myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Sunday 18 July 2010

A brief appraisal of Crest Builder Holdings Bhd. (CRESBLD)

A brief appraisal of Crest Builder Holdings Bhd. (CRESBLD)

Cresbld is engaged in construction and property development.

Crest Builder is a class A contractor registered under catgory G7 with the CIDB which enables it to tender for any government and private contracts of unlimited value. Not unlike the other listed contractors, CRESBD has also ventured into property development amid an extended gloom in the construction industry in the Nineties.

1. Let's look at its historical Sales and Earnings

FY ending Dec 05 Sales 253 m Earnings 11.7 m
FY ending Dec 06 Sales 318 m Earnings 20.0 m
FY ending Dec 07 Sales 366 m Earnings 40.2m
FY ending Dec 08 Sales 270 m Earnings 12.3 m
FY ending Dec 09 Sales 325 m Earnings 10.7 m

Stock Performance Chart for Crest Builder Holdings Bhd

Stock Performance Chart for Crest Builder Holdings Bhd

2. The company is in a competitive business which is rather challenging.

(No economic moat).

3. Future Growth Drivers

Not analysed. However, you can get an idea of the present and future activities of this company by visiting these posts. Courtesy of Eric Yong's Blog.

Past Projects:

Property development called 3 Two Square in Section 14, PJ in 2007. The project comprising a corporate office tower called The Crest and retail shops and offices contributed materially to the record earnings in 2006 and 2007. CRESBLD has retained the Corporate Tower 'The Crest' and the car parks for recurring income, marking its entry into property investment/management.
Mixed development scheme called Alam Hijau in Mukim Damansara.
Other projects are located in Kelana Jaya and Mont Kiara.

4. Long Term Liabilities and D/E ratio

FY ending Dec 05 LTL 78.8 m D/E 0.71

FY ending Dec 06 LTL 67.6 m D/E 0.53

FY ending Dec 07 LTL 90.4 m D/E 0.56

FY ending Dec 08 LTL 45.6 m D/E 0.54

FY ending Dec 09 LTL 111.46 m D/E 0.65

Note: The amount of net debts rose substantially in 2009.

FY ending Dec 05 Interest Expenses 4.79 m

FY ending Dec 06 Interest Expenses 4.70 m

FY ending Dec 07 Interest Expenses 8.05 m

FY ending Dec 08 Interest Expenses 8.03 m

FY ending Dec 09 Interest Expenses 8.28 m

5. ROE

FY ending Dec 05 7.71%

FY ending Dec 06 11.11%

FY ending Dec 07 18.58%

FY ending Dec 08 5.55%

FY ending Dec 09 4.66%

6. CAPEX required to maintain current operations

Not analysed

7. Is Management is buying or holding the stock?

FY ending Dec 05 Mr. Yong Soon Chow (Direct & Indirect) 43.66%

FY ending Dec 06

FY ending Dec 07

FY ending Dec 08

FY ending Dec 09 Mr. Yong Soon Chow 34.61% Yong Tiok Chin (daughter of YSC) 6.18%

8. Price versus Intrinsic Value

NTA per share

FY ending Dec 05 NTA/Share RM0.75

FY ending Dec 06 NTA/Share RM0.92

FY ending Dec 07 NTA/Share RM1.47

FY ending Dec 08 NTA/Share RM1.52

FY ending Dec 09 NTA/Share RM1.59

Given the strategic location of the properties namely, Corporate Tower 'The Crest' and the car parks, hefty fair value adjustments on investment properties lifted the NTA sharply (+61%) in 2007.

Present Price of CRESBLD share: MR0.69

Number of shares: 124.09 m

Market Cap 85.6 m

Warrants 24 m units Maturity 30/5/2013 Exercise Price RM 1.00

Well, will you buy this stock for long term investment?

I won't because this stock fails my tests for a GOOD QUALITY company. It is neither a great nor a good, but a gruesome company by my definition.

I invest and I rarely speculate.

Estimating an investment's value using DCF

Using DCF Foolishly

By David Meier
March 28, 2005

I consider myself a value investor. To me, all that means is that I am price-conscious. It doesn't matter what type of company I look at or what its situation is. The bottom line is that I refuse to pay more than an investment is worth.

If I am not going to pay too much, then I have to make an estimate of an investment's value. There are different ways to calculate value; you have probably seen many of them in the Fool's School. But today I want to focus on the discounted cash flow analysis.

John Burr Williams developed the idea in the '50s, and Warren Buffett has evangelized it in the years since. Despite its power and simplicity, there are areas where we need to tread carefully. Used Foolishly, DCF can be a great friend; used foolishly, DCF can be our worst enemy. So let's look at DCF carefully, because I don't want you to pay too much for an investment.

Here's what we're up against
First, we need the equation. You may already know it, but I'll present it here for reference:

Value = Sum[Cash Flow(t)/(1+k)^t] from t = 1 to infinity

We'll call this the long form. All you need to do is predict all of the future cash flows and discount them back to the present at the rate of k. What could be easier? For simplicity, we'll define "cash flow" as cash flow from operations minus capital expenditures.

