MAMS: A low-liquidity beakout

Update: I closed my MAMS bull position on March 18 for a 14.1% gain. The entry price was $3.20, and the exit was $3.65.

Regular readers will know that I've added over-the-counter bulletin board stocks to my mix, and a strangely unproductive pool it has been. But today, (drumroll, please), for the first time ever, a tradeable OTC BB stock makes it past my analytical screens. This is too exciting.

MAM Software Group Inc. (MAMS) broke above its 20-day price channel on Wednesday, gapping above the $3.15 upper boundary.

Like most low liquidity stocks, MAMS tends to move in fits and starts, unchanged at a price one day, gapping to a new level with no intraday movement the next day, and then going slightly crazy with a very broad range of trading for a few days in a row.

Longer term, the price has been in an uptrend since late 2011.

For someone schooled the world of the big caps, tiny MAMS, with a market cap of only $44.6 million and four-digit volume, is an education.

MAMS upside breakouts have been profitable nearly three out of every five time since January 2009, for a large average return of each successful trade of 20.2%. Adjusting the return by the 57.1% success rate produces an adjusted yield of 11.6%.

MAMS has no stock options, as is usually the case with the small fry, and so presents no opportunity for leverage.

The breakout came on the second day of a rise from just below the midpoint of the 20-day channel. The stock has been trading in a sideways pattern since late October, with a floor at $2.75 and a ceiling at $3.33.

The price-channel breakout leaves MAMS within the trading range. The prudent trader, which is an epithet that is not always accurate in describing my trading, wouldn't open a bull position until the price had broken past $3.33.

The company, headquartered in Barnsley in the English South Yorkshire region, sells management software and other services to companies working in the automotive aftermarket, with customers in the U.S., Canada, the U.K. and Ireland.

That sector gave the company a return on equity of 30% with no long-term debt. That would be growth stock territory for a more liquid company.

The company has been profitable the five quarters. With analyst following, there's no way to track earnings surprises.

Institutions own 40% of shares, and the prices is slightly above sales parity. It takes $1.68 in shares to control a dollar in sales.

MAMS on average trades only 2,087 shares a day. This produces a relatively wide bid/ask spread on the stock, amounting to 9%.

Today's 30-minute chart shows trading a two levels, $3.18 and $3.20, with volume spikes on the higher price.

MAM Software Group next publishes earnings on Feb. 4, which puts it within the 30-day zone where my rules prohibit opening a new position.

Decision for my account: No trade, because the earnings announcement is coming so soon. That date didn't show up in my usual places, so by the book, I wouldn't have done an analysis of MAMS had I known.

Without the earnings exclusion, I would attempt to open a bull position, but whether I would go through with it would depend upon my ability to get a decent fill on my order.

Actually, a change of heart. I've opened a bull position, by buying shares, but a smaller position than I would under my normal trading rules. I want to get a sense of how the fill comes out. 

In working with my new OTC BB pool, I've noticed that few have success rates as high as that shown by MAMS. So that alone, I think, makes it reasonable to break my earnings announcement rules and take the trade.

The initial bid/ask spread was $2.93/$3.20; I offered $3.07, and had no takers. I increased my bid to $3.10, and stepped away to make a pot of green tea.

Market orders, of course, aren't allowed for OTC BB stocks. 

I'm back, and check the orders. There are no offers below $3.20, so I change my bid to $3.20. I get filled 60 seconds later.

An interesting exercise My first write-up of an OTC BB stock. The lack of options and low volume mean that many of the analytical tools that I use to assess current momentum simply aren't available. So in thinking about the trade, I found myself giving much more weight to the financials than to the chart, something I would never do with a high-volume stock.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.