Sunday, August 21, 2016

The Art of Successful Investing in the Stock Market kcchongnz

read a good article when the author describes on hindsight in the link below that investors could have avoided losing big money in Globetronics if they were aware of the cognitive behaviour of confirmation bias and have done some detail business analysis.

http://klse.i3investor.com/blogs/JTYeo/102530.jsp

Frankly, readers would benefit much more by reading this type of sharing, rather than those boasting how much they have made in the share market, and encouraging you to take excessive risk such following the greater fool theory and using margin finance to boast your return and to become multi-millionaire overnight.

Here, I would like to share what I had seen for the same stock, Globetronics, how investors could have avoided some heavy losses, and for a couple more stocks, Focus Lumber and Latitude Tree, if they know and care to carry out some quantitative analysis and valuations.

Globetronics Technology Bhd
Globetronics, a great company which I will describe later, had its share price plunged by 55% in less than 8 months from RM6.50 at end of year 2015 to RM2.90 at the close on 20th August 2016 as shown in Figure 1 of its share price movement below.

Anyone who has bet big on it with margin finance would have lost everything in just than 8 months. Why not bet on it? There are numerous reasons why an investor would “sailing”, or bet all on it.

Figure 1:

When Globetronics announced its fantastic result for year ending 31st December 2015 on 23rd February 2016, I did take a good look at Globetronics with the intention to invest in it.

Earnings per share improved (again) by about 15% to 25.3 sen per share from the previous year. Return on capitals were again great at more than 20%, more than twice its costs of capitals. Cash flows were great too. There had been profit growth every year since many years ago. This is what I would classify as a great company.

However, bear in mind a great company is not necessary a good investment, provided that it is selling at a reasonable price. So was Globetronics selling at a reasonable price at RM5.95 at that time?

PE ratio was at 22.3, not really expensive as the company has excellent growth in the past and beautiful operating numbers. However, Enterprise value was 17 times earnings before interest and tax (Ebit). This is definitely on the high side for me as it is two and half times more than what I would pay for an ordinary company. Oh yeah, I like growth, but I am cheap skate as I won’t pay much for it.

I did a discount cash flow analysis from the fundamental aspect assuming growth is internally generated through return on capitals, assuming a bold 15% growth for the next 5 years and 5% subsequently. I was only able to get an intrinsic value of RM4.15, way below its price of RM5.95 at that time.

With that market price, investors were expecting Globetronics would continue to growth at very high rate of more than 20% as before, and with margin expansion and higher return on capitals, and hence willing to pay a high price.

I gave up the idea of investing in it as I think it was overvalued at that price.

Shortly after that, the growth expectation did not materialize, and profit plummeted the last two quarters. With the high price paid by many investors, it was a double whammy, and the rest is history.

Wonderful companies become risky when people overpay for them.” Peter Lynch

Focus Lumber
I have written about Focus Lumber before in the link below:

http://klse.i3investor.com/blogs/kcchongnz/97079.jsp

Focus Lumber is another great company. Just before it announced its third quarter results for period ended 30th September 2015 somewhere on 17th November 2015, its share price jumped by 70% within 3 months from RM1.84 to a high of RM3.09 on January 12 2016 as shown in Figure 2 below.

The results show the vast improvement for the third quarter 2015 with net profit increased by more than 200% from RM3.3m to RM9.6m for the corresponding period in 2014. EPS, as a result, also increased by more than 200% from a EPS of 3.2 sen to 9.4 sen for the quarter.

Figure 2
Some investors who purely base on a single metric of “Profit growth”, without considering where this “growth” comes from, saw a great opportunity and annualized the EPS by multiplying by 4 to the single quarter exceptional result and obtained an expected EPS of 37.6 sen for the next 12 months, and chased the share price up to more than RM3.00 in early January 2016.

However, many do not care about its financial statements and failed to see that the greatly improved result for the third quarter of 2015 was in a major part, due to the gain in foreign currency as a result of rising USD against Ringgit from the beginning to the end of the period, a one-off item.
When the next quarter showed a reduced profit from the preceding quarter due to some recovery of Ringgit against USD, investors dumped its share, resulting its share price dropped more than 30% to less than RM2.00, in less than two months. It closed at RM1.72 on 19th August 2016. They would have lost a total of 44% in less than 8 months.
Again paying too much to chase the illusive growth story, without understand where the “growth” comes from, is hazardous to one’s financial health.
At RM1.72 now, I think Focus Lumber is a great value stock to invest for long term. But why is there no interest in this stock? Once bitten twice shy?

