Tuesday, April 24, 2012
“Last Train ......
This will be the last time I post something on Jaya Tiasa until it goes to RM13.00 cum basis or RM4.50 on an ex-basis. Naturally Jaya Tiasa is on a 15 year high, and naturally investors are loathed to buy at current levels. So, you have to do your own research and decide.
To me, this is the easiest, no-brainer, for an easy 50% within a short period of time. Possibly the best recommended stock in my 6 years of blogging.”
Is the above post familiar to you?
Jaya Tiasa was at the adjusted price after all corporate exercise and dividend payments of RM3.06 when the above was posted in a popular financial blog. Its price has never gone up to RM4.50, and in fact that RM3.06 price was about the highest since then. It closed at RM1.68 on 8th May 2015, or a loss of 45%, while KLCI has gone up by 26% during the same period. The negative alpha is a whopping 71%! That is incredible as the stock was highly and confidently recommended by a very popular blogger who prior to that had recommended some stocks with impressive returns.
No, I am not doing personal attack on the blogger concern, as this could happen to anybody, and myself included. Anybody can be very wrong in his analysis, Warren Buffett included. I am just trying to put forward my point that the future in investing is highly uncertain and unpredictable. The difference is that I would never make such a confident statement like that in investing. This is also the very reason that I never give stock tips when asked.
This also serves as my qualification here that I am not going to slander on a super investor in Malaysia whom I respect very much, Fong Si Ling, or more popular known as ColdEye, or 冷眼 on his portfolio of stock picks which I happened to stumbled on today as shown below.
http://klse.i3investor.com/servlets/pfs/6736.jsp
You can see the degree of respect I have for Mr. Fong. I even used his principles successfully in investing as shown. So there is no reason for me to ridicule him. In fact, Mr. Fong is one of the very rare local investors with logical and fundamentally sound reasoning I have great respect on.
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp
Rather I am putting forward my constructive criticisms, may be on hindsight, on the stocks in his portfolio for discussions purpose. Anyone is welcomed to criticize me too on my comments, of course preferably with some logics, facts and figures, rather than personal attack without any substantiations.
ColdEye Portfolio
The portfolio of ColdEye posted in i3investor with the arbitrary reference date on 12th March 2012 as shown in the link above is made up of diversified 18 stocks from the mid and small capitalized stocks listed in Bursa, as shown in Table 1 in the appendix. As you can see, Mr. Fong is also a value investor looking for good stocks to invest in the less travelled path.
The initial costs of each stock is adjusted to take into consideration of all corporate exercises and dividend payments as obtained from Yahoo Finance adjusted price history.
The total adjusted cost of the portfolio is RM23m, with the biggest holding in MBSB of present market value of RM7.4m. The other significant holdings are Ivory Properties, RM1.85m, Zhulian, RM1.64m, Plenitude, RM1.52m, MSC, RM1.36m, and Cepatwawasan Plantation, RM1.22m.
The portfolio incurred a loss of 8.8%, or slightly over RM2m in absolute value, against the total return of the broad market KLCI of 26.2%. This is in contrary to the loss of 23.63% as shown in the website, probably because the initial prices have not been adjusted for the corporate exercises and/or dividends. It is not a big sum of money for ColdEye as I believe he has made tenths or hundreds of million from the stock market before, but it is still a surprise to me.
The problem is, unfortunately, all the six significant large holdings underperformed the total return of KLCI for the slightly more than three year’s period from 12th March 2012 to 8th May 2015. The worst is Ivory Property, which lost a whopping RM3.2m, or 63.2%! The red chip company HBGlobal which lost 88.2%, has proven the untouchable China owned companies in Bursa. The only significant winners are FACB, 165%, and ECSICT, 104%.
The losers
Property companies generally did not do well this couple of years because of the cooling measures taken by Bank Negara in curbing the heated property market which has been rising unabated before the measures were put in place. However, there is no excuse for Ivory as it has been doing very badly even all other property companies were making huge profit before the cooling measures. I couldn’t understand why ColdEye put so much bullets into this stock, except reading that it was having very good prospect for its projects in Penang, the large unbilled sales etc. which obviously were false. Ivory is in fact one of the stocks in my list of lemons here, a stock to avoid at all costs.
http://klse.i3investor.com/blogs/kcchongnz/45373.jsp
It has earnings but no cash coming in. Keep on borrowing money. Doggy financial reports with one-time-off item in land sale as profit, and “gain from sales of shares of part of a development” as profit, and even as cash flow!
The hope that it can make a lot of income from its Penang project didn’t come true. All I can say is:
“Hope is not a viable strategy in investing”
The other property company of Plenitude is not too bad with a total return of 17.9%, slightly underperformed KLCI. I have this stock in my portfolio too as a net net current asset investment.
http://klse.i3investor.com/blogs/kcchongnz/59102.jsp
At RM2.31 now, it is below the price of RM3.15 when I wrote the article above. It appears that I was wrong about its price too, at least for the short-term, hopefully not for the long-term.
The biggest loser in percentage term is HB Global. Even an experienced investor like ColdEye can be fooled by the financial shenanigans of China Company. So where does a small time retail investor stand? To me, HB Global is just like another Chinese stock, CSL, which is also in my list of lemons above.
The failure in investing in the high dividend yield HBGlobal at that time brings me to another peril in an investing strategy, the high dividend yield strategy which I have written here.
http://klse.i3investor.com/blogs/kcchongnz/62033.jsp
Before fallen, the dividend yield of HB Global was very high at double digits. Similarly for MSC (-32.5%), CSCSteel (-20.4%), and NCB (-20.3%) which were with high single digit dividend yields. This answers my question in the above post as below,
“High dividend Yield Investment in a Volatile Market: A Sure Win Strategy?”
