Companies trading at below net cash. Opportunity or value trap?

Companies that are trading at negative enterprise value (EV)

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

Why is the market having a very negative perception of the company's future prospects (rightly or wrongly), governance and/or believe the cash is not real?

Some of these companies are simply too small, and not tradeable.  

Some are shell companies waiting for a corporate exercise.

There are many reasons:

Fake bank statements

It is very hard to fake bank statements and accordingly, net cash on the balance sheet.  But if the monies are located offshore, this might not be the case.  

Recall, several China based companies, such as China Stationery and Xingquan International Sports Holdings previously listed on Bursa.  Investors were badly burnt, following revelations of massive accounting irregularities - including the reported cash going missing and discovery of previously unknown (un-authorised) loans.  When something appears too good to be true, it often is.

Poor corporate governance

The integrity of management and controlling shareholders is a key factor for investors when valuing stocks and this is reflected in the stock price.

Investors lack of confidence maybe when investors expect that the cash - even though real - could be used in a way that is not in the interests of minority shareholders.  It has happened time and time again.

Contingent liabilities

Existing cash on the balance sheet could be whittled away by contingent liabilities, when the market anticipates imminent payments for retrenchment exercises, lawsuits and so on.  

Persistent loss-making and negative cash flows from operations

When a company is persistently loss-making and importantly, suffers negative cash flows from operations - whether due to idiosyncratic issues and/or broader economic downturn - that too will eat into its cash hoard.  If the market has a downbeat outlook for the company's prospects, it will place a big discount on the stock.  

Time to monetisation factor

Oftentimes, companies trade at discounts to their net cash and more broadly, the value of their underlying assets, because of the "time to monetisation" factor.  It takes many years to translate an asset into earnings, cash flows and returns to shareholders.

Absence of powerful activist shareholders

There was no EV company among components of the S&P's 500 index and only a handful of very small companies in the Russell 3000 Index.   This could be attributed to the presence of powerful activist shareholders in a mature market.  The absence of activist investors may well be the problem for Bursa.

Knowing where to look for opportunities to invest

Investment Research: The Challenge of Finding Attractive Investments 

Investors are in the business of processing information

While knowing how to value businesses is essential for investment success, the first and perhaps most important step in the investment process is knowing where to look for opportunities. 

Investors are in the business of processing information, but while studying the current financial statements of the thousands of publicly held companies, the monthly, weekly, and even daily research reports of hundreds of Wall Street analysts, and the market behavior of scores of stocks and bonds, they will spend virtually all their time reviewing fairly priced securities that are of no special interest. 

Good investment ideas are rare

Good investment ideas are rare and valuable things, which must be ferreted out assiduously. They do not fly in over the transom or materialize out of thin air. Investors cannot assume that good ideas will come effortlessly 

• from scanning the recommendations of Wall Street analysts, no matter how highly regarded, or 
• from punching up computers, no matter how cleverly programmed, 

although both can sometimes indicate interesting places to hunt. 

Upon occasion attractive opportunities are so numerous that the only limiting factor is the availability of funds to invest; typically the number of attractive opportunities is much more limited. 

By identifying where the most attractive opportunities are likely to arise before starting one’s quest for the exciting handful of specific investments, investors can spare themselves an often fruitless survey of the humdrum majority of available investments. 

Three categories of specialized investment niches

Value investing encompasses a number of specialized investment niches that can be divided into three categories: 

• securities selling at a discount to breakup or liquidation value, 
• rate-of-return situations, and 
• asset-conversion opportunities. 

Where to look for opportunities

Where to look for opportunities varies from one of these categories to the next. 

1.  Computer-screening techniques, for example, can be helpful in identifying stocks of the first category: those selling at a discount from liquidation value. Because databases can be out of date or inaccurate, however, it is essential that investors verify that the computer output is correct. 

2.  Risk arbitrage and complex securities comprise a second category of attractive value investments with known exit prices and approximate time frames, which, taken together, enable investors to calculate expected rates of return at the time the investments are made. 

• Mergers, tender offers, and other risk arbitrage transactions are widely reported in the daily financial press – the Wall Street Journal and the business section of the New York Times – as well as in specialized newsletters and periodicals. 
• Locating information on complex securities is more difficult, but as they often come into existence as byproducts of risk arbitrage transactions, investors who follow the latter may become aware of the former. 