Latitude Tree
Latitude Tree was and still is a great company in my opinion with high return on capitals, excellent cash flows and a good growth story. I personally have written a number of articles discussing about it, including a number of other furniture companies.
Latitude Tree was heavily promoted in i3investor when it was about RM6.00 sometime in November 2015. I was a contrarian then and I have written my last article on it discussing about the cyclical and the power of mean reversion in investing in the link below, and hence put forth my opinion that at RM6.00, it wasn’t cheap any more.
http://klse.i3investor.com/blogs/kcchongnz/80034.jsp
Latitude Tree’s share price continued to climb to above RM8.00, pushing its PE ratio, based on the latest and historical highest earnings per share, to about 12, way above its historical PE of single digit number.
I did hear some investors making hundreds of million investing in this share when its share price climbed from RM6.00 to above RM8.00. But how many retail investors lost big when they bought at about RM8.00 and now the share price is lingering at RM5.15?
At this price, PE ratio is only 6.4, considerably below its historical PE ratio, but nobody talks about it at all.

Figure 3:

Conclusion
Most investors chase the growth story, buying stock without having an idea the value of a stock. They usually follow some rumours and hypes, taking the road where the greater fools go. They buy stocks when they are selling at high prices, hoping someone else will buy from them at even higher prices. They paid too high a price for some growth expectation, expecting trees to grow to sky. The end result is, most of them lost money when there is a double whammy; that they pay too high a price for something which eventually did not materialized.
The only way to have a higher probability of success for retail investors in the jungle out there is to have some knowledge of the business, and know the language of the business, that is the ability to read and interpret financial statements, and have a feel of the value of a business, i.e. to know how to carry out at least some simple valuations.
If you know how to do the above, you would be able to buy some great companies selling cheap.
Sure, everyone makes mistakes in his judgment. I have my share of those too. Investors must realize that the stock market is unknowable and unpredictable. One must know what he may not know, especially about the future. Even Charles Munger said this,
"IInvesting is not easy; anyone thinks it is easy is stupid".
Know and understand the relationship between price and value. Understand risk, recognize it and control it.
And that is what I try to teach you. And if you are interested to learn about them for a small fee, because you want to have a higher chance of getting satisfactory return of your investment in the long run, please contact me at
ckc15training2@gmail.com

Thursday, August 18, 2016

Lord Rothschild: Why I've sold hundreds of millions of pounds worth of shares, and bought gold

Lord Rothschild, chair of the £3.04 billion Rothschild Investment Trust, has revealed that while he has significantly reduced his exposure to listed shares, he has responded to the prevailing economic uncertainty by buying gold.



Lord Rothschild has been selling shares

Lord Rothschild and his family have an investment of well over £100 million in the Rothschild Investment Trust.

In his latest update to shareholders he commented that recent months have seen, ‘Central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters and it is impossible to predict the unintended consequences of very low interest rates, with some 30 per cent of global government debt at negative yields, combined with quantitative easing on a massive scale. To date, at least in stock market terms, the policy has been successful with markets near their highs, while volatility on the whole has remained low. Nearly all classes of investment have been boosted by the rising monetary tide. Meanwhile, growth remains anaemic, with weak demand and deflation in many parts of the developed world’
The veteran investor continued, ‘The geopolitical situation has deteriorated with the UK having voted to leave the European Union, the presidential election in the US in November is likely to be unusually fraught, while the situation in China remains opaque and the slowing down of economic growth will surely lead to problems. Conflict in the Middle East continues and is unlikely to be resolved for many years. We have already felt the consequences of this in France, Germany and the USA in terrorist attacks. In times like these, preservation of capital in real terms continues to be as important an objective as any in the management of your Company’s assets. In respect of your Company’s asset allocation, on quoted equities we have reduced our exposure from 55 per cent to 44 per cent.’


He added, ‘Our Sterling exposure was significantly reduced over the period to 34 per cent, and currently stands at approximately 25 per cent. We increased gold and precious metals to 8 per cent by the end of June. We also increased our allocation to absolute return and credit, which delivered positive returns over the period, benefiting from a number of special situations. Within this category our new association with Eisler Capital had an encouraging start. We expect this part of the portfolio to be an increasingly important contributor to overall returns. Our significant US Dollar position has now been somewhat reduced as, following the Dollar’s rise, we saw interesting opportunities in other currencies as well as gold, the latter reflecting our concerns about monetary policy and ever declining real yields.’

