals were you know, of historic scale, so would your model then say go short
at those levels or just get you out?

Initially, get out. Like back in the dotcom boom I was all for preempting tops back in those days and learnt my lessons that I’m better to wait for a market to actually peak and roll over yes and then getting momentum to the downside, and again use risk management strategies to get out if things reverse and then let the market fall as it does.

So I don’t actively trade stock short, the risk reward profile is not as good as trading long. Most a stock can fall is 100%, most it can rise is infinite,

Host: Right, so it’s a asymmetric.

It is, so it’s very much looking for that asymmetric angle as you say, and that comes better on the long side than the short side, but it can be good looking for those indicators to know what stocks
to stay out of.

So rather than try to pick the low in AMP over the last few years the trending indicators have been strongly down, stand back. Let it fall, wait for it to base, wait for it to turn higher. Should that happen, and then the risk reward starts moving in your favour.

Host: It’s a wonderful compliment of risk management strategies, isn’t it? That form of what I call a technical analysis, your slightly more sophisticated. I’m quite simple in terms of my chart analysis, but I blend both technical and fundamental analysis, but I’ll never do anything unless I’m feeling comfortable about what the charts are telling me. Because that to me is the most powerful signal.

It is, Jeremy Grantham, the value investor. He talks about the curse of the value investor and being
early, so this is a great thing about the price action approach. It’s about waiting for the price to be
moving in your favour, and then if you have a great value story going then, and look, it can save you waiting three year.

I remember the old Pacific Dunlop back in the 90s. The investment bank I worked for, the fund
management was very keen on that and they said there’s a great value story. But when I looked at the charting profile of it, the stock had been in a downtrend, it was now in a holding pattern, but
you don’t know where a holding pattern is going to break, is it upside or downside.

Turns out it was downside and they end up exiting their position and taking a big loss, would’ve been better off waiting, watching for the price action and then repositioning as momentum was on their side.

Host: And talk to us about another company then that has passed your algorithm tests.

Yeah, another interesting one is a company called Mader Group. Now, chances are most people wouldn’t have heard of it It’s again one of these weird and wonderful ones you find. Well, not so much weird, rather one of these wonderful, out of the box ones you find with the algorithms, it’s capped at around $195 million dollars. It gets in the All Ordinaries but not in the ASX 300. So again, probably on the fringes for most people in terms of finding it.

It’s focused in the resources sector and what they do, they service the heavy equipment so you know the diggers, the trucks plant, all the all the big stuff that makes a mining operation work. And with 1,400 people in the company they’ve got operations in Australia, Asia, the Americas, in Africa,
in the big mining areas.

It’s really interesting because what I’ve been seeing over last, probably the last six months, there’s been quite a lot of momentum triggers in resource stocks, and this is from BHP, RIO, Fortescue all the way down to the small caps and the micros, so it’s not everything with a mine going up by any means. Still, you gotta find the right ones. But it is really looking like a hot sector for opportunities and I think over next maybe next one, two, three years we could really see some interesting stuff in the resources sector with what’s happening worldwide with infrastructure and modern monetary theory.

And with all this going on, I think there’s a positive backdrop showing up in momentum of a lot of these stocks and a company like Mader. We talk about, you buy the guys who sell the picks and shovels to the miners you can make money doing that these guys are going out and fixing the picks and shovels, so if you get an uplift in that sector, it could be a good way to play it.

Host: Not only that, but when there is a turn in the economy eventually, instead of going out and buying new ones, everybody starts fixing their old picks and shovels right?

There you go.

Host: Do you agree with the assessment about you know, picking and choosing amongst these resources names as in, just because we’re seeing this rotation from growth into cyclicals, it doesn’t mean all are created equal. Where do you look most favourably?

Guest: I don’t think they’re all created equal I want to just really zero in on Jason’s point here. I’m getting to feel. I would love to hear your perspective on whether the charts are confirming this. That we could be seeing a bit of a commodity super cycle boom taking place here. We’ve certainly got the monetary and fiscal ingredients. We’ve got the policy environment and we spoke earlier, Nadine.
Which central bank is going to be the first one to raise rates? They don’t want to go down in history
as ruining the global economy. Politicians are now all popularists and economic nationalists. There’s no such thing as any concern about deficits. So we’ve got politicians and central banks joined at the hip. Or simulating. We get a vaccine, Hallelujah, we get take off and surely that’s the right environment for a commodity super cycle?

I think you could be right. It’s interesting. I saw a fascinating chart not long ago. It was a ratio of commodities index to the S&P. And it’s at multi decade lows and you can see how cyclical these things are. That real asset based commodities will have periods where they outperform financial assets like S&P stocks and then periods where they fall out of favour and it just rolls, it rolls like the waves and so now we’re down in one of those troughs.

And at some point it almost seems inevitably at some point, timing is always difficult, you can never know that, but it does seem like the risk reward is looking quite favourable.

And yeah, it’s a really interesting sector, I think, to watch there’s a lot of stuff going on with the. Are we going to be seeing inflation over the next few years? Do we have other markets setting themselves up for that with the way central banks now are handling every crisis. It’s really like pump the money in. That’s been the playbook for a long time and it’s worked and they’ve been emboldened by the last bout of weakness we’ve had, I can’t see that changing and that has to be, I think that’s probably a positive for commodities.

Host: Jason, we’re starting to run a bit short of time. Your last pick is one that I know that a lot of people who are watching this programme will know, Raiz has also come on your radar, Raiz Invest.

Yeah it’s a really interesting one. It’s only capped at $78,000,000 so it falls well short of getting
into the All Ordinaries. It’s a micro investment business, So what they’ve got, they’ve got an app that they’re targeting to the millennials, and the idea is that a user can automatically transfer small amounts of money from their linked account into the investment portfolio. And then it goes out to ETFs.

And they’ve got this really interesting feature where, they call it round up. So every time you buy something. They round it up to the nearest dollar and the change, the virtual change then gets sent
off to the ETF. So it’s meant to be a simple and painless way to invest.

Host: Not profitable? But your algorithms are still saying it’s a go, and that’s momentum.

Yeah, so that’s caught my attention through the momentum and it’s not profitable yet, but they’ve got $450 million under management. It’s up 30% on last year and these businesses are just so scalable. And if they can continue to grow locally, get traction in Indonesia and Malaysia. You never know with these things. But again, like with Apiam, I’m not hanging around for three years to find out. Like I’m not wedded to the story. There is a story there, it’s an interesting story. Maybe it doesn’t pan out. It doesn’t pan out. I’ll be out, rotating to something else,

But the thing is, you gotta get these ideas before they appear in the ASX200 because by then, they’re a lot higher. So this is the beauty of using the algorithms to find them when no one knows them.

Host: Jason again, I’m going to say it this time I could sit and listen all day but we’ve got Apiam Animal Heath, AHX, MAD for Mader group and RZI for Raiz Invest. Our viewers will thank you. Thank you for coming in.

Thanks for having me. It’s been fun.

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.