Wishing all my readers a Happy and Prosperous New Year of the fire monkey 2016
Saturday, January 09, 2016
Scenario of Stock Market Euphoria
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria / Sir John Templeton
The last stage of a bull market is euphoric. It is important to know the scenario of such a market so as not to be deluded by the madness of the crowd.
In an euphoric market, optimism is at its extreme. Price-rise is an expectation. Newbies come in drove to open accounts with broker firms. More and more housewives get involved. Shoe-shine boys, ice-creme sellers and poor farmers will also be talking about the market. By then the market is a hive of activity.
The public flocks to the boardroom every trading day. Financial news is good. Price advances are spectacular and frequently made head lines in local newspapers. The dogs and cats (low-price stocks of no investment value) are whirled up, but big blues refuse to rise further. Volume continues to rise and speculation is on the rampage. In every corner of the town people are talking and boasting of their gains in the stock market.
Stocks will be trading and very high PE and low-dividend yield. Every tip you get is a good tip; everyone is an expert as prices continue to move up day after day.
Boardrooms in broker firms are crowded as soon as the market opens. All seats available will be fully occupied; people will be standing here and there.
IPOs (initial public offerings) become more often, and most are oversubscribed by close to a hundred times.
The craziest thing is that warrants can be higher than the mother shares. People simply throw cautious to the wind, become illogical and mad! Then you hear someone says, “this time is different).
The truth is that, like all bull markets, this too will pass. It will not be unlike any other bull markets. If you are lucky to see such a scenario, be wise enough to sell everything, and sell short if you are allowed. Remember what the great investor Warren Buffet said, “Be fearful when others are greedy.”
Euphoria has no time limit. It can lasts for months, weeks or even days. You must get out in time. For when the market finally reverses, the way down will be fast, furious and cruel. The majority will be hurt; they will be devastated. Don’t be one of them.
Are we anywhere near a market on euphoria?
Fundamentally sound stocks giving 4 to 5% dividend yield are still available presently, and volume transacted daily is normal, 1 billion plus. I think we are far from there. When volume transacted daily is over a few billion units, its time to worry.
Notwithstanding the truth and opinion expressed above, stock markets are always uncertain.
You listen to me at your own risk.
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Tuesday, January 05, 2016
Supreme Global Group Ltd (SGGL) is a Hong Kong registered company. It has a 91.15% subsidiary known as Henan Xinghe which manufactures and trades edible oil, mainly peanut and other blended oil. SGGL got listed in Bursa via a reverse takeover (RTO) exercise in April, 2014.
Key West, a GN3 status company in Bursa issued 1.9 billion shares at 11.05 sen per share to take over SGGL valued at RM210m. In a private placement, it also issued 300 million shares at 20 sen per share. Shortly after the RTO, the name Key West was changed to Xinghe.
On 29 April 2014, Xinghe debuted at 25 sen, moved up to 26 sen and closed at 22 sen. The highest it went up was 29 sen some time later before easing all the way down in a roller-coaster ride to below 7 sen.
Now at 6.5 sen, is this a good stock to buy? Is this another risky and useless China-based stock? Let us have a look at its balance sheet and earnings.
As at 30.9.15
Paid-up capital : RM234.850m
Par Value : 10 sen per share
No. of shares issued : 2.3485b
NTA : 23 sen per share
EPS for the quarter ended 30.9.15 : 0.77 sen
Non-current assets : 37.732m
Current assets : 549.186m
Current Liabilities : 19.675m
Current Ratio : 27.91 (This is fantastic)
Cash : RM373.27m (Excellent)
Borrowings : RM29.072m
Final dividend paid on 21.9.15 : 0.2 sen
On 25.3.15, 1.17425b bonus warrants of 1 for 2 were issued. These warrants are convertible to ordinary shares at 10 sen per warrant. The expiry date is 22 March 2019.
From the above info, it can be seen that the company has a very strong balance sheet with plenty of cash and little borrowings. If it is not China-based, this stock is easily worth 50 sen a share.
Other points to note are:
SSGL is 10% owned by the China Government. The Chinese government is very serious in dealing with corruption. So, hopefully, there won’t be any hanky panky in the company.
Henan Xinghe is one the top six edible oil producers in China. It is mainly involved in producing edible vegetable oil as well as peanut protein cake in the China market.
It is a profitable company with ambitious plan for the future. It intends to produce peanut protein to compete with soybean protein by 2017. According to its MD, peanut protein is a better product than soybean protein.
