We do a tremendous amount of research on individual stocks at Zeal to search for the highest-potential trades for our subscribers.  While it becomes readily apparent we like a particular company when we actually recommend it for purchase, many of our subscribers want to know what companies we are interested in outside of our open trades.  We created our Watch List to address this need, to outline many of the companies that are on our radars.  If a stock appears on our Watch List, we are actively researching it and considering it for a trade once technical market conditions warrant.  It gives subscribers a heads-up on probable trades in the future.



Watch List Basics  The Zeal Watch List is published monthly on Page 8 of Zeal Intelligence.  An example appears to the left, and you can click on it or the small page above to see a real sample Watch List in its original context.  The Watch List consists of four columns that outline the symbol of each company we are officially watching, the exchange on which the company trades under this symbol, the company's general sector, and its perceived relative riskiness.


On a particular company's symbol and exchange, sometimes one company will trade on multiple exchanges in different countries.  For companies traded in multiple places, we have to choose one listing to watch.  In general, since most of our subscribers are Americans like us we prefer to trade on American exchanges unless there is a particular advantage not to.  We also tend to favor larger exchanges over smaller ones for liquidity reasons.


So if a company trades on major exchanges in both the US and Canada, we will choose the US listing.  But if a company has a major Canadian listing and just a Pink Sheets listing in the US, we will choose the far-more-liquid and safer Canadian listing over the US Pink Sheets.  If you are an American, the May 2006 Zeal Intelligence describes how to trade stocks directly on the Canadian exchanges.  (logon and password are located on Page 8 of the current issue of ZI)


If you are not an American and one of the companies we are watching or recommending is also traded on a major exchange in your home country, there is no problem purchasing the stock locally.  Each major listing of a particular stock around the world is functionally identical so there is usually no disadvantage to buying a stock locally, especially over the long term.


We actually sort our Watch List alphabetically by sector first and then alphabetically by symbol second, so the order of the list denotes no favoritism.  On sectors, we do attempt to keep this list diversified across sectors that we believe have a high probability of thriving in the months and years ahead for fundamental reasons.  The sectors are listed so our subscribers can quickly narrow down our Watch List to the sectors in which they are specifically interested.


If a particular company has operations in multiple sectors we usually list the sector of its main operations.  This is generally the sector from which the company derives the most sales, profits, and/or cashflows.  It can also be the sector that made us interested in the company.  For example, if a company produces oil and also refines chemicals, we would list "oil" if that is the reason we think the company could be a good investment or speculation going forward.


The final column defines the perceived risk each company carries.  Listed on a scale of 1 to 10 with 10 being the riskiest, this risk measure is subjective and based on what we know at Zeal about a particular company.  If you are a long-term investor who can't afford to lose, you are not going to like a high-risk speculation.  And if you are a speculator who loves volatility, a low-risk investment will bore you to tears.  Risk is described in more depth below.


Although not all of our new ZI and ZS trades will emerge off of our Watch List, usually the vast majority will.  These are the companies we are watching today to attempt to discern whether they will likely be good buying candidates the next time market conditions warrant.


Watch List Philosophy  In general, if we include a company on our Watch List it is because we believe it has excellent fundamental merit.  Typically it is in a sector where its selling prices are likely to stay high or rise and it has excellent prospects for increasing its production.  We also usually like its story and think it will grow more attractive to investors going forward.  Often promising fundamentals will make one company a good investment and speculation, or a good company to buy for both long-term and short-term time horizons.


But this is not always the case.  Sometimes we include companies on the Watch List because they look like good short-term momentum plays.  For whatever reason, speculators may be circling a company and ready to flood in and drive its price higher.  Sometimes when these temporary buying frenzies occur, they are in companies that have good stories but not a lot of proven fundamental merit.


So while it is a fair generalization to say that our Watch List companies are generally good solid fundamental plays, please don't make the incorrect assumption that all of them are.  On the speculation side of the game, over the short term stock prices are driven far more by sentiment than they are by fundamentals.  Sometimes we watch stocks not because we think they have great long-term prospects, but just because of sentiment swirling around them.


Risk Ratings Explored  Our risk column is totally subjective and relative.  It is based solely on our knowledge of a particular company and the risks it faces.  And for a given company, our perceptions on its risk can change monthly in some cases.  New information can become available that can make a watched company seem more or less risky, so when this happens we update our risk rating accordingly.  Risk is always changing and constantly fluid.


The risk column is also somewhat relative to the other companies in the Watch List.  We try to set the ratings so all 9s, for example, are riskier than all 8s.  The primary purpose of this arbitrary risk rating is to help investors pick investment-grade companies and speculators pick high-potential speculations.  Please realize there are no formulas or math under these risk ratings, they are totally subjective gut feelings based on our knowledge of a company.


Despite this, there are a couple common dimensions across which we rate risk.  Company size is one.  A large company with a big market capitalization is usually much less risky than a small company.  In order to grow large in the first place companies have to do a lot of things right, exist for a long time, and build a dedicated following of investors.  By their very nature mature companies that know what they are doing and have long-producing operations are far less risky than start-up-phase ventures.


Fundamentals are a second dimension.  They include how much a company is able to produce, how long its reserves will last in the future if it is in an extraction industry, and how profitable its operations are today.  Generally the more a company produces and the larger its operating cashflows, the less risky it is.  Other fundamental factors are also considered including the amount of debt that a company has, its cash balances, the countries in which it operates, and the viability of its sector's underlying bull market.