The Rothschild Investment Trust has returned 58 per cent over the past three years, compared to 15 per cent for the average trust in the AIC Flexible Investment sector, making it the top performing trust.

Sunday, August 7, 2016

AirAsia's resilient Fernandes eyes China to chart new expansion

CK Tan, Nikkei staff writer
AirAsia's group CEO Tony Fernandes, left, and Airbus President & CEO Fabrice Bregier signed the deal in the U.K.
KUALA LUMPUR -- Confidence has returned to AirAsia, the region's largest budget carrier by fleet size. Group Chief Executive Tony Fernandes has gotten more involved in running the airline group, charting a new course for expansion that may include a second listing, in Hong Kong, and a joint venture in China.
 
Nearly 20 months after one of its jetliners crashed into the Java sea, claiming 162 lives, Fernandes is aggressively charging toward a new phase of growth.
 
 
On July 12, AirAsia announced an order of 100 Airbus A321neo passenger aircraft. The deal, AirAsia's biggest since the accident, was announced during the biannual Farnborough Air Show, on the outskirts of London. The purchase lays bare a bold expansion plan for the no-frills flyer that in 2015 had 172 aircraft.
"With these aircraft," Fernades said during the signing ceremony, "we will hit 100 million passengers in the not-too-distant future."
The group, which has associate carriers in India, Indonesia, the Philippines and Thailand, ferried 51 million travelers last year.
 
In Farnborough, Fernandes was at ease. His casual attire included his trademark red baseball cap and a pair of jeans. He peppered the post-signing ceremony press conference with jokes. Fabrice Bregier, Airbus' president and CEO, was also on hand.
The new aircraft have a total catalog price of $12.6 billion. Deliveries are to begin in 2019. The A321neos have better fuel efficiency and are more spacious than AirAsia's current A320s. Fernandes has big plans for them.
Fernandes, a former executive of record company Warner Music Group, began his airline in 2001 after being inspired by the success of Ireland's Ryanair, which covers much of Europe.
Fernandes' no-frills business model, from which he has never strayed, made air travel and faraway vacations affordable to many Southeast Asians.
Of course, he never saw the Java Sea tragedy coming.

"My heart is filled with sadness for all the families involved in Flight 8501," Fernandes tweeted on Dec. 30, 2014, two days after the crash. "Words cannot express how sorry I am."
While AirAsia was dealing with the tragedy, it was also grappling with intense competition. Other budget carriers appeared in the skies, and fares fell. Amid all this, the group was accused of tweaking figures to boost earnings. As a result, the company's stock price last August caved in, falling to a low of 0.78 ringgit.
 
"Many people were writing off AirAsia, but we stuck to our guns," Fernandes recalled in Farnborough. "We have moved from a Southeast Asian airline to an Asian airline."
And AirAsia's share price has bounced back. On Tuesday, the shares closed at 2.95 ringgit, the highest they've been since two days before the crash. Cheaper fuel prices, which have buoyed the entire aviation industry, and a reshuffling of routes have contributed to the recovery.
The shares finished the week at 2.97 ringgit.
Market capitalization grew by about 7% to $2.03 billion since the crash, but still lacked behind regional peers like Shanghai-based Spring Airlines' $5.89 billion.
According to the Centre for Aviation, or Capa, an Australian consultancy, among the 20 regional airlines in Southeast Asia, 14 reported year-over-year improvements in the first quarter 2016, including all seven of the AirAsia-branded airlines. "The group is upbeat about its outlook, having recovered from a very challenging 2015," Capa added.
After the accident, Fernandes kept a low profile. Only now is he re-emerging. "Super second quarter performance for All Stars," he tweeted on Jul. 27, giving employees credit for AirAsia's strong passenger growth in the April-June period.
AirAsia said it carried 13.9 million travelers during the quarter, 12% more than a year earlier, despite the April-June period traditionally being "our slowest quarter," Fernandes said.
The bumper passenger numbers are thanks to higher demand in Malaysia and Thailand.
By way of comparison, AirAsia's closest rival in the region, Cebu Pacific Air, out of the Philippines, carried 5.2 million in the quarter.
Ten new routes were added during the quarter, mainly to second-tier Chinese cities, which now account for about 40% of revenue. AirAsia also increased the frequency it flies to many of its destinations.
The group is to announce its latest earnings by the end of the month.
In the 20 months since the accident, AirAsia has undergone operational and structural changes.
 
