Jan 2021 Portfolio Review

Hong Kong Tracker Fund: 4.32%
Straits Times Index Fund: 1.62%
SPDR S&P 500 Index: -0.58%
My little portfolio: 1.68%

Transactions:
Increase in Emporer Entertainment Hotel due to lower prices

Comments:
The most talked-about topic in the investosphere is the short squeeze of heavily shorted stocks, particularly Gamestop and AMC. 

Quite often I come across the term “Burn the shortists!” in investing forums, particularly Investing Note. Some of them actually think that stock prices goes down primarily due to short-sellers..I think the anger towards shorting companies are misplaced. Have these people actually pause and consider if the stock they bought were actually overvalued? 

A substantial decrease in stock prices does not always mean that short sellers are responsible. A stock price has to be worth a certain amount, long term. The market could be right or wrong momentarily, but long term, they would always get it right.

Some depicted the situation as sweet justice-- retail guys getting back on institutions—but how can they be so certain that other institutions are not taking opportunity in betting with them as well?

Eventually, there would be casualties on both ends when sanity resumes.

The only detail that piqued me is how certain brokerages could be allowed to suspend trades, allegedly because they have backers with an vested interest in GameStop, possibly in short positions.
The squeeze effect is nothing new. In recent years, Softbank was also accused of having bought tons of call options, artificially bringing up the prices of the many tech stocks late last year. 

For the reddit stock, the effect is stronger because the stock is heavily shorted. Buying of call options would force the brokerages or some authority to purchase stock. A call option gives the buyer the right to buy the underlying, they would realistically need to have the underlying should the option holder wishes to convert. This further limiting supply for these short sellers to cover.

I would guess that this situation should be brought to a stalemate by a dramatic reduction in short interest across the board.

I respect the short sellers-- they usually done tremendous amount of research before hand, and have more than just skin in the game (as some of the bankrupted short seller would attest). They are the most fundamentally sound investors around.

Volatility in the Hang Seng Index

Even though HSI returns a very respectable 4.3% year-to-date, it was as high as 9.5% at the start of this final week. So we were looking at a drop of 5% in as many days...

The charts do not look very great either for the America and Singapore indices. But there were serious amount of volatility, not as much as Hong Kong. Quite a few stocks like IGG and Nexteer were having double digit percentage moves.

However, such volatility does not extend towards my holdings, and as such there were no opportunity.

Interesting Insider Disclosure
The directors of Perfect Shape Medical are very optimistic indeed.

The CFO/Secretary So Hin Lung purchased a total of 140,000 shares, whereas the executive chairman bought 1,644,000. The total transaction value is about 75,000 SGD and 800,000 SGD respectively, which is decent amount of money for a company with 4B HKD market cap (685m SGD).
Personally, I feel that the market price for Perfect Shape is not on the low side, although I would clarify that I am usually overly conservative.

Here are some very simple mathematical figures:

The entire market cap is priced at 3.8B HKD.

There is about 850m in cash, which means you are paying for 3B for the company. There isn't much liabilities in its BS.

Free cash flow has been increasing at an insane CAGR of 16.6% since 2011, net income, 25.58%. as of 2020 first half, it has already earn 341m in cash flow,. Given that sign up during the 11.11 sale was promising ,I think the free cash flow should at least equal 450m of last year's, and that means you are paying for only about 6.6 times for the entire company.

Of course, the price has gone up a good 60% since my last purchase, and it is easy for me to feel bright and cheery. So I would conservatively say that the odds are good that you are not paying a lot for growth here.

Perfect Shape is about 20% of my entire holdings.

See you next month.

#asklbs02: How do you spot when is a good time to buy?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Question: How do you spot when is a good time to buy?

There are a few schools of thought. 

The CANSLIM camp would feel that, if a stock fits all seven criteria, and if the chart follows one of their many recognized patterns (the most famous of all resembles a cup’s handle), one should buy the stock.