It uses lots of palm oil as its feedstocks, and that is the main reason why SSGL wants a listing in Bursa, according to its CEO. Its presence in Malaysia is good for the palm oil industry.
The company has a dividend policy of paying 15% of its earnings as dividends.
At the last traded price of 6.5 sen, I am of the opinion that the stock is a good buy. The stock has been crawling at the bottom for many months. To me, this is an accumulation by savvy investors.
Will this ugly duckling turn into a golden swan someday? The potential is there, but only time will tell. Best action to take is to buy some now at 6.5 sen, and watch the stock closely. Chase only when the 7 sen level is decisively breached.
Trading or investing is never without risk. You buy at your own risk absolutely.
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Friday, January 01, 2016
I choose the following stocks for investment in 2016:
Kim Hin RM2.28
I believe these 6 stocks will be much higher by end Dec 2016. They are all dividend-paying stocks with strong fundamentals.
May 2016 be a much better year than 2015, and may all my readers be blessed with good health, good luck and much prosperity for the new year.
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Friday, December 25, 2015
The Importance of the Cash Flow Statement
Cash is not everything, but it makes everything different.
Companies fold not because they are unprofitable, but because they are not able to settle their financial obligations that are due for settlement.
Most people look at the cash position in the balance sheet, compare it to that of a year ago, and then decide whether the company has improved or not. They wouldn’t be bothered to look at the Cash Flow Statement (CFS).
Actually the CFS must be studied in detail to gain an insight of what has happened to the cash of the company. Some people like to read it from the bottom to the top, some prefer to read it from the top to the bottom. It doesn’t matter how you read it as long as you get the facts right.
Cash flow is about cash inflows and cash outflows. It is not about profits. A company may make profits, but its cash may have dwindled. On the contrary, a company’s cash may have improved while the company is showing a loss.
Cash can flow in via the operation of the business, investing activities financing from banks, right issues, bonds, etc
Cash outflows are operating expenses, interest payment, taxes, company shares buyback, capital expenditure, the purchase of property, etc.
The CFS will show you all these information. You need to study it carefully before deciding whether a change in the free cash flow is good or bad.
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Sunday, December 20, 2015
In business, the priority is earnings. You need earnings to settle your operating expenses, pay taxes and expand your business.
No company can survive without earnings. Earnings go by different names. Profit, income, the bottom line and earnings are all the same.
EPS (earnings per share) is the most often used metric to evaluate a company. Many people just look at EPS and then decide whether the company is good or no good. This is a mistake.
When you look at EPS, you must also look at revenue and the actual amount earned so as to have an idea about its profit margin. A high profit margin is better than a low one.
Often overlooked is the quality of earnings. Earnings can come in many forms. These are:
01) Profits from normal trading and services provided by the company
02) Sale of a property or some properties that are outside its business model
03) Sale of treasury shares
04) Sale of some financial instruments, such as equities or bonds
05 A change in depreciation rates
06) Appreciation of foreign money against the local currency
All the above activities can affect earnings. So, the next time you look at EPS, do not forget to read the income statement in the quarterly or annual report to know how the earnings come about. Bear in mind that some earnings are just one-off affairs and are not repeatable in the foreseeable future.
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Friday, December 18, 2015
There are 3 important statements to carefully look into when you analyse a company. They are: the balance sheet (BS), income statement (IS) and the cash flow statement (CF)
The BS shows on a certain date what the company has and what it owes others.
The IS shows the sources the profits come in.
The CF statement shows how cash flow in and out of the company.
When I study the balance, the first thing I look at are the current assets and the current liabilities. From this I work out the current ratio. If the current ratio is below 1, I take this as a red flag, and I shall not bother to dig deeper into the stock. This is my personal style; it is not a standard criteria for you to follow.
Cash is a very important item.The more the better. If a company has plenty of cash, it can do many things. It can expand its business, use it to acquire new businesses, purchase its own shares or distribute some of it to its shareholders.
Debt is the opposite. A high debt, especially one with high interest rate, relative to its paid-up capital is a red flag. Bear in mind that debt has to be serviced. This means interest has to be paid. A company that has a not of cash and much borrowings is not in a strong financial position.
Personally, I prefer small-cap stocks and mid-cap stocks instead of big-cap stocks. Big-cap stocks are suitable for institutions and fund managers. As a small player, you can’t compete with them. Once institution or fund managers have taken notice of a stock, the stock will no longer be cheap.
There are many other things to consider when you look at the BS. For example, when you look at the accounts receivable or inventory, you need to concern yourself whether these can be easily turned into cash.
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