3.  Financially distressed and bankrupt securities, corporate recapitalizations, and exchange offers all fall into the category of asset conversions, in which investors’ existing holdings are exchanged for one or more new securities. 

• Distressed and bankrupt businesses are often identified in the financial press; specialized publications and research services also provide information on such companies and their securities. 
• Fundamental information on troubled companies can be gleaned from published financial statements and in the case of bankruptcies, from court documents. 
• Price quotations may only be available from dealers since many of these securities are not listed on any exchange. 
• Corporate recapitalizations and exchange offers can usually be identified from a close reading of the daily financial press. Publicly available filings with the Securities and Exchange Commission (SEC) provide extensive detail on these extraordinary corporate transactions. 

4.  Many undervalued securities do not fall into any of these specialized categories and are best identified through old fashioned hard work, yet there are widely available means of improving the likelihood of finding mispriced securities. 

• Looking at stocks on the Wall Street Journal’s leading percentage-decline and new-low lists, for example, occasionally turns up an out-of-favor investment idea. 
• Similarly, when a company eliminates its dividend, its shares often fall to unduly depressed levels. 
• Of course, all companies of requisite size produce annual and quarterly reports, which they will send upon request. Filings of a company’s annual and quarterly financial statements on Forms 10K and 10Q, respectively, are available from the SEC and often from the reporting company as well. 

Niche opportunities sometimes emerges

Sometimes an attractive investment niche emerges in which numerous opportunities develop over time. One such area has been the large number of thrift institutions that have converted from mutual to stock ownership.

• Investors should consider analyzing all companies within such a category in order to identify those that are undervalued. 
• Specialized newsletters and industry periodicals can be excellent sources of information on such niche opportunities.

To avoid falling into a value trap, an investor must always keep asking, "why"?

Once you find an undervalued security trading at a substantial discount to your estimate of intrinsic value, your job is not over. 

"Why is the stock trading at this level and what catalysts will lead to its eventual reversal?" 

If you cannot answer this question, you should not be investing in the stock. 

This is second level thinking (Howard Marks) and it will keep you from falling into a value trap. 

An investor must always keep asking, "why"? 

• Why is this occurring? 
• What is the overarching reasoning or justification behind this particular scenario or occurrence? 

When you have those answers, you have to ascertain why the other side may (or may not) be wrong. 

• Is there are mispricing here? 
• There was a major disconnect between perception and reality - between the stock price and the intrinsic value of the business. Why? 

There can be from any number of reasons. Usually one or the other side is wrong from psychological or analytical misjudgements (sometimes both).

This is opportunity cost at its finest action.

PROBABILITY OF VALUE REALIZATION


What do you do if there are multiple bargains at the same time?

How do you distinguish which ones offer better value than the other ones?

One stock is trading at 40% below its intrinsic value and another at 70% below its intrinsic value.

• WHICH ONE DO YOU INVEST INTO?
• WHAT IF ONE OF THE INVESTMENTS HAS A GREATER PROBABILITY OF VALUE REALIZATION THAN THE OTHER?

Note: The best absolute value may not always be your best investment choice.



As a focused value investors, we want no more than a few investments in the portfolio at any one time.

As the number of investments in the portfolio build up, every decision make will be based on whether it is a better investment in comparison to any of the current holdings.

This is opportunity cost at its finest action.

Making investing enjoyable, understandable and profitable...*

Is it not true, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

 
------------------


BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

 
-----------------
 
PHILIP FISHER'S WISE WORDS
"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

 
--------------------


Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

 

Take risks (but protect yourself) - Peter Lim

Image Credit: futbolfinanzas.com

Much of Lim’s wealth was the product of an unlikely venture. His single investment of US$10 millionin Wilmar, an Indonesian palm oil startup, seemed far from promising in the late 90s, when Indonesia was facing political and social unrest. At the time, the currency fell from 2,500 to 16,000 rupiah against the US dollar. But against all odds, Wilmar began to pick up the pieces and Lim’s faith in the company paid off — in 2010, he cashed out his shares for US$1.5 billion.

“My Indonesian partner was asking me the other day: ‘How the hell did we make so much money?’

Up to a point after people tell you a story and a vision, don’t write it off. Sometimes it comes true. You just make sure that if it doesn’t come true, you don’t get hurt too much.”