Their idea is that the timing has to be right, and any sell down of 8% means they have to go into cash as they made a mistake. 

The value guys would focus on the price to value gap and ignored the preceding movements. When there is a sufficient discount of price from value, hit the buy button.

The more nuanced parties would argue for a known catalyst before getting involved.

Obviously, I lean towards the value side of things, and would add that the best timing clue offered, legally, is the presence of heavy insider buying. To clarify matters, we are looking at purchase of stock using their own money, not the mandated company buy backs. 

The latter could just be an exercise to purchase enough stock for the treasury, so as to offer to them as stock options to management as incentives. As such, they are less reliable as indicators of value, more probabilistically a sign of whether management pays attention to value.

In other words, there are some merit in what the guys at Spiking are doing when they track insider buys.

I pay a lot of attention to insider buys. If I already have the stock, I usually wait for 10-15% from my last buy price before buying more.

I was extremely fortunate, timing wise, with Cross-Harbour (thanks to a group of friends who are smarter than myself.. it was their idea). I noticed that the owner was buying a huge amount of stock towards the end of 2019, and I bought the stock around August 2020.

Timing is mostly luck.

P.S.: On the less serious side, I do follow a couple of "investors" whom I revered as reverse indicators. Whenever they accumulate a certain stock in my portfolio, I do get very very worried.... and when they start selling, I do have the temptation to buy... haha

#asklbs02: How long do you hold a stock, especially if it didn't move at all (aka value trap)?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Q:How long do you hold a stock, especially if it didn't move at all (aka value trap)? 

I would disagree that when a stock (price) doesn’t move at all, that doesn’t qualify it as a value trap.

I think it warrants a deeper look into the company's financials and ponder why it doesn’t move.

For e.g., if a toy manufacturer is not doing well, but the other toy companies are doing amazing business (as in P&L wise), perhaps the former is not doing a good job and deserves to be call a value trap.

Company with loads of cash and have no idea how to deploy it for years? Yea, value trap.

What about when the company is not doing very well, but management opt to increase its own salary? Definitely a value trap.

Having said that, I am not that good in investing to avoid them. I have two companies in my portfolio that are not doing so well in terms of prices… and I am inclined to agree with the market that they deserve its current prices. The only saving grace is that the management is not outright incompetent or hostile to shareholders, and they pay a decent amount of dividend.

Could they have do something to increase shareholder value? Definitely… but there is nothing I can do about it.

I am inclined to wait another couple of years and see. I have been holding them for about 2-3 years now, so I guess I would start to think of re-deploying them when the management start misbehaving, or if I find something better to invest and I needed capital. Meanwhile I would just collect dividends and wait it out.

So in short, 3-5 years or when I realize that management is the reason for the value trap.

#asklbs02: What are your thoughts on Bitcoin?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. 

Question

What are your thoughts on Bitcoin?

Answer:

I don't think I got anything clever to say about Bitcoin (BTC) which people far smarter than me had not.

Simply put I think it is too difficult. 

When you buy a piece of property, you more or less know if you are overpaying based on adjacent properties' sale price, rentals, historic prices, etc.

You know that a particular property price is going to appreciate when this MRT is built, or when it becomes more accessible. Human beings are naturally good at property investing.

But I don't know how that natural ability of logic and reasoning can be extended to something like BTC.

I do have something to contribute to this discussion... and that is my idea of Process and Results. 

I believe that if you follow the proper process, after a reasonable long time, you would invariably get the results you deserve.

I had a friend who knew next to nothing about stocks, but was in a hurry to make money. He simply followed the recommendations made by brokerages, and made a reasonably small fortune. For almost a year, he listened politely to my value investing ideas, but continued betting blindly on brokerages' recommendations. His returns that year was about 20%. Mine? 5%.

What he followed was the wrong process, but it lead him to desirable results. Sometimes we even confuse the result with the process. The sun didn't rise because the rooster crowed.

