Mar 15, 2021Liked by Ali Kokaz

Awesome spots, Ali, keep up the great research! Any tips for researching these stocks myself?

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Thanks, glad you enjoy it.

There is a fantastic article on Reddit which goes into this, the original can be found here: https://www.reddit.com/r/pennystocks/comments/lwvisz/7_unconventional_ways_to_dd/

I will post here for better visibility:

1. Look in places where others will not

If someone asks you 'would you invest in x', and your answer is anything other than, 'it depends', you're thinking the way I used to think. Four years ago I worked with a businessman who was very successful in real estate development. He attributed his success to his philosophy that he will always take time to listen and consider an investment proposal. If he finds a chance to invest in something, the answer is always yes, he wants the chance to learn more and fully understand the opportunity. When the terms aren't favorable to him he won't invest, but often enough those investments that he shouldn't have even considered according to conventional analysis turned into much greater returns that he could have found elsewhere. This type of value is often hidden, easily overlooked and usually difficult to quantify.

My approach takes a lot of time, I spend around 4 hours each day researching companies. There's always something to learn from my research even if I don't end up making an investment in a company. Curiosity makes an excellent research partner.

My primary target is undervalued companies, not stocks that will create long term value over time. I want something that I can buy today for $1 knowing at the very worst I will sell it for $0.50, but optimistically can sell it in 6 months for $10. More on how this can be profitable later.

2. Dig through the dirt for trades that won't show up on a screener

My research process is far from glamorous or tech savvy. If Keith Gill's style is the Roaring Kitty, mine is the Caffeinated Pig. I sit in a coffee shop with a caramel latte, go to otcmarkets website, filter by OTCQB, QX and Pink Current (because that's all Vanguard lets me trade), and dig through that list of 1400 mostly trash companies to look for hidden treasures.

I probably spend about 5 minutes on each company before I move on, unless I see potential and then I'll spend a lot more time. There's no way that the 2 week old 8K that implies a beautiful future for a company will show up on your screener. I do this 5 days a week for at least 4 hours, and have done this for around 3 years. And that's it, that's how I find companies to invest in.

3. Prioritize signs of good capital management and protective corporate structure

The companies that are traded OTC usually have pretty dismal financial statements, either due to lack of data, or they're simply hot messes that no sane person would ever invest in. Often they're hot messes with a limited history, so I don't put too much weight on comparing ratios to industry averages and those types of fundamental analysis.

Instead I want to see how the company is structured.

How many investors? How many lenders hold convertible debt? What are conversion terms? Did anyone involved with this company manage a publicly traded company in the past? What happened to that company? Is their attorney a scumbag who I won't name here but seems to specialize in pump and dumps? Have their investors previously invested in companies that turned out to be pump and dumps? Who owns the majority of shares? What types of shares are there? How has share structure been managed? Is the company set up in a way that it's easy to benefit the CEO, Investors and Preferred shareholders and the expense of common stock holders? How much capital on hand before the next S1/dilution? These are the sorts of things I ask myself when researching a company.

I want to protect my capital, and need to know there aren't conflicting interests inherent in the company structure. I love to see strong ownership structure with insiders owning a large majority of common shares. A great example of very strong ownership and share structure is USDR, I just published my research on them if you're interested in seeing what I mean. You can find it in my post history.

4. Imagine the extremes

My love for investing is directly correlated to my ability to be creative in my trades. I dreamed that AsiaBroadband would go viral, and even wrote a DD on it when it was back at a penny (also in my post history). My mind is still blown that the stock not only did what I imagined was possible but to an even bigger degree!! I owned 4.3million shares back when it was at a penny. I sold most by $0.14. three days later it hit $0.60.

I learned that I didn't dream big enough.

By imagining the extreme's of both bullish and bearish situations that could impact a stocks share price, I structure my portfolio in a very speculative, maximum upside minimum downside theory.

5. Embrace risk, and structure it

Every time my dad gives me a hard time about my high risk investments, I remind him of his 'safe' investment in the 'Value Stock' Charter Communications back in 2008 before they filed Chapter 11. Common stock holders lost everything, my dad lost $15,000 (at the time I was 18, he was the sole wage earner in our family and only made $40,000/year and was planning to use that money for my college). Shout out to Paul Allen for screwing over the little guy.