(Source: The Business Times, AsiaOne News)

 https://sg.news.yahoo.com/8-wise-lessons-wealth-singapore-053251357.html

Comments:

1998. US$10 million
2010. US$1,500 million (1.5 billion)
Period 12 years

Compound Annual Growth Rate:
51.82%. (WoW.  )


2015.  US$ 3,000 million (3 billion). His present net worth.
CAGR from 2010 to 2015.  14.87%

CAGR from 1998 to 2015.  39.87%


He bought Wilmar in 1997/1998.
It was at the time of the Asian Financial Crisis.
Prices of stocks were very low.
Indonesian currency and regional currencies were at historical lows compared to US dollars and Singapore dollars.
He made a big investment.  (Fat pitch when the opportunity came.)
He was in the position to make this investment and he took the risk, knowing his downside was protected. (My analysis.) (Luck = preparation + ability to seize opportunity when this presents)
He stayed with the company long term (12 years).
He cashed out in 2010. (Perfect timing or pricing.  How did he do this?)
Since 2010, he has grown his wealth around 15% per year, doubling in 5 years.

There are many lessons one can learn from this investing behaviour of Peter Lim (almost sounds like Peter Lynch).  :-)



For references.
CAGR
61.41%      (Land - short term frenzyl)
8.14%        (Property capital appreciation)
9.75%        (Plantation capital appreciation)
17.79%       (Land - long term)
9.65%         (Property Total Return)
10.61%       (Plantation Total Return)
15%+          (Equity)
Unlimited     (Business)

Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways

If secondary issues tend normally to be undervalued, what reason has the investor to hope that he can profit by such a situation?

For if it persists indefinitely, will he not always be in the same position market wise as when he bought the issue?

The answer here is somewhat complicated.

Substantial profits from the purchase of secondary companies at bargain prices arise in a variety of ways:

1.  The dividend return is high.

2.  The reinvested earnings are substantial in relation to the price paid and will ultimately affect the price.  In a five- to seven-year period these advantages can bulk quite large in a well-selected list.

3.  When a bull market appears it is most generous to low-priced issues; thus it tends to raise the typical bargain issue to at least a reasonable level.

4.  Even during relatively featureless market periods a continuous process of price adjustment goes on, under which secondary issues that were undervalued may rise at least to the normal level for their type of security.


Benjamin Graham
The Intelligent Investor


Related:

Bargain-issue pattern in Secondary Companies

The LONGER a stock remains seriously UNDERVALUED and the LONGER they DONT' RETURN TO NORMAL VALUE, the BETTER it is for the investor

A Margin of Safety BOOSTS Returns Rather than Just Providing Protection


The longer the stock remains undervalued, the better it is for shareholders, because their reinvested dividends, or their new purchases, or management’s share buybacks, continue to accumulate undervalued shares.    

It actually becomes a demonstrably negative scenario for a long term investor when their stocks go up above fair value.    


That’s how Buffett made 30-50% returns in his early days. 

He wasn’t investing in companies that were growing earnings by 30-50% per year; he was investing in companies that were seriously undervalued.

Eventually, those stocks will return to normal values, and the longer they don’t, the better it is for the investor.    



Comments:  
A most important point.
As a value investor, you should be happy for the stock market to be down.
It is only then, you can find the bargains you wish.
As you will be a net investor in stocks for the future and for the long term, you should welcome a down market, so that you can buy stocks at bargain prices.
Yet, in many forums, everyone is cheering for the prices of stocks to rise. 

GOLDMAN: These Are The 40 Most Undervalued Stocks In The Market

Lucas Kawa | Jan. 4, 2013, 6:22 PM |

blumenbiene / Flickr

The S&P 500 booked a nice 13 percent return in 2012.

For 2013, Goldman Sachs' equity strategy team expects the index to hit 1,575 by year-end.

However, they expect some stocks to do better than others.

The firm's recently released "US Monthly Chartbook" includes a list of stocks with the most upside opportunity relative to Goldman analysts' price targets.

Many of these companies highlighted are either in energy production or energy equipment.

The stocks listed offer 24 to 44 percent upside relative to their current prices. We've arranged the stocks from least to most upside.