There is a sad ending to my friend's story, and it has to do with cryptocurrencies. Based on his research, he believed that a certain coin would be widely adopted by banks. He made a small profit at first, but got tempted to buy more.

It ended with an unrealized 90% loss.

(I just check the price and it is still a 90% loss today, I have no idea if he had sold, and I am too afraid to ask)

***

There are too many things in life that cannot be achieved with intelligence and logic. Accept it and move on. Sometimes it is not about doing the right things but avoiding the wrong ones. There is no proper process for BTC.

Stick with the right process. Losing money is fine, but losing the discipline is far more disastrous.

P.S. I have a colleague whose son is a Bitcoin millionaire.

#asklbs02: regarding investment style

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously.

Question:

1) How would you classify your investment style? Would you recommend value investing as the base with consideration for growth or the other way around?

2) Do you think investing based on company’s fundamentals are the main way?

Answer:

(1) I am mainly influenced by the Graham-Schloss form of investing, looking at assets first and then earnings later.

I am particularly attracted to companies weighed down with problems that are well protected by its balance sheet, particularly if it comes with a history of sustainable dividend. I don't have special insights to any industry, as such, these companies tend to be "easy bets."

When it comes to earnings, I am also influenced by Paul Sonkin/Tobias Carlisle school of thought-- earnings should be examine from the private owner's perspective. 

So I would personally recommend that one starts off with the balance sheet first and then look at its growth; although I would add (unhappily) that the current market is acutely sensitive and efficient to growth investing. It is going to be tough finding bargains.

To quote someone, "there are too many people out there who have read their Graham-and-Dodd." The market is generally very efficient.

In short, I belong to the school of "I won't lose too much money if I am wrong, but my returns are going to be okay-to-good if I am right."

(2) Personally I would never deviate from my way of investing by value. No single method of investing or trading works incredibly well all the time.

Hence, one should have reasonable expectations. I don't expect to outperform the market by wild margins. I just want to beat it most of the time and then retire after 20 years. 

I am never going to match returns of someone who got it right with wayyyyy-out-of-the-money options.

I like the value way because it suits me like a pair of old jeans. Jeans might not be suitable for every occasion, just like value/fundamental investing isn't going to be vogue most of the time. 

But I think jeans is going to be around for a long time. Value investing will do reasonably well over decades. And because stocks are fractional ownership of businesses, business owners are inclined to act logically and rationally when there are significant value to price gaps.

There is no way in hell Elon Musk would privatize Tesla at current prices. 

But that doesn't mean someone buying Tesla shares today, would lose money tomorrow. And it is very hard to argue with success. You can't convince these people.

So I do understand where the growth investors are coming from. But I stick to my methods. It keeps me sane and sometimes the market can be very cruel.

 

#asklbs02 - Thoughts on Samudera Shipping and Sutl Enterprise? Steep valuations currently?

From now until 29-Jan, you could access https://app.sli.do/event/lxmezhxh and ask questions anonymously. This is one of the questions post.

It is not in my interest to discuss individual companies but I think there is a learning opportunity in discussing Samudera, which I owned for a couple of years. I would refrain from discussing SUTL as I am still vested in the company (I do not think SUTL is very attractively priced atm).

This is a very quick, back of the envelope look which may not appeal to everyone. It is also overly conservative for many people.

(all screen captures are from www.stocks.cafe. It is a wonderful site that I used since I started value investing, and the fees are worth it)

***

Samudera is currently selling at market valuation of about 538m shares multiply by 0.26 SGD = 139m SGD. I going to convert this to USD, because the financials are reported in USD.

Hence, Samudera's market cap is about 104 USD.

Is Samudera attractive from its earnings ability?

over 13 years of cashflow statement, Samudera's total sum of free cash flow is...

-64.3m

That tells you that it is a poor business.

