Wednesday, August 27, 2014

S&P 500 Hits 2000 - Be Fearful When Others Are Greedy!

An amazing 5 year bull run it has been! The S&P 500 gained 94% over this period to reach a new record high of 2000 points! It currently trades at around 19 times earnings, which way above its historical average of 15 times earnings.

Investors that had parked mostly in cash over these few years could only watch in envy as the market climbed higher and higher. Even some of these investors have started to lose their patients and instead follow the crowd by jumping on board too, but do keep in mind that by paying 19 times earnings, not only does one not have any margin of safety, one is greatly at risk of capital loss!

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." - Warren Buffett

Back home the STI has only gained a disappointing 25% over the last 5 years. The STI seems "stuck" around the 3300 level and it might be years before it ever touches its previously high of 3800 again.

Valuation wise, our index is only trading at 14 times earnings with a decent dividend yield of 2.6%. Which I feel is neither expensive nor cheap, but fairly priced already. I would not be interested in buying the index as whole due to the lack of margin of safety, but some individual blue chips could be still attractive.

When taking a overview of the index components I like to use a sortable table, please feel free to use the link below

You can also look at mid cap stocks at this link

which is pretty useful, as I usually like to sort by PE and dividend yield

Currently O&G and Banks trade at lower valuations, Keppel/Semb Corp (PE ~11) OCBC/DBS/UOB (PE ~12), which I find still attractive for the long term.

Other Blue Chips that I really like but are trading at way too high valuations are
SIA Engineering (PE 19)
Comfort Delgro (PE 20)
ST Engineering (PE 20)
Genting (PE 21)
SGX (PE 24)

The market may continue roaring higher or a crash may come soon, you never know. But when one is tested by the market, do make sure you are holding high quality businesses and not penny stocks nor heavily geared cyclicals (commodities, property, shipping etc)

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.  - Warren Buffett

Signing Off
Felix Leong aka pipi486

Sunday, August 17, 2014

Arbitrage Play - OCBC Rights Issue 1 for 8 @ $7.65


1 Rights for every 8 existing shares
Exercise price $7.65 to convert each rights into shares
Ex Rights date: 25th Aug

Rights trading period: 1st to 9th sept


Ocbc is up close to 7% over the last 6 months, so its management took this rally as an opportunity to quickly do its much awaited rights issue following its acquisition of wing hang bank. Previously that was much fears of capital rising and dilution that resulted in OCBC trading as low as $9.05 over the past 1 year, however with the dust settled investors seems to be taking it well with the stock price holding well above the $10 level.

Trading Strategy 

The rights could be traded in the open market  from 1st to 9th sept. The theoretical ex-rights price would be $9.92 meaning there could be opportunity for arbitrage if one can complete below this price.

Post rights, I estimate OCBC to make around 90 cents per share for the full year. A theoretical price of $9.92 would mean OCBC will be trading at close to 11 times earnings post rights. I would demand some margin of safety, thus I would be interested at paying say 10 times earnings or less. In that case I would like to pay something like $9.00 for the new shares.

So if we take $9.00 minus the rights exercise price of $7.65, we get $1.35
I would be on a look out when the rights start trading on 1st sept, if it opens below $1.50 or so I would definitely be glad to scoop more up to increase my position in OCBC.

Theoretically the rights should trade around $2.30, but if there is negative market news or that investors are cash tight and unable to deploy their cash for this deal or technical difficulties such as those who bought OCBC using CPF investment funds but currently do not have extra funds to pick up the rights etc, these factors could result to a lower trading price of the rights in open market.

As such case this would present a great opportunity for those who are cash rich.
Lastly if the market instead overvalues the rights at say $2.50-$3.00, I would gladly sell off my rights.


Felix Leong

"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."

~ Warren Buffett

Friday, August 8, 2014

Lesson on Margin of Safety - Challenger 1H Earnings Down 27%

First half earnings took a big dip as Challenger completely exits its Malaysia operations. It previously had 3 stores in Msia and has failed to execute its growth strategy.

The stock is down 15% this year, from a high of around 60 cents to 49 cents now. On the bright side is that dividends had been maintained.

I expected Challenger to make about 3.8 to 4 cents for the full year while maintaining full year dividends at around 2.5 cents. At 12-13 times earnings with a dividend yield of 5% and net cash position, Challenger is probably fairly priced already.

Given Challenger's failure to expand into Malaysia, I think the days of Challenger growing its earnings by 10-20% is over! I guess its more likely for future earnings to be pretty stagnant around 4 cents and probably they would consider a higher payout ratio, anything 60-80% would be fine. In short its no longer a growth stock but its Singapore business is still a cash cow and the dividend yield would be my focus instead. Anything 6-8% would be attractive for me.