Read more: http://www.businessinsider.com/goldman-sachs-40-stocks-with-upside-2013-1?op=1#ixzz2OsOX1l7b

Undervalued Health Stocks

Laura Joszt

Published: Monday, January 7th 2013

In 2012 the S&P 500 reported a 13% return, much better than some other stock markets in the world. And investors are proving to be perpetually optimistic, forecasting the market will do surprisingly well in 2013, as well.

Goldman Sachs’ equity strategy team released a list of stocks with the most upside given Goldman analysts’ price targets. The 40 stocks on the list offer 24% to 44% upside.

The list offers a large number of energy companies, which isn’t surprising given the fact that investors are looking to get in on America’s move toward energy independence.

Here, we’ve pulled five health-related stocks for your consideration.

(Stocks listed in alphabetical order)

Alexion Pharmaceuticals
Symbol: ALXN
Current Price: $96.80
Upside to target: 28%

A pharmaceutical company looking to develop cures for severe, life-threatening and rare diseases.

Edwards Lifesciences
Symbol: EW
Current Price: $91.79
Upside to target: 24.2%

The company designs, manufactures and markets tissue heart valves and hemodynamic monitoring devices.

PerkinElmer
Symbol: PKI
Current Price: $33.08
Upside to target: 26%

A leader in human and environmental health, offering therapeutic and disease research, prenatal screening, environmental testing and industrial monitoring.

Prudential Financial
Symbol: PRU
Current Price: $56.15
Upside to target: 36.9%

A financial services and insurance firm offering life insurance and long-term care insurance.

Stryker Corp.
Symbol: SYK
Current Price: $56.65
Upside to target: 24%

A medical device and equipment manufacturer specializing in orthopedic medical technology.

Read the full list here

Ten signs your stock will double

Date March 16, 2013

Nathan Bell

Everyone loves the idea of buying stocks that double in price. But how do you spot them? Here are 10 quick pointers:

1. Out of favour

A stock that's out of favour – hated even – is potentially an investor's most rewarding opportunity.

Intelligent Investor recommended News Corp in July 2011 at the height of the phone-hacking scandal when the price had fallen to $14.58. Since then it's more than doubled.

What most investors missed was the fact that the company's newspaper businesses were insignificant compared with its pay TV and movie operations, which were travelling along nicely. It was the quintessential out-of-favour stock.

2. Hidden progress

Computershare, the world's largest share registry, last year completed the purchase of BNY Mellon. As a result, it now controls about 60 per cent of the US registry market. That has huge potential to deliver cost savings and higher earnings when corporate activity recovers. The company has made hidden progress but the market is yet to catch up.

3. New technology

Sirtex owns an innovative treatment for liver cancer that costs $US14,000 ($13,500) per dose. When Intelligent Investor recommended it as a "speculative buy" in November 2010 at a price of $5.90, the company was involved in litigation with a major shareholder, directors owned very few shares and profitability was declining.

But new clinical trials were underway that could increase the market size for Sirtex's product tenfold.

The results of the trials aren't due until next year but the share price has almost doubled since late 2010 in anticipation of the potential financial rewards.

4. Investment in R&D

In his book, Common Stocks and Uncommon Profits, Philip A. Fisher suggests that the best companies to buy are those investing heavily in research and development to provide future profits.

After recommending blood products manufacturer CSL in March 2011 at $33.97, its share price surpassed $60 recently. This year the company will invest more than $400 million in research and development – more than its entire revenue in 1997.

5. Industry tailwinds

Air travel tends to grow at about twice GDP growth. That's a lovely tailwind for an airport business (less so for airlines where the benefits get competed away). At the bottom of the market in 2009, Sydney Airport stock hit a low of $1.45. With passenger growth recovering, the stock price is now $3.16 and it has paid handsome distributions along the way.

6. Changes to industry structure

The internet has all but destroyed traditional newspaper companies. In their place have arisen online classifieds sites such as Realestate.com.au, Carsales and Seek. All trade at multiples of their float price while companies such as Fairfax struggle. The structural shift has destroyed some businesses and created others.

7. Owner-managers

When owner-managers put their money on the line, pay close attention. Investors in four-wheel-drive accessories manufacturer ARB Corporation and Flight Centre would understand the benefits. Stocks that double tend to have exceptional management with a vested interest in maximising the value of their shareholding.

