An amateurish technician move

Wearing an amateur technician’s hat, let me jot down a small ‘prediction’ on OCBC.

OCBC is trading below the recent support line of $8.2. The downward breakout today could be whipsaw and I foresee an upward move in the next 3 to 4 weeks.

Suggest to wait for Friday’s US employment data and confirm it’s movement before we go in.

Must we always look at oil price?

The market is ridiculously sensitive to oil price.

2 days ago, Dow Jones rallied because of oil price dropped. Yesterday, oil price shot up to record intraday high of USD140 and the Dow Jones plunged close to 360 points. When US catches a cold, the rest of the world gets fever. Singapore market is no exception. As at 10am, STI dropped 51 points. The market is trading based on emotions and mood swings, but then again, this mood swing is consistent and relative ‘predictable’ should we leverage on this mood swing and how? Suzanne Jung, the TV reporter of Channel News Asia, recapped (with exclamation, so cute) that a few months ago, analysts predicted that the oil price will shoot up to USD200 at the end of year. Jennifer, another business report explained that it is probably due to speculations. It was quite fun looking at two young chicks reporters discussing oil prices 7am in the morning. My personal view is this: what goes up will eventually come down. Today’s oil price’s surge is not only due to high demand and lack of supply, but also weakened USD. Although USD is and will be depreciating in the long run, oil price surge due to weakened USD will not sustain and will be adjusted accordingly. Lack of oil sources is a true problem and it is well known in the sense that it is not something people caught off-guard, middle east has already increased oil supplies and alternative energy sources are being explored. Recent oil price hike is more due to traders’ speculations. I definitely do not agree with the so-called analysts (who could be speculators themselves) that oil price will hit USD200 end of year.

ET just SMSed me while I was writing. He has been very bearish and hoping Dow Jones will plunge further and apparently he is happy with yesterday’s closing. However, this plunge is illogical, it’s not due to healthy adjustments on the fundamentals but rather based on short-term speculative movements on oil prices, the buying opportunities are short-term and they come and go. ET claimed that he is a fan of Buffet and does not time the market, then how on earth of all these value investors take advantage without looking at the market at all?

Water related industry

Recently at a dialogue session during Lee Kuan Yew Water Prize Ceremony, Singapore Minister Mentor Lee emphasized again the importance of water to Singapore. Although global water shortage issue is obvious, only certain countries such as island countries like Singapore will be more badly hit than other bigger countries which have more natural water supplies and resources such as China, India. Therefore, this gives more initiative to local water treatment companies like Hyflux, Boustead to do well in the field, main reason is that Singapore cannot afford to rely solely on water technology from overseas because importing foreign technology is expensive, while there is even a stronger demand locally, the cost of importing such technology will become even higher. Local water companies have a bigger mission on hand, than merely doing a good business.

CFA – here I come!

Geee…I have finally decided to sign up for CFA Level 1 exam this December. The curriculum has arrived yesterday and guess what, they are 6 thick books and they are heavy!

I have created a separate blog – http://mycfajourney.wordpress.com so that any posting regarding my preparation for CFA exam will be written there.

Have fun.

Keep getting in touch with the business world

Today is the first time I have seen RT in such high spirits since a long time. He came in earlier than usual, instead of starting up his laptop, the first thing he did was to take out a few pieces of loose papers and flashed at me. They are photocopied newspaper cuttings of company news on water and energy sectors, two of them were on Hyflux and another big player in the same field, Boustead. He also passed me this month’s edition (June) of Pulses, featuring CEO of Boustead, Mr. FF Wong. In the magazine, there were also some important financial figures showing constant growth in terms of revenue and profits (in 2007, a bit low, could be due to expenses). In a gist, Mr. Wong expressed a very positive outlook and aggressive roadmap for Boustead not only in its field of infrastructure building, already expanding water and wastewater business, but also geo-spatial services, an area which provides solutions for optimisation of land and space resources. Its subsidiary Salcon, apparently a direct competitor to Hyflux, is also venturing into Middle East market, on top of its current NEWater plant locally. The magazine also covered stories on Capitaland and Goodpack and many other inspiring articles; and very coincidentally, these companies were mentioned during the TA course that we attended a few days ago and we seemed to appreciate more and more on the business talk. Could it be sheer serendipity, or is it us getting better in touch with the business world? Whatever that is, I reckon that continuous hardwork and research will definitely pay off one day.

