“L-2 Indicator: Best for Gold Stocks”

By Travis Johnson, Stock Gumshoe, January 30, 2008

This teaser comes in from the folks at Stansberry’s Phase 1 Investor service, which is their uber-expensive $5,000 subscription newsletter that purports to find the best opportunities in the smallest stocks.

They have developed what they call the L-2 Indicator that tells them when to buy stocks, in this case gold stocks: “the ‘L-2 Indicator’ is the most accurate strategy we’ve developed to predict the moves of tiny natural resource stocks. And using it, you could’ve made up to 8,800% gains – in a matter of weeks…”

And, for the headline attention-grabber part of the teaser, “S&A’s secret “L-2 Indicator” predicts which tiny gold stocks will jump 80% or more in the next 30 days.”

We’ve run across part of this “L-2 Indicator” before, because Andrew Mickey at Breakaway Investor also apparently uses a piece of it: One of the reasons he picked Bayou Bend Petroleum a few months back was that it had a relationship with a “pair of legendary wildcatters.”

Those “legendary wildcatters” turned out to be the Lundin brothers, scions of the Lundin family and at the top of the Lundin Group, the massive interconnected family of natural resource companies started by Adolf Lundin, the Swedish mega-investor who passed away about a year and a half ago. The group includes several public companies, several private subsidiaries, various holding companies, etc. etc.

But anyway, the letter from S&A for Phase 1 tells us that these same Lundins are, in fact, one part of the L-2 indicator — you’ll probably hear, if you’re interested in natural resources and mining stocks, that “following the Lundins” is a fairly popular activity, sort of like the many value investors who follow Warren Buffett’s picks for Berkshire Hathaway and buy shares of everything he invests in (though on a much smaller scale, of course).

So this is slightly more complex: We know that we want to buy (according to this teaser) after the Lundins buy into a microcap mining or resource company. The teaser notes that these companies typically go up by at least 5-10% in the ensuing month or so.

But they say the real gain, over the long term, comes from buying after the second part of the L-2 Indicator is triggered. And they have a particular gold stock in mind which “recently” triggered this second part of the indicator.

Now, given the large number of companies that the Lundins invest in, it might be somewhat difficult to pin down the exact gold miner being teased here … or to tell you precisely what that second part of the L-2 Indicator might be. But the Gumshoe is game to try!

Here’s what we know:

They give a few examples of stocks that you could have picked with the “L-2 Indicator.” Some, like Tenke Mining, triggered the indicator simply by merging with Lundin companies (Lundin Mining, in this case). There doesn’t seem to have been a second part of the indicator for these guys.

A couple others, like Pearl Exploration, saw the Lundins buying big pieces, then the shares fairly rapidly shooting up (Pearl then spun off Bayou Bend, for whatever that’s worth). Or Valkyries Petroleum, now a wholly owned part of Lundin Petroleum. Not necessarily a second “trigger” there, either, at least not one that I can see in the news or the charts.

So what is this second part? From Matt Badiali, the S&A Analyst for this sector:

There’s one more thing you need to know before buying potentially explosive resource stocks… It involves a certain event in the business cycle of these companies.”

The way I see it, this is most likely to be one of two things:

  1. Actual mining or drilling results.
  2. Change in corporate structure.

Now, given the examples provided, a real answer might require cornering Matt at an investing conference somewhere … but here’s what I see — I’m blocking out this segment of text in case you want to ignore it, it’s long and complicated, and I’ll talk about what my guess is for the “next” L-2 company at the bottom:

They mention Lara Exploration, which had a 7.2% gain “within a month” after a press release, which I assume is the announcement that the Lundins are buying in to their private placement. That announcement was on September 17, so you bought the next day at $1.10. One month later it was at $1.18, which is indeed a 7.2% gain. So far so good.

But they also indicate that you could have gotten a return “almost 7-times as much” in 20 days if you had waited for the second part of the indicator to kick in. So what the heck is that?

I assume it must be after the first indicator, so we’re not dealing with much time. We need something like a 50% gain in 20 days, sometime last fall.

So what happened? Lundin put someone on the board of Lara — but that was October 16, and the stock actually went down for the subsequent 20 day period (though it did spike briefly on the news, it was only a few percent).

And actually, looking at the chart, it appears to me that to get a 50% gain in Lara at any point in 2007, you would have had to buy it at the recent low of 87 cents in early September (pre-Lundin announcement), and sell it 20 days later on October 1 for $1.30 (this is all Canadian, I’m not going to figure out how you could have improved it if you timed Canada/US exchange rate moves, but there weren’t any other st