8. Insider buying

Directors buying stock is another indicator of a potentially cheap stock. Flight Centre's Graham Turner last purchased shares on market at a price of $3.84 on March 16, 2009. Now, the company's share price is well over $30. Directors know their businesses well. It pays to watch their activity.

9. Financial strength

The strong financial position of serviced office provider Servcorp meant it could purchase cheap leases during the GFC and reap the benefits when the market recovered. That's one of the reasons why the stock has increased more than 40 per cent since the middle of last year.

10. Unrecognised by the market

When the stock price fell below $20 a year-and-a-half ago, complaints about Macquarie Group's return on equity failed to recognise the value of its large capital cushion, and investors ignored its more stable businesses such as funds management, which were growing, and supported a decent dividend. The market is now catching on, with its share price more than doubling since the 2009 market lows.

Genuinely independent thinking and a thorough understanding of the facts increase your chances of buying stocks that will double in price. Next time you're considering a stock purchase, use this checklist.

The more factors you can tick off, the greater the chance of your next purchase doubling in price.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is the Research Director at Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au.



Read more: http://www.smh.com.au/money/investing/ten-signs-your-stock-will-double-20130316-2g72h.html#ixzz2NvyYjZln

Value Investing and Contrarian Thinking

Value investing by its very nature is contrarian.

• Out-of-favor securities may be undervalued, popular securities almost never are.  
• What the herd is buying is, by definition, in favor.  
• Securities in favor have already been bid up in price on the basis of optimistic expectations and are unlikely to represent good value that has been overlooked.

If value is not likely to exist in what the herd is buying, where may it exist?  In what they are selling, unaware of, or ignoring.  

• When the herd is selling a security, the market price may fall well beyond reason.  
• Ignored, obscure, or newly created securities may similarly be or become undervalued.  

Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct.

• Since they are acting against the crowd, contrarians are almost always initially wrong and likely to suffer paper losses.  By contrast, members of the herd are nearly always right for a period.  
• Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value.

Holding a contrary opinion is not always useful to investors, however.

• When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide.  It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome. 
• By contrast, when majority opinion does affect the outcome or the odds , contrary opinion can be put to use. 
• When the herd rushes into home health-care stocks, bidding up prices and thereby lowering available returns, the majority has altered the risk/reward ratio, allowing contrarians to bet against the crowd with the odds skewed in their favor. 
• When investors in 1983 either ignored or panned the stock of Nabisco, causing it to trade at a discount to other food companies, the risk/reward ratio became more favorable, creating a buying opportunity for contrarians.

Ref:  Margin of Safety by Seth Klarman

Greater risk does not guarantee greater return, risk erodes return by causing losses.

Greater risk does not guarantee greater return.

To the contrary, risk erodes return by causing losses.

It is only when investors shun high-risk investments, thereby depressing their prices, that an incremental return can be earned which more than fully compensates for the risk incurred.

By itself risk does not create incremental return, only price can accomplish that.

Buying Time

When the market hits its low, true value investors feel that harvest time has arrived.

"The most beneficial time to be a value investor is when the market is falling," says institutional manager Seth Klarman.  There are plenty of companies ripe for the picking.

In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, "You know, some days I get up and I want to tap dance."

Unfortunately, this is the time when investors are feeling most beat up by the markets.  Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be.  This, at the depths of a bear market, is the time to buy as many stocks as are affordable.

Value bargains aren't found in strong market.  A good rule is to examine stock markets that have reacted adversely for a year or so.

Undervalued stocks quite often lie dormant for months - many months - on end.  The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait.

Benjamin Graham: "Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience."

Margin of Safety Concept in Undervalued or Bargain Securities

The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities. 

• We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other. 
• That difference is the safety margin. It is available for absorbing the effect of miscalculations or worse than average luck. 
• The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. 
• For in most such cases he has no real enthusiasm about the company’s prospects.

True, if the prospects are definitely bad the investor will prefer to avoid the security no matter how low the price. 

But the field of undervalued issues is drawn from the many concerns—perhaps a majority of the total—for which the future appears neither distinctly promising nor distinctly unpromising. 

• If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. 
• The margin of safety will then have served its proper purpose.

