Wednesday, October 15, 2014

Market Correction and Chicken Rice




I will ask you 2 questions, try to answer it immediately from your heart. (Don't even use your brain to think about it lol)

If you eat chicken rice, and will continue to do so for the 10 years to come. Do you prefer the price of chicken to be higher or lower?

If you currently hold stocks, and will continue to purchase stocks in the next 10 years to come. Do you prefer stocks to trade higher or lower?

The first question is pretty straight forward and your mind probably instantly tells you that you prefer lower prices for chicken. However the 2nd question is not so simple, you will find that most people actually hope for stocks to trade higher! Their thinking is that stocks go up so they can make a profit right?

However if you are a long term investor and will continue to put money into stocks year after year for the coming 10 years, the best for situation for you is that stocks trade lower so that you can have a lower cost on your purchases. 10 years later you will enjoy a much higher dividend payout!

So let us all rejoice that stocks are trading lower! at least for now




The US declined 6% while Europe declined 8% over the past 1 month, just a bit more and we will hit the 10% bear market.

Meanwhile Oil prices has fell from the $100 level to the current $80, a full 20% bear swing!

I personally think that Oil should be able to hold around $80 as this is the breakeven level for the average oil producers, any lower the producers will be making big losses, in which it makes more sense for them not to produce so much, thus reducing supply and pushing up prices.

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” - Warren Buffett





Thursday, October 9, 2014

Core Holdings Hitting One Year Lows - Portfolio Review on Starhub, Challenger & Semb Corp Industries



Starhub fell 7% over the year, as investors fear of interest rates going up to as high as 4% in 2017. Currently it trades at around 20 times earnings with a dividend yield of 5%.

I think its slightly overvalued, as its fair value is probably worth about 15 times earnings for this defensive blue chip. I wouldn't be looking to add more into this position and neither would I wanna sell unless I'm desperate for cash. The 5% yield still feels pretty comfortable for me to hold on to. Starhub has been my core position for 5 years and likely to continue so.


Challenger fell 23% over the year, as first half earning took a dive due to the closure of its 3 Malaysia outlets. The retail industry as a whole has also been facing pressure from areas such as rising labor and rental costs. Meanwhile its closest rival Courts Asia has lost almost half its market value within the year.





In 2013 Challenger made a full year profit of close to 5 cents, at worst case I am expecting full year 2014 earnings decline of 30% to 3.5 cents. On a moderate view I'm expecting 4 cents earnings per share. Full year dividend payout should stay around 2.5 cents.

So at the current price of 43 cents its trading at around 11 to 12 times earning with a dividend yield of 5-6% along with a strong balance sheet of 13 cents cash per share (net cash no long term debt), which is fairly priced for such a small cap stock. Like Starhub, Challenger has been my core position for over 5 years, so I will continue to hold onto it as long as the dividends are not reduced. Instead I might consider adding more to this position if it comes down to say 10 times earning or less.



Lastly my new core position Semb Corp Industries, has declined 4% over the year, off 10% from its  peak of $5.50 and is hovering near its $5 support level.



The recent decline of Oil prices from its $100 peak down to today's $85 has put a lot of pressure on offshore and marine stocks. As Semb Marine which contributes about half of the earnings, declined 18% over the year.





Semb Corp Industries currently trading at around 11 times earnings with a dividend yield of 3%, along with a solid balance sheet of net cash position. I think its Utility business is pretty defensive and also generates a high return of equity of 19%! I'm confident that this area would continue to grow especially its overseas projects in China, India and Middle East where there's very strong demand for energy.

I definitely think that Semb Corp Ind is severely undervalued for such a strong and solid blue chip as the market currently values its Marine business at 13 times earnings and its Utility business at only 10 times earnings!

Its Utility business is still in the growth stage as seen by the pipeline of mega projects, but in the next few years to come management could unlock tremendous value by listing the Utility business like how they did for Semb Marine, it would easily fetch 15 times earnings or more, given comparable listed utilities companies such as SP Ausnet, City Spring Infrastructure & K-Green Trust, all of which trades at much over 15 times earnings.

Portfolio wise, like what I previously mentioned of markets being overvalued, I held around 20% in cash. With the recent sharp decline in global equities, I think its time to put some of the extra cash to work.

Were you prepared for the correction?
http://stockbrokerplayspoker.blogspot.sg/2014/09/the-crash-preparation-3-step-check-list.html

Be Greedy When Other Are Fearful - Warren Buffett






Wednesday, October 8, 2014

Mr Market on US and China



Mr Market is here to serve you, not to guide you.
When he quotes you an insane price, take advantage of him!




The US market has gained 70% of the last 5 years and is currently trading at 19 times earnings, that seems pretty expensive for sure. US investors are still too optimistic, they are not worried about a crash as they know the Feds will come in to prop up a weak market. To them its like having a free put option. Heads investors win, Tails they activate the Fed put option to save themselves.