In general we think of this 1-to-10 risk scale as having three regions.  Higher risk runs 7 to 10 or so, medium risk from about 4 to 6, and lower risk in the 1-to-3 region.  Lower-risk companies are much more appropriate for long-term investors investing capital that they cannot afford to lose.  Higher-risk companies are much more appropriate for short-term speculators betting on fast gains but willing to lose big if they are wrong.  Each of these regions is discussed in more depth in the following paragraphs.


Higher-risk companies (7 to 10) are generally explorers not producing anything yet or small producers with oversized risk.  Factors that lead to oversized risk include having all a company's operations in a single country that is not geopolitically stable and safe.  If something adverse happens to an operation and the company owning it only has that one, the company could be in serious trouble.  And of course companies like this with only one major operation tend to be smaller in size in market-capitalization terms.


Medium-risk companies (4 to 6) are generally mid-tier producers with multiple operations.  These operations can be for the same product produced in different regions or different products produced.  These producers tend to be more sensitive to market prices for their product than bigger producers too.  This can be due to a lack of hedging or simply because they are not well-enough-diversified to nonchalantly weather a turndown in the price of the primary product they produce.  These companies are usually mid-cap in size.


Finally lower-risk companies (1 to 3) are generally major producers.  They have many operations spread across many areas and/or products.  They have typically been around for a long time and are such good operators that they are still highly likely to earn a profit even when the market prices of their products fall.  These companies tend to be leaders in their industries and sectors with strong balance sheets, an excellent record of consistent profitability, and plenty of cash on hand.  They are often large-cap in size.


Watch List Management  We actively monitor the stocks on our Watch List at Zeal.  The purpose of our continuing attention as well as research is to attempt to discern whether or not they really are the high-potential future investments and speculations that we first suspected them to be when we originally added them to our Watch List.  This process ultimately culminates in us either recommending a stock for purchase as an investment or speculation on Page 7 of ZI if the results are very favorable or removing the stock from the Watch List entirely if the ongoing research results are not favorable.


Actively monitoring each stock includes watching company-specific news as it hits the wires and monitoring the progress in the bull market of the underlying sector in which a company produces.  In some stocks we are busy digging way deeper in research terms as we watch them, including carefully looking at their financial statements and reports filed with the US SEC or equivalent regulator in their home country.  Companies we research in great depth and find we really like are often included in our Zeal Reports, which are periodically-published comprehensive fundamental discussions on our favorite companies in a particular sector.


Sometimes we have companies on our Watch List because we really like them but we are waiting to see how their general story plays out.  For example, if a small explorer's first feasibility study on a promising project is due out in the coming months, we may put the company on our Watch List and wait until the results are in before we make any buying decisions.  The disposition of the big event we are waiting for could be enough to push us over the edge either way, to buy a stock or remove it from the Watch List.


As far as adding and removing stocks from the Watch List, a broad array of information factors into our decisions.  We almost never write about what went into a particular add/remove decision.  The reason is not because we want to obscure our decision process, but simply because it would fill ZI each month to talk about all our stock deliberations and we would have no room to discuss anything else.  Not an hour of work goes by when one of the Zeal principals doesn't learn something new about one of our Watch List stocks.


Adding a stock seldom creates any controversy since there were no expectations surrounding the new addition.  But removing a stock can create concerns among subscribers who happened to own or really like a stock we removed.  Usually when we remove a stock there is a reason that reflects less favorably on that company's future.  But this is not always the case.  Sometimes we remove and replace a particular company simply because our research leads us to a better one with superior prospects in the same sector.  So a stock falling off our Watch List does not necessarily mean that we've suddenly come across something negative on it.


The vast majority of the time add/remove decisions are ultimately based on objective new information.  Rarely, subjective information is used to undergird a remove decision.  The following paragraphs discuss some examples of these factors.


On addition decisions, there are all kinds of objective good news or events that can lead us to add a company to our Watch List.  Some examples include a feasibility study coming back positive, a new project coming online, reserves and resources growing faster than expected, excellent and/or fast-growing profits, a new discovery, or a favorable acquisition or joint venture.  Other factors outside of a company's operations are also considered.  For example, if a great company secures a listing on a major US exchange for the first time we might add them.  And if technicals and fundamentals look particularly good in an underlying sector, we may add more stocks to our Watch List that are involved in that particular promising sector.


On remove decisions, all kinds of objective bad news or events can lead us to remove a company from our Watch List.  These include poor operating results despite favorable product prices, a deteriorating balance sheet, a company facing increasing geopolitical risk in its primary country of operations, adverse merger and acquisition activity, disappointing exploration results, and a lack of operating activity.  With today's great commodities bull thriving in full force our research focus is largely on commodities producers.  Yet producing commodities is a very challenging business and all kinds of things can go wrong for a particular company at any time.


Finally, rarely we make decisions, particularly remove ones, on subjective information.  Many of our readers around the world graciously share information with us that helps us understand more about a particular company.  If someone sends us something on a company in the Watch List that is pretty negative, and in our judgment the information is credible based on what we know from our own research, we will remove the stock from our Watch List.  While we would far prefer to use objective information for our decisions, we certainly cannot ignore subjective information that happens to come our way.  Everything we learn, from all sources, is considered.