Ref:  The Intelligent Investors by Benjamin Graham

CHAPTER 20  “Margin of Safety” as the Central Concept of Investment





Also read:

• Margin of Safety Concept in The Business Venture of Buying and Selling Stocks
• Margin of Safety Concept in Conventional and Unconventional Investments
• Margin of Safety Concept in Speculation and Investment
• Margin of Safety Concept in Diversification
• Margin of Safety Concept in Undervalued or Bargain Stocks
• Margin of Safety Concept in Growth Stocks
• Margin of Safety in Good-Quality and Low-Quality Stocks.
• Margin of Safety Concept in Common Stocks
• Margin of Safety Concept in Bonds and Preferred Stocks

What do you need to beat the market? Higher mathematical expectancy

What do you need to beat the market?  

You need to pick stocks of companies that have a higher mathematical expectancy than that of the market, example, the S&P 500. 

Of course, this could come in many forms, for example:

- a higher earnings yield (low PE), 

- better growth prospects (high EPS growth rate), 

- higher certainty in the company’s future prospects (good quality business and management), or 

- a cheaper stock price in relation to the business’s underlying assets (undervalued stock).  

'Expensive' shares: Do not look at how high the share price is. It is the valuation that counts.

Quick Comment: 'Expensive' shares

Some time ago, I had a conversation with my ASX remisier based in Australia and I think some of his comments are worth sharing.

*Me refers to myself when I was speaking to him.
*Investssmart is also myself but from my point of view now.

Me: Good shares in Malaysia are expensive.
Remisier: What do you mean by expensive? When you say expensive, do you mean in absolute terms or in terms of valuation? When I say it is expensive, it normally means overvalued or fully valued. Some companies can trade at $30 but we still call them cheap.
Investssmart: This is very true. The word expensive should be used more carefully when talking about shares. The absolute value does not really count. A Mercedes for $100k is 'cheaper' than a Waja for $60k. It is the value that counts.

Me: Malaysians' perception is that the higher the share price is, the more it can drop.
Remisier: That happens all the time. It is important to remember that we should look at the movements in terms of percentage. If a $50 company can drop to $5, a $5 company can drop to 5c as well. The important thing is to fix the absolute amount you invest. Purchasing 100 shares in a $50 company is the same as purchasing 1000 shares in a $5 company. If both rise by 10%, you will still earn the same amount of $500 no matter which company you invest it. 
Investssmart: We should not be put off by the share price. It is the valuation that we should worry about. The chances of IRIS to drop from 90c to 20c is higher than the chances of BKAWAN dropping from $7.80 to $2. But somehow, if you give investors just these two choices, many would rather invest in IRIS because they think it is 'cheaper'!

Remisier: Do you remember me recommending you Rio Tinto ($30), BHP ($15), Woodside ($20) and Cochlear ($25)? You did not purchase any either! Perhaps, this changed your view on 'expensive' stocks!
Investssmart: These four stocks have skyrocketed since his recommendation. They are now about $75, $30, $45 and $50 respectively. Never say that upside of highly priced shares are limited. There is no such thing. Upside of overvalued/expensive shares is limited but upside of highly priced shares is not. Although I did not purchase these shares, it was not because I was scared of the high prices. It was mainly because I did not have the strong confidence in the commodity bull and sadly, I was proven to be wrong. Could have made tonnes more from the ASX. Nevertheless, in a bull market, almost everything on the ASX rose.


Me: I did not buy those few but I still bought some highly priced ones. What would I be trading if I don't buy any highly priced shares? I don't remember you ever recommending me any penny stocks!
Remisier: Good stocks are normally highly priced because the demand for good stocks is very strong. Lowly priced shares are normally those that are speculative or not performing. 
Investssmart: It is strange but true to a certain extent. Of course, it does not apply to all company shares.

Strange but could be true: I don't think it is a coincidence that most of the true blue chips throughout the world are trading at high prices. Most of these blue chips have been there for ages. It had to start off somewhere as a smaller company and it takes time to reach where it is today. If the company was trading at $1 ten years ago, it will probably trade at $10 today to be considered a top performer. Otherwise, it would not be considered a blue chip.

Fundamental based investors always look at companies that have excellent track records and therefore, end up investing in highly priced shares. That is because it is very rare that we can get such companies at low prices as share prices should have risen as companies perform well over the years. I doubt fundamental based investors would be interested in companies that trade at low prices over the last few years because that means that they probably do not have a good track record. Of course, this does not apply to all shares but I believe that it is true to a certain extent.



