The Bear Trend in S&P 500 Has Not Change

Yesterday's gravestone doji has neither been confirmed or denied by today's candle. I will still urge anyone I know to avoid take speculative positions.

The ARA deal

$ARA Asset Mgt(D1R)

Weeks ago, as I could not find any decent deals and that the market in US shown signs (in charts) of stalling, I decided to liquidate most of my fair-valued investments as well as event driven trades.

As such, the portfolio shrank and ARA Asset Management became, and still is, 50% of my entire portfolio, which is of a very modest amount. It was 50% because I couldn't find any outstanding deals, and it was a very low risk trade. Even when it fell from 1.71 to 1.68, I simply held on as I think there is nothing official being filed at SGX. Hence, no worries. At 1.68 it would be a 12% annualized return, but I do not want to increase my holdings due to risk.

So I am glad that the scheme is passed with overwhelming majority today at the meeting in Suntec today. Of course, a few investors were very vocal and rightly point out that retail investors are being denied of any future prospects in this company. Some questions were raised but not answered, and I am not sure if the board was simply not bothered, or that they were tired of answering questions that were raised earlier (than today). Still, none of them raised their voice and replied amicably.

Some of the questions that were raised but not answered:
a) Is there any way that AVIC/WP will take preferential shares?
b) Although ARA mentioned that they need capital, why is it that funds from the last rights issue utilized at such a snail pace (probably infer by the asking party if they really need these capital)

My view is that $1.78/share is a fair deal; though not an exciting or generous one, but good enough to entice most early investors to realize the profits and arbitragers to take on positions. I was the latter, since I felt that the safe price to enter ARA was below $1. Granted, there were periods in which I could buy it at that price, but I started investing really really late. Still, given the opportunity, I wouldn't say that I definitely will buy ARA because it was cheap based on earnings, and earnings, to me, is volatile.

While I can understand that many "long term" investors (funnily enough, they keep stressing this term when they stood up to question the board during Q&As), that is just how the game works. Investors who has bought before the announcement wish to realize their profits are not wrong to do so since,

a) there is a small but possible chance that the deal might be voted down and the price is certain to go back to where it was before the deal announcement due to traders.

b) there is not much upside to justify the risk.

And in selling their shares, the buyers are likely arbitragers.

Most people who voted yes knew that the future might be sweeter if they held on, but that is just how the game works. Move on and find another gem. It is the dream of all  investors to buy a stock and hold on till it is a multi-bagger, but sadly ARA wouldn't be one of them.

Kimly and M1

These two stocks taught investors a lesson today.

First off, M1. The telco announced that its
"... three biggest shareholders - Malaysian telco Axiata Group Bhd, Keppel T&T and SPH - confirmed on Friday that they are currently in the midst of conducting a strategic review of their respective shareholdings, which may or may not result in a transaction. The three respectively have 29 per cent, 19 per cent and 13 per cent stakes in M1 for a combined 61 per cent holding."

Right off the bat this morning, the stock advanced  to last Friday's height, at 2.28, almost equaling what was reached last trading day. However, the bulls lost steam rapidly and closed almost 1% lower than last closed.

I firmly believe that, for acquisition deals, trying to buy in before any confirmation is risky. With no price point in mind, there is no idea if the deal is worth the risk. With no timeline in place, this deal could become cold. Imagine a deal that pays only 4% a year? That is no higher than what a high-yielding dividend stock. One should also assess the possibility of the buyer's ability to make the deal possible-- if its financial health enable its acquisition.

***

Kimly is a new issue that just started trading today. Its IPO was beyond popular, and many investors took on the easily understood PE of 12x and guess that it is worth more than the commonly price 24 times PE of available issues.

So it was no surprise the stock went straight to 0.50$ during pre-market, and went as high as 0.565, before cooling down to 0.44. For investors who said hello at 0.565, that represents a 22% loss in a single day. I was prepared to only pay 35-40 cents a share for this stock, but its popularity turned me off.

Trading is a bet on human's emotion and crowd direction, while investing is about a company's worth. Nobody knows where this stock might head next.

***
These two popular issues taught investors two lessons today. One, never partake in an arbitrage until it is confirmed. Two, valuation is crucial.

The Optimism of Medical Stocks in SGX (Part Two) Singapore O&G

On previous post, I mentioned about how optimistically the market has guided investors on the prospects of medical stocks. Companies which has performed well are usually priced well above their NAV. One of them is Singapore O&G. I shall refer to it as O&G from now.

O&G debutted in the middle of 2015 and have you had the fortitude to hold on during the 2016 correction, it is currently a two-bagger. (Chart from Yahoo Finance)

  Granted, the stock does not pay much dividends. Below, from www.dividends.sg

Amazingly enough, although this stock does not offer much dividends per se, it will be difficult to pay higher dividends in the future. Dividend payout in 2015 was about 62%. It was 72.6% last year. Do not expect this company to be a dividend aristocrat (a fancy term for a dividend machine/stock)...

But I am sure investors are in for the capital gains :)

Above is the latest income statement for FY 2016, it does indicate that profits are up 64.8%, which is a frightening improvement. However, the income statement is one of the more superficial data.
Note that profit margin actually decrease slightly: from 32.5% to 30.7%

The question is, how well is this company performing based on return on capital?

2015- 25.74%
2016- 24.21%

Although ROC did not increase, it is still impressive as it is.

This company does not have any debts. Purist might find the goodwill sizable.

 Of special interest to me is the > 3 x of goodwill accumulated over the course of one year, more than 10 times of inventories, and little change to its cash and equivalents. Without knowing much of the business, one can tell that business was acquired using shares, as its equity based increased from 24m to 41.6m. It has also incurred plenty of payables.

Should one invest in O&G? That, I am not an expert of, since I invest mainly from the balance sheet. One thing for sure, the growth continues. Another year like this, the business would have gone two fold (rule of 72).

Stocks like O&G are what one call growth stock-- it is not the growth of its share price BUT the growth of its business. Share price did move accordingly with growth, and I say it is well-deserved. However, I will abstain from investing because many situation can arise and dampen its share price-- competition, weaker performance, etc. I still think it is prudent to look for downsides first then the upside.


The management of this company will be the key factor on how well this company fare in the future. As of now, it seems to be on a M&A drive, and the increasing share price will make it easier for them to do so. If so, I can expect them to increase dividends so as to entice these subsidiaries. One should pay attention to its cashflow so see it is sustainable. As of now, the story still looks sweet.