I invest in some pretty sketchy companies, so what's the point of evaluating risk in a fundamental sense if this stuff happens on the major exchanges? Also, do I really care about volatility in a company when a stock price has been bouncing 5-10% every day for the last month? No, I care about volume, I want to be assured that I can get my money out quickly if Mr. Market decides the price should go down dramatically. Here are some other considerations that impact risk.

If a company has strong performance by fundamental standards and very little downside, but limited upside, I will usually pass.

If a company has terrible performance by fundamental standards, but limited downside and lots of upside, I will dig deeper

I like companies with limited downside, generally no more than 100% above the 52 month low, with daily volume at least 5x my investment, but with 10x-40x upside potential based on market cap and current share structure. This is all totally subject to change given the situation.

Fox example I have $60k in LexaGene right now, and the daily volume on that stock sometimes dips to around $20,000 traded per day. If some terrible news comes out about LexaGene, there's a real chance I could lose the majority of my investment because there's not enough volume for me to liquidate my position quickly. I accept this risk given the 13x minimum upside potential with a company and product that I really believe in. This is the type of investment I can make 9 times in a row and be wrong, and on the 10th time when it runs 13x I'll have $240,000 more in my investment account than before I made those last 10 trades. That's a 400% return.

Technology, anything that scales, biopharma, acquisitions/mergers and any kind of government contracts usually seem to be what I end up investing in.

My portfolio is usually between 5 and 7 positions representing 15-30% of my portfolio in each stock, and 10-20% cash.

I monitor my portfolio daily, and keep an eye on news using the 'News Dashboard' on Koyfin.

6. Don't just project financials, project potential

I do project financials, but don't put a lot of stock in my projections. The real purpose of projecting financials is to help me determine the upside potential that a situation has. A current example that illustrates this perfectly is in the diagnostic space, LexaGene (LXXGF) and Zomedica (ZOM).

LexaGene is almost entirely undiscovered. Volume on slow days equates to around $20,000 per day in shares traded. LexaGene has a market cap of $150million, with a product that is designed to meet demand in a much broader market than Zomedica, with tech that's arguably superior to Zomedica, enough cash on their balance sheet to last them another 9-12 months, and is currently going through FDA EUA application and projected to receive EUA in the next 2 months to begin COVID screening (which by the way, LexaGene's MiQLab is the only product of it's type that can screen for up to 24 strains of COVID in a single test. Talk about future proofing. I could go on and on about LexaGene, but will stop now and just write a DD on it later this week.)

Zomedica on the other hand has a market cap of $2billion, with no sales, has limited themselves to veterinary market (which is greatly suffering right now due to disrupters like Chewy that are siphoning revenue away from veterinarians) and their tech has no real differentiator when compared to LexaGene's MiQLab.

My financial projection in this case is pretty simple. I believe LXXGF has more earning potential than ZOM, so it's safe to assume at least a similar market cap once LXXGF becomes more widely known. $2billion/$150mm, for a conservative estimate of LXXGF running 13x with very limited downside risk.

7. I invest in fundamentally poor companies, so I don't miss the 'bad' winners

I don't have a lot of faith in my stock picking ability. Generously figuring if I could be right 50% of the time, and if I were to only invest in the 'good' companies by conventional analysis, I would miss out on half of the winners that I deemed 'bad investments'.

What if there was a way to not miss out on the 'bad' winners? There is, I do it through risk management and portfolio structuring.

I make fundamentally bad investments that have limited downside, and 10x-40x upside when I imagine the wildest upside scenario possible. Then I actively manage my downside risk, I'll typically start to exit a position at 20% down from my average price per share. I'm accepting a 20% loss in pursuit of a 10x-40x return. Even if I'm only right 1 in 20 times on a 10x play, I still make a 620% return over those 20 investments.

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I like the break down here, well done. Over the past 3+ years, have you hit on 10x-40x plays?

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thanks, bear in mind this breakdown is not my own work, I shared it from a Reddit post linked at the top. For me, OCDO, WEED, TREE and LULU.

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Mar 15, 2021Liked by Ali Kokaz


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no problem, glad you're enjoying it!

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