One important lesson I have learned here is margin of safety when buying growth stocks! The big fall in earnings was a big disaster, but I was fortunate that I paid only 5 to 10 times earnings for my purchases. So even with this big fall, I'm still very comfortable sitting back and collecting the dividends.

When I look at the valuations of other growth stocks like Super, Osim & Sheng Shiong. These are really great companies and investors are expecting 20% growth rates, however they trade at very high valuations of about 20 times earnings or more. By paying so much, these investors have no margin safety!

What happens if earnings come flat, or even worse... a decline in earnings? Surely the market will cease to price it at 20 times earnings and it could come down to 15 times or even worse 10-12 times earnings! So no matter how confident you are about a company's growth prospect, its normally not wise to pay 20 time earnings for a 20% grower, unless you are 100% sure.

What I am 100% sure is that among Super, Osim and Sheng Shiong is that not all of them will grow constantly at 20% year after year, sometimes there's bound to be setbacks.

If I had to define my investing philosophy in only 3 words, it would definitely be

Margin of Safety

Felix Leong

Monday, August 4, 2014

Semb Marine - Decent First Half Results

2nd Quarter earnings up 5%
1st Half earnings up 4%
NAV up 12%

Earnings Trend

Earnings peak at 2010 and crashed along with the European crisis, from 2012-2013 we kinda see them holding well above 500m levels, given the 1H14 results I don't think they would have any problems earning above 500m for the full year 2014, with 550-600 being more likely.

Order Book

The order books looks pretty solid, with the 12 bil stretching into the next 5 years. As such I do think they should at least be able to maintain earnings and if things goes well, maybe 5-10% annual growth in earnings.

Stock Price

Down 15% over the last 2 years, which is clearly the opposite direction of the STI.

However at 15 times earnings Semb Marine seems fairly priced already, a purchase at such level would have little to no margin of safety. I would consider buying if it trades at 12 times earnings or less.

I currently have around 20% of my portfolio in Semb Industries, of which half of their earnings comes from Semb Marine. I'm definitely comfortable holding on to this position as I believe its Utilities business is undervalued at around 10 times earnings and close to 1 times book value. Semb Industries itself trades at around 12 times earnings, which is still a pretty decent buy for a solid blue chip.

If Semb Industries continues to go up in price and Semb Marine continues to decline, I would definitely consider switching funds over to the take advantage of valuations.

Logically we should buy stocks like how we buy groceries, quality and value.
However modern retail investors often buy stocks like how they buy perfume, feel and excitement.

Felix Leong(pipi486)

Wednesday, July 30, 2014

The Bulls Are On Banks

In the beginning of the year I mentioned about our local banks, how raising long term interest rates would benefit them and also how they were dirt cheap (PE 10-11 only). I personally bought into OCBC with about 20% of my funds and it contributed well to my overall portfolio.

Now we are in another bull phase as the STI gained 10% over the last 6 months

Most of these gains came from our bank stocks which made up about 1/3 of the straits time index

6 months performance

UOB +20%
DBS +10%
OCBC +6%


Currently the index trades at slightly above 14 times earnings with a dividend yield of close to 2.5%, which is really getting close to its historical PE of 15 times. As such level I really think the market is fairly valued and any purchase at this level would have little to no margin of safety.


If you ask me whether the market would go higher or a major crash would come, my answer would be "I really don't know"

However there are two key areas that I would pay close attention to

1) Interest rates

As the US ends its bond purchases by 2014, long term interest rates would likely to start picking up from 2015, thus the rally we have seen in bank stocks, as they benefit most from the steeper yield curve. However do note that for that to be true the short term interest rates must continue to stay low! Keep a close watch at short term interest rates, it wouldn't be near zero forever... eventually it has to come back to the norm of say 2-5% levels instead, but for when? we can only ask the feds.

2) War

As you read the headlines, there's a lot going on and here's my simple thought. Its easier for things to get a lot worse, but very difficult for a sudden peace and recovery.

Oil prices are likely to stay at around $100 or higher for a longer time than most would expect. As such it would be wise to avoid certain industries that are negatively affected by such extended periods of high prices. Such as the transport industry (I don't wanna go into detail about how bad airlines are, just pick up a report on SIA or Tiger.. its pretty gloomy with no signs of recovery)

Sectors that continue to support the Oil and Gas industry would be good areas to park your money in. My recent choice was Semb Corp Industries in which I mentioned in detail from my previous post, their Marine business has a pretty solid order book for the coming 5 years and their Utilities business is stable with recurring income, at net cash position I'm pretty confident in this golden chicken laying eggs.

Lastly as the stock market rallies, investors of all sorts are getting more confident and looking like geniuses. Don't let a winning streak cloud your judgement, continue to look for great companies with honest management and hold these businesses for long term.

A rising tide lifts all boats

Felix Leong aka pipi486