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.


http://stockbrokerplayspoker.blogspot.sg/2014/02/riding-year-of-horse-are-banks-cheap.html

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%



Valuations

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.

Outlook

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 become 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

















Friday, July 11, 2014

Mid Year Review - Sticking to the Blue Chips

Positions Exited
FCL
Valuetronics
Comfort Delgro

Positions Added
OCBC
Semb Corp Industries


If you were following my blog over the last 12 months you would had saw my posts on FCL, Valuetronics and Comfort Delgro. All which did very well in recent times!

However as much as I did my work well as an investor, I failed badly as a trader...sadly I got out too soon on my positions and was not able to enjoy the full up swings. But well, small profits are better than no profits right?

As the US market continues its feverish bull run, I am starting to get really cautious. As such I have added new positions into only two blue chips. The market can continue to go higher for months or even years, I can't predict when it will end. But when the bull comes to an end, it will probably be explosive and ugly! As such I am definitely more comfortable holding solid blue chips than small/mid cap stocks.

OCBC

I had previously mentioned a lot about why I liked banks, so I managed to pick this up at around 10 times earnings as the stock suffered an over 15% decline from its peak!

Overall I am bullish on banks in the mid term because when long term interest rates starts to go up, this will result in the steeping of the yield curve in which this would help improve their net interest margins.

What I like most about OCBC is that about 40% of its earnings comes from non-interest income. Two business units that I really like are BOS (private banking) and GE (insurance), which provides solid recurring income from managing their customer's assets.

Like I mentioned previously, I like asset management companies such as ARA, however I do not feel comfortable playing 20 times earnings for such a business. (there's definitely no margin of safety for a purchase made at such a high valuation). For OCBC at 10 times earnings, the margin of safety is definitely very comfortable as compared to the STI trading at 14 times earnings.

Lastly OCBC is a solid company that has shown a good track record over the last 10 years, they should be able to hold ROE around the 12% level. I would expect 10-15% long term returns on this position.

Semb Corp Industries

Basically when evaluating this stock, I broke it down by its two main businesses, namely Marine and Utilities.

Semb Corp Marine has a wonderful ROE of 20% along with a solid net cash position, it currently trades at around 15 times earnings which makes it pretty much fairly priced. Its order book is also pretty healthy, stretching into at least the next 3 years or so.

Whats undervalued here is its Utilities business, which trades at only 10 times earnings and 1 time book value! This is a solid business which operates in a stable environment and has very predictable cash flow, I'm surprised that very few investors spend time looking at it. Most analysts seems to focus their attention only on the marine business and little is said about its Utilities business. SGX listed Utilities stocks like SP ausnet tend to trade at over 20 times earnings, looking at the global market this sector normally trades at around 15-20 times. So I'm pretty comfortable with the margin of safety I'm getting here by paying only 10 times earnings for this stable Utilities business.

Overall Semb Corp Industries sells at about 12 times earnings with a solid net cash position and I think they should be able to maintain ROE at 15% or higher. Lastly I would also expect 10-15% long term returns on this position.


Portfolio Balancing


I'm still taking a cautious balanced approach like I mentioned before, I'm currently 90% vested and 10% in cash. The cash component is getting higher returns now as fixed deposits are paying over 1%, so I'm quite comfortable with it.

However if the STI crosses the 3500 level or trades above 15 times earnings,  I might wanna par down to around 80/20 instead. If a crash really comes, the cash will probably come in handy for picking up more blue chips.

At the current level of 3300 or above, I'm probably not buying any more stocks. My portfolio yields about 4%, which I consider still pretty decent. Overall I'm just happy to sit around and slowly collect my dividends and interests. 



Small minds speak of People
Average minds speak of Events
Great minds speak of Ideas

Felix Leong aka pipi486

Saturday, May 24, 2014

5 years of Starhub - My Best Dividend Stock

In 2007-2008 the market was hit by the global financial crisis. I remember buying my first stock during that period, the STI ETF. As the index fell from around 3800 to 2700 I bought my first STI etf at $2.70 as I thought it was a good deal after the 30% correction and that a basket of blue chip was a safe place to put my money.

Well as the bear came in full force the STI when even lower till it hit rock bottom at around 1600 and I was looking at a paper loss of close to 40%. I couldn't sleep well for many night as I was so new to investing and it felt like I had made a terrible mistake.

I held on, waited and waited till the recovery came, after what it seemed like a long wait the STI climbed back to around 2300 before I got impatient and sold out my shares at a loss.(Yup another mistake) It was my first experience in the stock market, painful but I'm glad I learned it the hard way.

As I was new to investing I started looking among the blue chips, bitten by the financial crisis I now wanted a stock that had a good history, was stable and paid good dividends. In 2009 that's when I found Starhub and this was what its 2008 annual report looked like.





The stock price was around $2.00 and it made 18 cents a year. That makes it a PE of 11, not very cheap nor very expensive at that time as compared to other blue chips. What attracted me most to starhub was its defensive and recession prove business. Like I said the 2007-2008 crisis was a nasty experience, many companies had a decline in earnings and some companies even sank into the red.

However the telecommunications industry did not have any pull back at all, instead revenues and profits continued to soar higher. Lastly the biggest reason I had to buy starhub was its dividends, in 2009 it announced a quarterly dividends of 5 cents, that works out to be 20 cents a year which means a very comfortable 10% dividend yield.

Back then I made up my mind I jumped in with 2 feets and never looked back.


5 years later, the price has doubled but I'm still firmly holding on to it.

Since my yield on cost is 10%, what I need to do is hold it on for another 5 years and the stock would cost me nothing! (20cents times 10 years = $2.00 total in dividends) Amazing isn't it?