Next Assignment

Recently RT and I attended a 2-day technical analysis course which we find very useful, especially to fundamentalists like us. While we have started to appreciate more on TA, we still believe that trading with TA alone is not our style. Our strategy is to pick the right companies by using FA and put them on the watchlist and then trade them during obvious trends.

I was very tempted to come out a topic on TA for June’s assignment since we have just recently aquired new skills on this topic, but there is really nothing much to write about TA unless we drill into trading strategies which will require more practice and experience than research. Therefore, I have come out the topic on macroeconomics which is important to both fundamentalists and technicians and it is a topic that we can research on.

Have fun with the assignment.

Verifying Buffett

It was reported that Warren Buffett’s Bershire Hathaway had increased its stake in Kraft to 138.8 million shares from 132.4 million. Being a little skeptical, I checked the P/B ratio and P/E ratio of Kraft to see if it was indeed ‘under-valued’ when the king of ‘value investing’ made the purchase. Here is the finding: P/B Ratio: 1.8 and Current P/E Ratio: 20.4 (and it has been +/- 20 recently). If we strictly go by the academic definition, with P/B ratio>1, Kraft is not traded ‘under-book-value’ technically. So, does it mean that Warren Buffett has deviated from his ‘value investing’ framework? Well, not necessarily. In my opinion, in a gist, the rationale behind value investing is about value for money. Before Warren Buffett makes a purchase, as long as the price is ‘reasonable’ and he sees the growth in value, he will make the move. The reasonable price does not always mean one that is below book value. In fact, what Warren Buffett or an experienced value investor finds worth paying for is the book value + ‘something extra’. This ‘something extra’ can be something tangible or intangible such as business fundamentals, brand name, potential revenue and earnings growth, market demand, products, management, recession-proof, etc. Kraft has good business fundamentals, strong earnings and is recession-proof which made Warren Buffet believe that it was reasonable to pay a price at 1.8x its book value. (Well, how much is unreasonable? Only Warren Buffet would know.) Also, today, with information and news about corporates being widely available and transparent on the internet, the chances of good and undervalued stocks go unnoticed are very low, market reacts faster and prices are adjusted quicker as compared to the past, good and undervalued stocks will soon become not-undervalued. Therefore, we cannot blindly apply the ‘hard figures’ that were used during Benjamin Graham’s days (such as very low PE and PB<1) in today’s context. Even if we spot a handful of stocks that fulfill such hard criteria, the companies that are indeed being traded below book value could be ones that are really in deep trouble and hence the situation is reflected on the stock prices. For Kraft’s case, both P/B ratio and P/E ratio are considered not high as compared to many other growth stocks in the market, and coincidentally, these numbers are not far from the ‘benchmark’ figures used by my friend ET as he mentioned earlier: PE=15, PB=2.

So Kraft is a good buy. Say cheese. 🙂

Earnings vs Market Cap

I don’t usually get MSN messages at 8am in a public holiday morning.

But I did get 1 today from my good friend ET.

ET has read my report on Hyflux last night and he was eager to share with me what he thought first thing in the morning.

I really appreciate his enthusiasm.

Something new that I have learnt from him is that he uses:

EARNINGS/MARKET CAP x 100%

as the yield of stock.

Hyflux’s market cap is $3 billion. Earnings in 2007 is $32,949,000. Based on this formula: Yield of Hyflux stock is therefore 1.1%.

The following is an excerpt on what ‘discussed’ online:

ET:

i just read the report

ET:

was good in general, though conclusion is not firm

DW:

thanks

DW:

cos at this point, I want to wait for the market to be more clear before I can firm up a plan, so conclusion is to keep a close eye on Hyflux

ET:

anyway, good try, though if i were writing, definitely, the conclusion is: don’t buy @ current price

ET:

i would be uncomfortable owning something with PB > 2+ without strong reason

DW:

but the thing I don’t know what price is good.

DW:

cos some people like O’Neal, he cares more about growth than PB or PE

ET:

even growth has been inconsistent in the net profit

DW:

agree

ET:

revenue growth is one thing, but if it’s achieved @ net profit expense, growth is useless

DW:

net profit was not consistent because of 2006 figures

DW:

I think we can wait for 1 to 2 more years to see if the net profits are consistent, need more data to support

ET:

and u mentioned she bought sino….