The plantation companies of Cepatwawasan and Kretam suffered losses of 25% and 5.3% respectively when the market was up by 26.2% during the same period. Cepatwawasan was having a reasonable 12% ROIC and was selling cheap at less than 5 times Ebit. Again the market, whether it is the stock market, or the commodity market such as oil palm, Tin, crude oil etc. is highly unpredictable. When every analyst and investor predicted that the rise in palm oil price seemed unabated, it turned the other way round. The same thing happened to tin price for MSC, and crude oil price.
Another plantation company, TDM, is up by 80.2% instead, mainly because it was a real value stock then with low market valuations. It had a high return on invested capital of 27%, but yet selling at an enterprise value of just 5 times earnings before interest and tax. It also has some significant health care business which shield it from the poor palm oil price. Its corporate exercise also has probably unlocked its value.
EAH (-16.7%) is another company kept on recommended by this popular blogger for its prowess in growth strategy by acquisitions. It has also made a few corporate exercises in rights and bonus, “free” warrants etc., trying to boost its share price. I have never placed too much faith in growth by acquisition as research has not shown that it is shareholder value enhancing, rather a lot of shareholder values have been destroyed by these corporate moves. I don’t pay much attention to bonus issues and free warrants as they don’t mean much to me. In fact I loath management who concentrate on playing up its share price, rather than focusing on improving their business. If I remember well, its margin and return on capital were deteriorating fast after the acquisitions.
MBSB (+19.9%) and Zhulian (+24.2%) were high growth and high return on capitals companies. However, they underperformed the market marginally since then. This goes on to prove the power of mean reversion; it is hard to keep on increase lending to low income government servants as whether they have the means to pay back, and you can push just that much in your direct sales.
I was also wrong in the projection of Zhulian’s future too as shown here:
http://klse.i3investor.com/blogs/kianweiaritcles/34314.jsp
The winners
Surprise, surprise, surprise. the biggest winners in ColdEye’s portfolio are the obscure and no-growth stocks of FACB at +165%, ECS at +103.6% and TDM, +80.2%, KESM +59.4%, and ChooBee, +32.6%.
FACB has not been making any money in a meaningful way. It is in fact an asset play, a negative enterprise stock with its cash and investment higher than its total liabilities. For those who are interested in what a negative enterprise value is and why it is a viable investing strategy can refer to this post:
http://klse.i3investor.com/blogs/kcchongnz/45296.jsp
ECS ICT has not much interest for punters and speculators as its major shareholders focus more on their business rather than frying their shares. It has very low margin of 2% to 3%, but that is the nature of the business model, mainly trading of computers and peripherals, and smart phones. However, it has high return on capital (28%) but trading at very low enterprise value of less than 3 times its Ebit then. It also has plenty of cash in its balance sheet without any debt. It is a stock in my portfolio here:
http://klse.i3investor.com/blogs/kcchongnz/75985.jsp
KESM (+59.4%), ChooBee (+32.6%) and KimHin (+30.4%) are also obscure stocks with low margins, but was selling cheap. Rock Chemical Industry, RCI, (+28.8%) had been privatized. This shows that
“The price you pay for a stock determines your return”
And not how fast the company grows.
Lessons for Investors
From the above analysis of ColdEye Portfolio, we can make an inference as the following:
- Finding opportunity in Superinvestor portfolios investing strategy doesn’t seem to work here with the underperformance of the portfolio by 35% compared to the broad market. Like what ColdEye had warned those who blamed him for losing money,
- 你没做功课，还赖三赖四，明明是你不会游泳，又不想去学游泳，还要跟我下海游泳？”
Translation: “You don’t do your homework, and yet blame me for your
losses. You know you don’t know how to swim, but yet don’t want to
learn how to swim; and yet follow me to swim in the sea?”
Yes, learn how to fish yourself, instead of depending on others to throw you fish to eat.
“In Bursa, there ain’t no tooth fairy”
- Beware of cycles. The demand for commodities such as palm oil, crude oil, tin, copper, aluminum etc. is cyclic. Do not project future growth from the past and hence overpay for the stocks. Commodity prices are also highly unpredictable. Who had predicted correctly the steep fall of crude oil price last year and its recent fast recovery?
- A high dividend yield investing is not a sure win strategy by itself as seen from the negative return of CSCSteel, NCB, MSC, and worst of all HBGlobal. It did work well for TDM and ECSICT, probably not because of their high dividend yield, but rather good companies sold at cheap prices.
- But not all good companies are good investment as you can see from Zhulian (ROIC=35%), and MBSB. There is this power of mean reversion. NCB though a good company (ROIC=15%) at good price (EV/Ebit = 6.5) at that time, can have its fundamentals changed completely and abruptly.
- Chasing growth is never my priority in investing, unless I don’t have to pay much, or best of all, no need to pay for this growth expectation. Growth by acquisition is never my favorite and it is proven in EAH here. Ivory is another failed high growth stock which before had never proven to be a good company with good management.
- Deep value investing, like the graham net net investing strategy in Plenitude doesn’t work too, or it hasn’t work? Great patience may be required. Few investors have that. But that deep value has been unlocked in FACB as shown.
K C Chong (10th May 2015)
Appendix
Table 1: ColdEye Portfolio
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