One last thing that I remembered was that I almost didn't buy starhub because it was up so much over the last few years from its IPO price of $1.15 in 2004. The psychology of the stock price being almost doubled over the last 5 years nearly stopped me from this wonderful purchase, fortunately I was able to ignore the past and focus on its fundamentals back then.

The lesson learned here is not to care too much about past stock prices but look deeply at the fundamentals you see today. The STI past high of 3800 didn't mean that 2700 was cheap. Starhub's double in price from IPO also didn't mean it was expensive.

In the end think of buying stocks like buying chickens, the chicken is worth for how many eggs and how much meat it can provide you. If you find a golden chicken that can consistently lay you eggs (pay you good dividends), grab it fast and don't ever let it go!

Instead nowadays investors are trying to buy chickens at $5 and try selling them to someone else for $10. It might work for a while, but it wouldn't work all the time.





Thursday, May 1, 2014

7 Movies That All Investors and Speculators Should Watch

1) The Wolf of Wall Street

 


Plot: Based on the true story of Jordan Belfort, from his rise to a wealthy stock-broker living the high life to his fall involving crime, corruption and the federal government.

View: Money, Sex and Drugs. It just has all the ingredients.

2) Wall Street



Plot: A young and impatient stockbroker is willing to do anything to get to the top, including trading on illegal inside information taken through a ruthless and greedy corporate raider who takes the youth under his wing.

View: A very old school movie, it was this movie that inspired me to become a serious and honest stock broker.


3) Margin Call




Plot: Follows the key people at an investment bank, over a 24-hour period, during the early stages of the financial crisis.

View: This could be boring for some people, not your typical kinda movie. However it does give you a very close look how it felt during the crisis.

4) Arbitrage



Plot: A troubled hedge fund magnate desperate to complete the sale of his trading empire makes an error that forces him to turn to an unlikely person for help.

Views: This focuses more on the story and less on the stock market. .

5) Boiler Room




Plot: A college dropout gets a job as a broker for a suburban investment firm, which puts him on the fast track to success, but the job might not be as legitimate as it sounds.

View: You may think its another story about a smart young kid blah blah blah, but well I have to say that this was the earliest and most original one for sure.

6) The Pursuit of Happyness




Plot: A struggling salesman takes custody of his son as he's poised to begin a life-changing professional endeavor.

View: A very meaningful movie about life, working hard and not giving up. Do note that this is base on a true story, you can google up for more info ya~

7) Rounders



Plot: A young man is a reformed gambler who must return to playing big stakes poker to help a friend pay off loan sharks.

View: This movie has nothing to do with investing nor stocks, its about poker. But its the best poker movie ever! Poker is a lot like business and investing, you got to know yourself and the other side, knowing when to get in and when to lay it down.








Wednesday, April 9, 2014

5 Years of Challenger Technologies - My Most Rewarding Investment Journey


In 2009 I was pretty new into value investing, having read a few Warren Buffett related books I followed his advice and started reading annual reports beginning from companies starting with A!

When I came to C I stumbled across this IT retailer called Challenger Technologies, I have been to their retail stores before and I was surprised that they are a listed company.

This was what their numbers looked like



I couldn't help but notice their explosive revenue growth, as revenues more than doubled from 2004 to 2008, profit after tax also nearly doubled. 2008 was the global financial crisis but Challenger stood well despite a fall in profits (many companies were doing a lot worse), I felt it had a defensive business selling needs instead of wants (everyone needed IT gadgets, funny and weird isn't it?)

Other things that I liked was the high return of equity (20-30%), I kept reading about how Warren Buffett likes high ROE stocks but at that point I still didn't understand it that much. However I also found out that Challenger had Zero Debt! It was a net cash company with no long term debt (meaning low risk) and was selling for only 5 times earnings!

Although I knew that IT retailing was a highly competitive industry (I was a nerd, I knew Sim Lim Square, Courts, Harvey Norman etc). The stock was cheap and the business was within my circle of competence (I also studied electronics and computer engineering... well nerdy me liked IT stuffs). So I ended up buying some shares of this little company.

As the years progressed, its results improved and I slowly accumulated more shares of Challenger over the next few years and steadily built up my position. At some point Challenger was almost 80% of my stock portfolio!(Yup like a true poker player, I didn't believe in diversifying. When you pick up Aces you bet all your $$ and pray it holds up. A true gambler puts $100 on AA rather then $20 each on AA/KK/QQ/AK/AQ)

Over these years I bought it from as low as 5 times earnings and paid as high as 10 times earnings. Today it trades at about 12 times earnings (I guess more people are taking note of it thus the stock price moving in closer to its fair value)

5 years later here are the results.

                           (do note that in 2009 they gave a bonus issue of 1 share per 2 owned)



The trend continued as Singaporeans from kids to old folks picked up on IT products, Challenger members grew from 200,000 back in 2008 to 500,000 today! Over the last 5 years, revenues doubled again but profits grew slower but still a decent 1.5 times (this is due to the more intense and competitive IT retailing land scape which lowered everyone's profit margins. As you can see net profit margin fell from 5.8% to 4.5%)

ROE was great over the last 5 years which averaged above 30%! Today its balance sheet has become more solid than before, with ever more surplus cash (still net cash position and no debt at all). Of its NAV of 17 cents most of it is still cash which would come in very handy on a rainy day (say another global financial crisis or crazy recession)




Over the last 5 years, its stock price gained a whopping 400%!!!

In the beginning I only had a very small position but I was fortunate to keep believing in the company by adding more shares year after year, its been the best ride I ever had and I do hope the next 5 years will be good too.

By sharing this story, what I'm trying to say is that value investing works!

Look for great businesses that you understand and is within your circle of competence, has honest management that have a good track record and financial numbers that passes your standard.

Lastly if valuations are cheap with a good margin of safety don't be afraid of pushing all in.