Looking east, worries of a hard landing has caused the China market to lose more than 20% over the last 5 years and is currently trading at only 7 times earnings! Investors fear of the slowing growth, the property bubble, the overcapacity, the raising labor cost blah blah blah u just name it, just nobody wants china shares.

I'm not gonna recommend buying individual china stocks because it can be very risky as we can't be sure of their balance sheets, however I think betting on the index would be a safer way to go.



There are many ETFs that track the china market, many of them synthetic. My preferred pick would be 2828 HK, a cash based ETF listed in Hong Kong.
It currently trades at 7 times earnings with a dividend yield of close to 2.5%.

For additional details feel free to visit

http://bank.hangseng.com/1/2/investment/etf/hang-seng-h-share-index-etf/overview

So what are H-shares? They are actually china large cap companies listed in hong kong. What I like about this ETF is the low management fees of 0.55% and its strong liquidity.





You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right. - Warren Buffett









Thursday, October 2, 2014

Why Look at PE Ratios?

Over the last century (100 years) how has stocks and bonds performed?

The answer is 8% returns for stocks and 6% for bonds.

So when looking to invest in individual stocks or businesses, what kinda returns am I looking at?

Definitely I'm looking at 8% or higher returns

If an investments pays me 8% or less, I might as well save the time and effort by buying the index instead right?

Therefore when I'm picking individual businesses I'm usually looking for something that's like 10% returns or better.



Take a simple example of a hot dog stand business, if it makes $1,000 profits a year and doesn't have any earnings growth at all I'll probably value it at 10 times earnings, which is $10,000 for this small business. However my judgement my not be 100% correct, that's where we need some margin of safety. Therefore I'll pay only 8 times earnings for it, or less.

Being a disciplined investor the most I will ever pay is 12 times earnings for any business. (12 times considering that the business is able grow its earnings faster than the economy, say 10-15% earnings  growth)

Now lets look at our local blue chips


Over half of them trade at 15 times earnings or higher

So if you own a basket of blue chips and they consist only of these 15, I'm pretty sure you would under perform the market's long term returns.

The conclusion is, buying great companies doesn't automatically guarantee investing success. One must make sure he is paying a reasonable price along with some margin of safety.



Price is what you pay. Value is what you get.
- Warren Buffett













Tuesday, September 30, 2014

Time to Buy the Hang Seng Index?



The HSI has lost over 6% within the month, with the heavy protest going on investors continued to dump hong kong stocks today. They are probably thinking "Sell first, think later!"

Well if you are a short term trader, yeah I think its probably wise to had cash out on first light and just wait for things to settle down before deciding whether or not to make another trade.

But if you like reading my blog, you're probably a value investor too... and well, while others flee the scene we are here to investigate and search for value!


While the STI is trading at close to 14 times earnings, the HSI is currently only trading at 11 times!


Lets take a look at 2800HK, a cash based HSI ETF traded on the HK exchange

For more details please go to
http://www.trahk.com.hk/eng/fundinvperf.asp

A brief history on 2800HK...

In 1997 we had the Asia financial crisis, most indices fell over 50% and the HK government made a bold move by using its reserves to purchase blue chips from the open market, stocks were cheap and this also helped to prop up the weak market.

A few years later the government had to exit its investments, well they couldn't sell these blue chips in the open market fearing another crash so instead they bundled them into a really huge ETF and sold the shares to the public! What a brilliant move! So that's how 2800HK was created.

Two things that I like about 2800HK is that it has plenty of daily liquidity and secondly its expense ratio is really low, only 0.10%! If you plan to hold  a fund for long term, having a low cost structure will greatly benefit your long term returns.


It currently has a dividend yield of close to 3% which is pretty decent, plus a solid track record of growing dividend payouts.

2009 - 54 cents
2010 - 58 cents
2011 - 63 cents
2012 - 66 cents
2013 - 73 cents
2014 - about 75 cents (my own estimate)

If you read my previous post on the STI, I said that I usually pay around 12 times earnings or less for it. As for the HSI, I definitely wouldn't pay the same kinda valuations because of the currency risk and it being a foreign share. I think overall a value investor could strongly consider a purchase at 10 times earning or less, that's probably a big enough cushion (margin of safety). However going in at the current 11 times is also pretty fine, especially if you have the extra bullets to fire if it comes down even further.

Lastly China will begin its golden holiday period tomorrow (Oct 1st to 7th), while Hong Kong's holiday is weds/thurs (Oct 1st/2nd). My expectation is that the protest should stretch out at least till this friday as citizens are free from work and highly motivated to follow the momentum onto the streets. Friday would be the big turning point, if the government doesn't give in to the citizen's requests then we could probably see the protest dragging throughout the long weekend.


Let us never forget that government is ourselves and not an alien power over us. The ultimate rulers of our democracy are not a President and senators and congressmen and government officials, but the voters of this country. 

- Franklin D. Roosevelt