Pitfall No. 1: We don't know jackI know that sounds harsh, but it's the truth. We cannot consistently predict the cash flows and their growth rates with any accuracy; the business environment is far too dynamic. Of course, we should try to make the best estimates we can. And that means being careful about our assumptions and predictions because we don't want to have the pitfalls of the equation work against us.

Merck (NYSE: MRK) has been getting the attention of many value investors lately. The Vioxx problems and the court ruling about early patent expirations have caused lots of uncertainty, knocking down the stock price. Using our definition, Merck earned $7 billion in cash flow in 2004. Should that be the starting point? No. Do we know the cash flow reduction from the two issues stated above? I read one report that said the Vioxx lawsuit could cost $4 billion to $30 billion. No precision there. Will two people using the same information predict the same value? Not likely.

The equation is not for calculating precise answers, like in physics and engineering. I think it is Foolish for making estimates based on personal judgments. The better the judgment, the better the estimate.

Pitfall No. 2: Stay away from critical mass situationsThere is a simplified form of this equation, assuming constant growth and a constant discount rate.

Value = Cash Flow(t = 0)*(1+g)/(k-g) where
g = growth
k = discount rate
t = 0 is the cash flow from the previous year

One reason we cannot rely on the equation for precise answers is that there is a point of critical mass. In 1946, scientist Louis Slotin died from radiation poisoning after he accidentally let two half-spheres of beryllium-coated plutonium touch during an experiment. When the two halves touched, they reached the critical mass required to sustain a nuclear reaction.

The equation above is valid only if the discount rate is greater than the growth rate (k > g). Ifk is less than or equal to g, the equation is undefined. Our critical mass pitfall comes when gstarts to get close to k. As this happens, value starts to get really big, really fast.

For illustration, let's look at Google (Nasdaq: GOOG). My gut tells me that Google is overvalued. But my gut and a quarter won't get me a cup of Starbucks coffee. From 2004 financial statements, we know everything in the upper half of the table. We don't know the growth rate. So let's assume a discount rate and solve for growth.

Google		(on 12/31/2004)
Diluted Shares	272.8	Market Cap	$52,590	CFFO	$977
Price	$192.78	Debt	$0	CAPEX	$319
		Cash	$2,100	FCF	$658
		Enterprise Value	$50,490


		Assume k	10%	25%	50%
		Solve for g	8.60%	23.40%	48.10%
		k - g	1.40%	1.60%	1.90%

Note: Dollar values in millions.

The results tell us that cash flow needs to grow at 23.4% per year from now until infinity to achieve a 25% annual return. So in year 19, Google will have to generate $35.7 billion in cash. For comparison, Microsoft (Nasdaq: MSFT) generated $13.5 billion of cash in its 19th year as a publicly traded company. That's a lofty goal. Does it mean that Google is overvalued? I don't think we can say from this equation. The validity of the answer breaks down because we are too close to the critical mass point, where k equals g.

Pitfall No. 3: Money for nothing.So if the simplified form of the equation is breaking down, what about using the long form? We can break the equation into parts: a fast-growth part and a slower-growth part. Let's assume that Google can grow cash flow at 100% per year for the next five years and at a slower rate after that. Again, let's use a discount rate of 25%. I know you Fools are wondering how I can have a growth rate higher than the discount rate. In the long form of the equation, there's nothing that says we can't. But let's think carefully about what that means.

Essentially, it means that we are getting money for nothing. It implies that the cash flows are more valuable simply because they are growing. It also implies that our investment has infinite value and that we are guaranteed a return no matter what price we pay. We both know those are foolish notions.

At the Berkshire Hathaway annual meeting, Warren Buffett referred to this as the St. Petersburg Paradox, based on a paper by David Durand. No investment has infinite value. So we have to be very careful using g > k for extended periods of time.

Should we throw DCF out the window?An emphatic no! We just need to use it Foolishly. Here's what I recommend:

1. Be conservative.
Aggressive analyses can lead to inflated values and cause you to pay too much. Pay too much, just like incurring high transaction costs, and you get lower returns.

2. Think about your assumptions and gather contrasting viewpoints.
Poor assumptions based on viewpoints that are the same as yours can lead to aggressive analysis. And we know where that can lead.

3. Use a margin of safety.
Sorry. Despite the fact that you are conservative doesn't mean your answers are more accurate. Have the courage to pay significantly less than your estimate of value. Your family will thank you down the road.

At the Inside Value website, Philip Durell has a wonderful DCF calculator to help you with your analyses.

Fool contributor David Meier learned to be price-conscious from his wife. He does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/value/2005/03/28/using-dcf-foolishly.aspx

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

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)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

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?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Sunday 18 July 2010

A brief appraisal of Crest Builder Holdings Bhd. (CRESBLD)

Estimating an investment's value using DCF

Using DCF Foolishly

All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

Political and Economic News

Interesting Blogs