You’ve probably heard the old Wall Street saying: “Buy on rumor, sell on news.” I’m sure I don’t need to tell anyone that it’s foolish to buy anything just because of some rumor. And yet, savvy speculators know that a strong story can run share prices up much higher than any reasonable valuation. That’s why it often makes sense to treat anticipated news—even if it’s as good as expected—as a “liquidity event” to use as an exit, locking in gains.
But does this work in the resource sector?
After all, even the biggest mining companies in the world are small fry compared to today’s trillion-dollar market darlings. It’s one thing if a big company with high trading volume has big news that meets expectations. It’s quite another if a tiny junior exploration company does the same.
Quick aside: it’s a whole different kettle of fish if the news disappoints or exceeds expectations. Or if the underlying commodity tanks on the day the news is released.
Today’s topic is what happens when a company delivers on great news as expected—and the stock doesn’t do what shareholders think it should. One reason for this can be that the good news was priced in advance—or more than priced in. Another reason is simple “sell on news” profit-taking. The impact of this can be huge for a junior that normally only trades a few thousand shares a day.
A shareholder liquidating a large position can singlehandedly cause such a company’s share price to drop on what is objectively great news.
This happens a lot to exploration companies when prospectors who got shares when they vended their properties to the company decide to cash out. Former employees and directors can do the same—and they may not show on insider trading reports.
In short, it’s common to see share prices of junior companies drop on good news, at least initially.
Key point: a retreat on apparently good news is not necessarily an indication of some hidden defect or fatal flaw in the news.
So how do you know if there’s a problem or if someone is just selling on news?
Well, honestly, that’s where the guidance of someone with many years in the sector helps…
But there are some things everyone can do. The first is obviously not to assume you’re missing something if you read a press release carefully—to the very end, as companies always put the good news first—and don’t see any bad news.
Once you do that, you could ask for input on public forums. My Twitter audience, for example, is often willing to give opinions.
You should also resist the urge to panic and watch the stock for a few days. That’s especially so on the second day, when shareholders who missed the news on the first day may panic and sell, possibly triggering stop-loss selling, creating a cascade downward.
If the fluctuation is short-lived—meaning not more than a week—it was most likely “sell on news” action. If the decline isn’t reversed or if the stock keeps drifting lower, that warrants a deeper look.
The good news, of course, is that “sell on news” action can create excellent buying opportunities for those late to a great speculation.
Longer term, investors can and should learn everything they can about whatever sector they are investing in.
The more you understand, the better you’ll be able to interpret press releases and industry news. In mining, everyone can learn to recognize what counts as high gradewith a little effort. You can learn to evaluate political risk. You can identify news among the bigger players that affects the smaller ones, potentially creating opportunities to profit on takeovers.
One of these days, I’ll write a book on this. Until then, I’ll do my best to help readers as best I can.
Friday, September 13, 1:26pm, EDT, 2019