The following details my quirky way of looking at the earnings as a owner, if there is a way to privatize this company (by taking advantage of the stock market's pessimism). I would adjust the market valuation based on its cash net of loans.

 

It has 56.519m cash (USD) and 60.421m trade receivables. Usually I will at least discount 33% off the trade receivables. That sums up to about 100m USD.

Total bank loans are 28.605+7.090= 35.695m.
Its payables, which I will conservatively take at full value, 23.617+22.532= 46.149m

That sums up to about 82m (35.695 + 46.149) USD in "liabilities". When you subtract 100m USD of "cash + receivables", that is about 18m of cash after paying off these quick liabilities.

So to someone who is thinking of delisting this company from the stock market: if it cost about 104m USD (stock market valuation at the moment) to buy over the entire company off the stock market, pay up the entire "debt" with its cash on hand, and still have 18m left in cash. I am actually paying 104-18 = 86m USD for the entire company.

Looking back at the income statement over the last 12 years, Samudera earns about an average of 6.3m USD in profits. Do note that income statements are the least reliable (and yet, ironically, influence stock prices the most). In order words, the numbers is more likely to be worse than better. That means I am paying 86m for 6.3m every year. That is a multiple of 13.5. That is not on the low side.

 

Looking at it assets wise

I tend to be very conservative and be selective in assets I deem as valuable, but would accord liabilities at 100% of its stated value.

The big ticket in asset value is its property, plant and equipment, it has about 115m in USD. At footnotes 12, it stated that it has 28m of freehold land, which is attractive. It has 4m in freehold properties.That makes it 32m. The vessels are stated at 55m, which I have no idea how to value. If we were to halve them, that is about 28m. 

Taking its freehold land and properties (32m), vessels, (28m, which is very unreliably valued, I might add), and cash+receivables (100m), that is about 160m in assets.

There are 93m in total liabilities. 

Net asset is about 160-93 = 67m USD. Compare this to the current market cap of 104 USD, it isn't favourable. Even if we were to value the vessels at 55m, as it was in the books, the net asset is 95m, still lower than the market cap of 104m USD.

(Just to express this value into "per share"...

Since there are about 538m shares, that is about 0.125 USD (67/538) per share of net asset, which is about 0.17 SGD.

I don't think at the current price of 0.26 SGD a share is attractive, assets wise)

Dividend History

Its dividend history is respectable, but I think it would be a mistake to look at dividends here. 

Firstly... it is a cyclical industry and thus unreliable as a dividend payer. Secondly, its cashflow generation is poor, and from the perspective of a business owner, it shouldn't be paying dividends at all!

Summary

Because of its poor cash generation, and that the market is already fairly pricing in its (my opinion) net current assets, it is not attractive at its current price. 

Of course, if the market do sell it at a substantial discount, there is an opportunity. In my opinion, that figure is 0.17 SGD a share.

(the red line marks 0.17 SGD a share, and everything below is a buying opportunity)

For the last 3 years, the biggest margin of safety avail was 0.11 SGD a share, which represent a 36% discount to adjusted asset value. However I feel:

a) On hindsight, this opportunity took place during the pandemic sell down. It would have make more sense to buy companies with decent earning power. 

When you buy and hold a good company, it would reward you with increasing cashflow, increasing asset value which would usually translate to increase stock prices in a sane, rational market. This company did not demonstrate the ability to do either over the decade..

If you had bought Samudera instead, you could have made a substantial profit. But you would have to expend effort and time look for better opportunities. 

b) Its liquidity is low, and as such, you might not be able to buy it easily. Sure, you could buy them in batches, but that would require more effort monitoring the stock market for sellers, and incur higher trading costs.

3-4 years ago, I was holding the share at about 0.18 SGD per share and liquidate at break-even. I thought that it is a cheap company, and dreamt of the potential profits coming my way.

 But I was wrong, and I learned. 

I hope this example of my (very conservative) way of valuing stocks is helpful to you.