Tuesday, 12 January 2010

Reviewing the rise in KLCI from March 09 to now

The market turned in March 09.  Those who continued to hold their stocks during the downturn would have seen substantial rebound in the prices of their stocks.  Remarkably many good stocks have risen above their previous highs.

The initial rise in the prices of these stocks was due to the steep bargain offered by the knocked-down prices created during the severe downturn.  Soon this steep bargain was eroded and most of the stocks were trading close to their fair price.  The market has the tendency to over-react on the downside and the upside.  As was mentioned before, this has something to do with the inexact science of finding the intrinsic value of a particular stock.  Moreover, there are many participants in the market who felt this is not important, driven mainly in their "trade" or "investing" by studying the sentiment driving the buying and selling of a particular stock.

What can we recollect from March 09 to now in KLSE?  The initial price rise from March 09 was broad base.  Almost all counters went up.  Few were laggards.  Soon the initial rise flattened.  The blue chips however continued to performed well.  The index linked counters continued their steady rise over the last few months, probably supported by huge institutional investors initially.  The financial counters moved steadily and swiftly, followed by others blue chips and KLCI component stocks.  The other stocks did not move much, though there were much excitement in some individual stocks like Mamee, Daibochi, HaiO and others. 

As usual, the retail investors were slow to enter the market missing the steepest part of the market rise.  It should be of interest to know the percentage of previous retail investors who are now permanently out of the stock market following the calamity in the market in 2008.  But the market is always a huge magnet.  When the market rises, new players (and also suckers) are attracted in.  The market has paused on a few occasions over the last 9 months.  The correction was not painful, the worst was a 6 percentage dip in the index over a brief period so far. 

As to whether the market price presently reflects the fundamentals, there are as many who argue either ways.  Is the market undervalued at present price?  Is the market overvalued at present price levels?  Is the market reflecting the fundamentals of the economy?  Is the market price ahead of the economy, not supported by the underlying fundamentals?  One way to get out of this confusion is to realise that in investing, you are investing into stocks and not into the market.  Therefore, for those stock pickers, the importance is in understanding the business of the company, the quality of its management and being able to place a value on the price of the business of this company. 

Since the start of market trading this new year, the market has risen upwards extremely fast indeed.  Many would have seen significant gains in their portfolio.  Many stocks have reached their 52 weeks high and there are also many that reach their all time high prices.  The prices of various stocks climbed not by mini-steps but by giant steps. Interestingly, a piece of good news can push up a stock price by a large amount. The present play is in the glove counters. This sector has proven to be resilient and growing.  Can one truly believe that the business fundamentals of a stock has increased 2 or 3 folds over this short period as would have to be accounted for by such rising prices in the stock?  As with all things too good to be true, be prepared now for when the music stops.  This is particularly most relevant for those who are late or recent comers to this wonderful bull party in the stock market.

Among my favourite stock picking matrix:  Search for those companies with 5 or 10 years consistent records of :
  • high ROE of  >15% and
  • generating large FCF (FCF/Sales >5%, high FCF/TOCE of >10%) 
This matrix has turned up many big winners with long sustainable economic moats for long term investing consistently.  Keep track of these companies and buy them when they are offered at fair or bargain prices. 

At bargain prices,
  • the EYs (EPS/Price) and DYs are at the higher of their usual historical ranges,.and
  • the FCF/EV yields  are attractive multiples of the risk free interest rates offered by fixed deposits.

FCF = Free Cash Flow = Cash Flow from Operation - Cash Flow from Investing = (CFO - CFI)
TOCE = Total Capital Employed = (Equity + LT Debt)
EV = Enterprise Value = (Market Cap + ST Debt + LTL Debt - Cash)]


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