Conclusion: Do not look at how high the share price is. It is the valuation that counts.

http://investssmart.blogspot.com/2006_04_01_archive.html

A Framework for Selling a Stock

A Framework for Selling a Stock
Written by Greg Speicher on October 28, 2010

Determining a good strategy for when to sell a stock is both important and difficult. In simple terms, your returns are going to come from two primary sources:

1) the reappraisal of an undervalued holding to its intrinsic value and
2) growth in intrinsic value.

Many investors sell their holdings if the price appreciates to fair value. Others, like Buffett, Russo, Greenberg, etc. hold their stocks for the long-term and look for gains from growth in intrinsic value.

Both of these approaches work and have generated a great deal of wealth.

Read more here....

Tan Teng Boo of iCap said there are a lot of undervalued stocks on Bursa Malaysia.

iCapital.biz sees 7pc GDP growth

By Azlan Abu BakarPublished: 2010/08/16


MALAYSIA could record a positive gross domestic growth (GDP) for 2010 although almost all major economies including the US and China have suffered a growth slowdown since a couple of weeks ago.

Icapital.biz Bhd (5108) managing director Tan Teng Boo said the global market outlook for the next six months will continue to be uncertain.

Key data released in the US showed hints of possible economic softness, which could trigger another round of cautious sentiment among investors.

"However, despite the current situation Malaysia could still record up to 7 per cent GDP growth this year given the strong growth it achieved in the first and second quarter of the year," he told reporters when met at the company's Investors Day in Kuala Lumpur over the weekend.
The event was held to educate investors on investments. It also held talks, exhibition booths and presentations from companies which icapital.biz had invested in.

Tan said although the equity market has somewhat lagged behind a bit compared to others in the region, foreign investors are nevertheless excited with the New Economic Model (NEM) introduced by the government.

"They (foreign investors) are waiting to see how fast and how broad the reforms will be able to take place," he said.

He said if the NEM can be implemented fast, it could also transform and take Malaysia's economy into a new level.

"When that happens, we can expect to see a boom on the local stock market," Tan said, noting there a lot of undervalued stocks on Bursa Malaysia.

He said the Malaysian economy has the potential to surpass the performance of other markets including Singapore and Taiwan.

"We can succeed as we have the people, necessary support and skills to further build up the economy and attract direct foreign investments into the country," Tan said.

He said Malaysia's growth at present will continue to be driven by the resilient domestic market.

Icapital.biz, the country's only listed closed-end fund, recorded a net profit of RM36.4 million on the back of a RM42.2 million revenue for the financial year ended May 31 2010 compared with a revenue of only RM11.4 million a year before. Net profit in 2009 stood at RM6.2 million.

Its net asset value for the financial year recently ended rose 19 per cent to RM2.10 per share from RM1.77 previously.

"We hope to double our assets in the next five years," Tan said, noting the company posted growth of more than 130 per cent since it was listed in 2005.



Read more: iCapital.biz sees 7pc GDP growth http://www.btimes.com.my/Current_News/BTIMES/articles/ibix15/Article/#ixzz0wiSOWKeN

Tabulating Quarterly and Annual Financial Figures for Easy Stock Analysis

Precision Auto Care is a network of franchised and company-owned auto repair and tuning shops. The company has over 380 service facilities in 8 different countries including China and the Middle East. Recently, Precision Auto Care recently “went dark” and stopped filing with the SEC in order to reduce the costs in complying with Sarbanes-Oxley. With the majority of stock held by company management, the lack of free floating stock and virtually no analyst coverage, Precision Auto Care has almost entirely disappeared off the investment radar.

Financial information for Precision Auto Care.

Historical share price of Precision Auto Care.

As you can clearly see, the market has rewarded the improving balance sheet, revenue and earnings of Precision Auto Care by cutting the company’s share price by over 80%. The price now suggests that the company not only is there no chance of growth, but also that there probably isn’t a future for Precision. Given the recession, large cash position, reasonable business prospects and solid revenue; it does seem that there is a degree of overreaction in the share price movement.

http://robertpiomolloy.com/blog/?p=49

Excess Returns by Decade for Undervalued and Overvalued Stocks

The value investing style has gotten back on its feet after trailing growth.