DW:

yes, SinoSpring

DW:

she put in more stakes

ET:

well, i hope this is not just to drive up the revenue

DW:

was only 50% then 80%

DW:

no, in fact the year she bought SinoSpring, SinoSpring had a revenue decrease…that’s something I don’t understand!??

ET:

when growth slows down, companies tend to go M&A way

ET:

ic

ET:

is Sino spring @ public listed company?

DW:

Err…don’t think so…need to check

DW:

but SinoSpring owns a lot of desalination plants

ET:

Hyflux in general has a good future, but seems it’s priced in the share

DW:

i agree

DW:

PB and PE are ridiculously high. BUT BUT…again I want to find out if this is also equally high for other companies in the same industry in the world.

ET:

that’s a good idea

DW:

and also…..

DW:

1 thing I am not good at mastering is to come out a price objective.

ET:

well, I would do that with 2 measures

DW:

tell me more man.

ET:

1. p/e (if it has stabilized)

ET:

2. book value

ET:

if pe= 15, and PB = 2, I guess in general it seems to indicate fair value (with average growth rate)

ET:

however if pe < 15, or PB < 1, maybe worth buying, especially if the PE < 10, probably a bargain

ET:

that’s my standard

DW:

but how did you come out these benchmark numbers?

ET:

to make it simple

ET:

think of yield of bond

DW:

ok…i am familiar with bond..

ET:

earning/ market cap * 100% is stock yield

DW:

oh…

DW:

if earnings/market cap of Hyflux..say…10% then consider not bad?

DW:

this is interesting…

ET:

if earning has been stable, yes

DW:

did you come out this concept yourself..or you read it from somewhere?

ET:

I definitely read it from somewhere long ago

ET:

which i could not recall

ET:

i guess even intelligent investor has some section in it

DW:

very good..you remember the important concepts

DW:

okay…i’ll try to re-read.

ET:

it discusses valuation model -> by net asset, earning, and dividend

ET:

I tend to remember if I practise it

ET:

hence, i seldom write it

ET:

writing is a chore to me

DW:

haha…

DW:

Don’t need to write…just draw some mind map…

ET:

now, gtg

ET:

have a few hundreds pages to go

ET:

about john kenneth galbraith life

DW:

who is he?

ET:

great economist born in canada, who is influenced by  keynes

ET:

he has served in us govt during war time

DW:

interesting….

DW:

btw, is there anything more you want to add about Hyflux?

ET:

conclusion is “future is bright as people will need water forever, however, to expect the company to deliver as good investment is doubtful given the current valuation”

DW:

very good punch line!

ET:

remember, good company does not constitute as good investment if it’s bought @ a high price

DW:

thanks…what you write today is very valuable to me.

ET:

u should read another interesting book

ET:

four pillar of investing by william bernstein

DW:

cool cool….i will check it out at bookstore

AOTM Submission for May 2008 – Hyflux

For those who can’t wait, please click here for my report on Hyflux. Please do not forget to post or email your feedback, comments, critical arguments, constructive suggestions, etc…

In the meantime, I must make a few confessions:

1. This is the first time I really enjoy reading a company’s annual reports.

2. This is the first time I seriously work on an assignment since my O-levels. (I didn’t really put in a lot of effort in my University days either!)

3. This is the first time I really walk-the-talk by seriously applying what I have learnt in the past on analysing a company for investment purposes.

I remember the first time I came across the terms like “fundamental analysis”, “value investing”, “understanding financial statements”, etc. etc. was way back to year 2000, since then I had a great collection of classical books such as Benjamin Graham’s The Intelligent Investor and others on my bookshelves (you may refer to the book list tab for the complete list), which was put into ‘very good use’ that was no better than merely impress family visitors. I briefly read some of them, occassionally talked about them during coffee breaks only to impress fellow coffee-breakers on how widely read I was. I at best knew the theories well enough to talk intelligently with jargons but I had no practical experience on applying those theories into my real-life investment (although I did get lucky on some stocks I had bought). Of course, as I grew older and became more mature, I started to appreciate the theories, methodologies, mindsets of those great investors much much better; however, procrastination became my biggest road block. I knew the importance of applying what I have read and learnt on real-life cases through practice and trial-and-error and improve from there, I just simply didn’t really seriously take a first step into serious investment. Not until setting up this website early this month, which is 8 years later. (Warren Buffett would have killed me for losing the compounding opportunities of 8 great years without seriously investing!)