Fernandes gave up the carrier's ASEAN headquarters, in Jakarta, and put it back in Kuala Lumpur. The CEO had hoped the Jakarta base would lead to growth in Indonesia and the surrounding region.
In April, Fernandes received shareholder approval to raise his stake in AirAsia from 18.9% to 32.4% through Tune Live, a private company co-owned with Kamarudin Meranun, who co-founded AirAsia with Fernandes. The new share issuance will raise 1 billion ringgit ($247 million), which will be used to pare debt and as capital expenditures.
The AirAsia Group's net debt after offsetting cash balances amounted to 9.2 billion ringgit as of March.
"The placement signals the conviction of the major shareholders with regard to the prospects of AirAsia, given the sizable cash outlay and expanded share base of the group," said Marvin Khor of AllianceDBS Research. He added that the capital injection will reduce the carrier's gross debt-to-equity ratio from 2.8 to 2.2, raising its stock valuation.
After the Airbus order, Fernandes traveled to the U.S. and Europe to let institutional investors like Fidelity and The Boston Company Asset Management know that they might want to kick AirAsia's tires. Perhaps they'll find a bargain.
From Paris, Fernandes tweeted, "15 days but very rewarding for me and investors now know how undervalued we are."
To be a bargain, though, the shares have to look like they are ready to jump in price. In other words, AirAsia needs to continue growing.
That is not going to happen in Southeast Asia. Budget short-haul routes there have approached "maturity," Capa said in a report earlier this year. Low-cost carriers made up of 56% of the seats flown in the region, compared to 11% in Northeast Asia.
For AirAsia, then, growth means going north.
To drive growth in China and Japan, AirAsia in June set up North Asia, a Hong Kong-based subsidiary.
The president is Kathleen Tan, who was in the music industry before 2004, when she was named AirAsia's commercial director. She was promoted in 2013 to head of AirAsiaExpedia, a joint venture with a travel agency that AirAsia has since divested.
"North Asia -- with China, South Korea, Japan and Taiwan -- is considered a high growth region" for no-frills flyers, Tan told the Nikkei Asian Review. Tan said demand for regional travel is high, partly due to the proximity of the countries and cultural similarities.
Tan's top priority is China. China's budget aviation market is growing rapidly. A raft of new players entered the skies after the government began opening new routes to promote economic growth in the western part of the country. Spring Airlines and West Air enjoy big pieces of China's low-coast market.
Fernandes said he will pursue more connections to second-tier Chinese cities.
"I can confirm China is a market we will love to be in," he said. "We are not interested in Beijing or Shanghai or those big metropolises. What AirAsia is good at is developing those secondary and tertiary routes, and those are what we are looking at."
Fernandes continued that AirAsia's forte is "providing connectivity where there isn't any connectivity and providing economic growth where there isn't any economic growth."
The strategy is to avoid directly competing with both full-service and budget carriers that have already established hubs in the country. AirAsia might do this by taking the joint venture route. He said AirAsia has been approached by Chinese companies in this regard.
Hong Kong's capital market could also beckon AirAsia.
"We need to attract a new form of capital and awareness of AirAsia," Fernandes said in Farnborough, adding that a Hong Kong listing could help AirAsia accomplish these goals. "It is something we are investigating," he said.
The carrier is also getting ready to start crisscrossing Japan again. It has received two A320s, and Tan said the group hopes to begin test flights this month.
Pending regulatory approval, it hopes to begin commercial flights from its base in Nagoya come January.
 
It will have to compete against established peers like Peach in Japan and Spring Airlines in China, and the relatively demanding customers in North Asia who may have yet to be fully accustomed to no-frills travels.
"While I joke and laugh but it is not easy," Fernandes said in response to a question on how he manages challenges in different markets.
"To me, business is the same whether it is in an airline or music: Maximize the top line, minimize the cost, do a lot of marketing and be different."
http://asia.nikkei.com/Business/Companies/AirAsia-s-resilient-Fernandes-eyes-China-to-chart-new-expansion