I remember my other good investment buddy, DmS, he once tested me with an IQ question: “Hey, in a dark night, you have a torch light and it can only reach 10 meters in front of you, what do you need to do if you want to see the road 20 meters in front of you?”. I proudly told him that the answer was simple, “Just walk forward 10 meters, so that your torch light can reach another 10 meters in front of you!”.

That was a wakening call.

No matter how smart, how widely-read you are, you need to take action and take small steps forward, in order to reach the goals you want to achieve.

I know my report on this little assignment is not flawless, but I am quite happy that I have moved forward with my little torch light and no matter how small the steps were, I know I am already closer to where I want to be.

I am happy because I have taken action. And I feel much cleverer after the assignment, and I hope I will become slightly richer soon.

Toyota: Gain or Loss?

Here are the headlines of 2 articles that I have read on the same day (9th May, 2008 ) from two different sources:

“Weak sales put brakes on Toyota’s profits” – source: TODAY paper, Singapore, dated 9th May, 2008.

“Asian stocks rise to highest since January; banks, Toyota gain” – source: The EDGE SINGAPORE, weekly edition for week starting 5th May, 2008.

Coincidentally, the primary source of these 2 articles is the same – Bloomberg. So, what is exactly going on with Toyota with these 2 obviously contradicting headlines? Here is the analysis.

First, to summarise the key points from TODAY:

1. 4th quarter profit dropped more than analysts estimated.

2. Forecast earnings will fall 27% due to sales slump in the US.

3. Net income fell 28% to 316.8 billion yen. Predicts annual net income to drop to 1.25 trillion yen in the year started April 1, from a record 1.72 trillion last year.

4. The stronger Japanese currency will probably trim 690 billion yen from operating profit – based on exchange rates of 100 yen to the dollar and 155 yen to the euro.

5. Nippon Steel Corp and JFE Holdings, Japan’s 2 biggest steel-makers, raised wholesale sheet steel prices 25 per cent last month to cover an unexpected tripling in annual coking coal prices. Hence, higher raw material costs.

Now, look at what THE EDGE covers:

1. Asian stocks rose…Toyota Motor Corp climbed after its US car sales increased for the first time in five months.

2. Toyota, the world’s No 2 automaker, advanced 2.8% to 5430 yen, its highest close since March 6.

3. The rest of the article covers that Asian stock prices in general rose.

Analysis

When reading contradicting news like these, first, we must compare an apple to an apple. The first article reported the performance of the company and the forecast earnings. It reported the fact that profit dropped and the forecast wll fall based on the sales slump in the US. Operating profit will suffer due to stronger yen and higher steel prices. The second article focused on the stock price of Toyota. A company’s fundamentals such as earnings might not directly reflect the stock price in the market as stock prices are very often affected by other factors than fundamentals, such as analysts’ expectation, market overall sentiment, existing trend and so on. Therefore, it is not correct to compare “earnings” with “stock price” in the very first place.

Secondly, the second article reported that “US car sales increased for the first time in five months”. There were no actual figures to support how significant was the increase and the increase in relative to the recent five months does not provide an insight on the company’s overall performance in terms of earnings. What the article meant to say is probably that the market felt more confident with Toyota after seeing an increase in five months, and therefore, the stock price rose and closed at a high since March 6.

Last but not least the important factor is: timing. THE EDGE is a weekly magazine and this particular article was originally published by Bloomberg on closing of 2nd May, 2008. How can we compare two different pieces of news which were reported 6 days’ apart? And more significantly, these 2 pieces of news were reported before and after corporate announcement. Market sentiments and stock prices swing drastically if what people believe and expect is not in sync with reality. I did a quick google and found out that the stock price indeed increased on 2nd May, however, on 8th May, Toyota reported profit loss and pessimistic forecast, despite the rally from 2nd to 7th May, the stock price fell from 104.76 to 100.21 in midday 8th May.

Lessons learnt: reading news and interpreting news are two different exercises. Reading without understanding the intent of the news may lead you to misinterpreting the underlying message. Overrelying on market prices without analysing the fundamentals will not give you correct insight on the true performance of a company. One last point, don’t act when you know there is an upcoming corporate announcement.