Malaysia's Disastrous Capital Flight
SPECIAL REPORTS
Monday, 11 January 2010
Money leaves the country on an unprecedented scale
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
Asia Sentinel
Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation's foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments. Says UBS: "Question: which Asian country had the biggest FX losses in 2009?" The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis". It describes the situation as "bizarre" and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.
In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.
Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.
This capital bloodletting has as yet attracted little attention because Malaysia's foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.
But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.
Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor's massive Iskandar development zone, has been much in evidence. Malaysia's one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.
The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia's commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.
But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation -- financed by a persistently large budget deficit.
Meanwhile, publicly controlled capital has been rushing overseas. Petronas has been spending its billions in profits around the world as it attempts to become a major global player – at the expense of Malaysian citizenry in general and the oil and gas producing states in particular. Other government-controlled entities such as Malayan Banking Bhd have been bidding top dollar for foreign assets – such as Bank Internasional Indonesia.
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
The 2009 reserves loss may have had some specific cause which will not be repeated. But it has merely served to underline a dismal trend which has been in evidence for the best part of a decade. Malaysia has so far been saved from itself by the commodity price gains of the past five years – with even the late 2008 collapse now largely reversed. Oil and palm oil may be off their peaks but both are now double their prices of five years ago.
It is better not to imagine what will happen to Malaysia if prices collapse to 2004 levels and stay there. Better now to address the real reasons behind capital outflow and lack of private investment.
http://www.malaysia-today.net/index.php?option=com_content&view=article&id=29559:malaysias-disastrous-capital-flight&catid=21:special-reports&Itemid=100135
Monday, 11 January 2010
What's next in Malaysia's Allah row?
What's next in Malaysia's Allah row?
Tue Jan 5, 2010
ARE RELIGIOUS TENSIONS IN MALAYSIA AN INVESTMENT RISK?
Not directly. Religious disputes are a risk mostly in their potential to increase ethnic tensions, with the biggest fear being a repeat of ethnic clashes that took place in 1969.
Some investors are concerned over the increasing Islamisation of Malaysia as a potential market risk.
During a meeting with investors in New York last year Najib, was asked about the government's stand over the caning sentence meted out to a Muslim woman for drinking beer under rarely-enforced Islamic criminal laws.
An escalation of religious tensions in Malaysia could weaken Najib's ability to push through economic reforms aimed at boosting foreign investment.
IS THERE A RISK OF ETHNIC CLASHES?
The risk is very small. The bloody 1969 clashes left a deep scar on the national psyche.
Any signs of trouble would see the government use the Internal Security Act that allows detention without trial.
While there are likely to be protests organised by fringe groups, there is no real risk of attacks on churches or other places of worship.
(Editing by Alex Richardson)
http://in.reuters.com/article/worldNews/idINIndia-45153020100105?pageNumber=4&virtualBrandChannel=0
Sadly, despite the journalist's prediction, some attacks on churches occurred a week after.
Tue Jan 5, 2010
ARE RELIGIOUS TENSIONS IN MALAYSIA AN INVESTMENT RISK?
Not directly. Religious disputes are a risk mostly in their potential to increase ethnic tensions, with the biggest fear being a repeat of ethnic clashes that took place in 1969.
Some investors are concerned over the increasing Islamisation of Malaysia as a potential market risk.
During a meeting with investors in New York last year Najib, was asked about the government's stand over the caning sentence meted out to a Muslim woman for drinking beer under rarely-enforced Islamic criminal laws.
An escalation of religious tensions in Malaysia could weaken Najib's ability to push through economic reforms aimed at boosting foreign investment.
IS THERE A RISK OF ETHNIC CLASHES?
The risk is very small. The bloody 1969 clashes left a deep scar on the national psyche.
Any signs of trouble would see the government use the Internal Security Act that allows detention without trial.
While there are likely to be protests organised by fringe groups, there is no real risk of attacks on churches or other places of worship.
(Editing by Alex Richardson)
http://in.reuters.com/article/worldNews/idINIndia-45153020100105?pageNumber=4&virtualBrandChannel=0
Sadly, despite the journalist's prediction, some attacks on churches occurred a week after.
Beijing is trying to prevent the property bubble from bursting.
China vows to keep ‘hot money’ out of property market
Beijing is trying to prevent the property bubble from bursting. — Reuters pic
BEIJING, Jan 10 — China vowed today not to let foreign speculative investment affect the property market, the latest expression of official concern that real-estate prices are racing ahead too fast.
The directive from the State Council, China’s cabinet, will serve as a guideline for local authorities and ministries, including the People’s Bank of China and the China Banking Regulatory Commission, to work out detailed policies.
“Relevant departments must enhance monitoring of loans and cross-border investment to prevent illegal inflows of capital into the property market and to avoid the impact of overseas hot money on China’s real-estate market,” the cabinet said.
It said the central bank and banking regulator should step up oversight and “window guidance” of mortgage lending.
About one-sixth of China’s nearly 10 trillion yuan (RM5 trillion) in new loans last year flowed into the property sector.
Concerned that a property bubble could stir social and economic instability, Beijing has vowed to combat overly fast price increases, although its moves to date, such as restricting sales tax exemptions, have been relatively mild.
The cabinet urged local authorities, especially in cities where housing prices are rising sharply, to increase the supply of affordable housing.
It reiterated that it would curb house buying for “investment and speculation purposes” and keep the minimum down payment for purchases of second homes at 40 per cent.
China’s central bank said this week that it would pay particularly close attention to the property market in 2010 while managing inflationary expectations. — Reuters
Beijing is trying to prevent the property bubble from bursting. — Reuters pic
BEIJING, Jan 10 — China vowed today not to let foreign speculative investment affect the property market, the latest expression of official concern that real-estate prices are racing ahead too fast.
The directive from the State Council, China’s cabinet, will serve as a guideline for local authorities and ministries, including the People’s Bank of China and the China Banking Regulatory Commission, to work out detailed policies.
“Relevant departments must enhance monitoring of loans and cross-border investment to prevent illegal inflows of capital into the property market and to avoid the impact of overseas hot money on China’s real-estate market,” the cabinet said.
It said the central bank and banking regulator should step up oversight and “window guidance” of mortgage lending.
About one-sixth of China’s nearly 10 trillion yuan (RM5 trillion) in new loans last year flowed into the property sector.
Concerned that a property bubble could stir social and economic instability, Beijing has vowed to combat overly fast price increases, although its moves to date, such as restricting sales tax exemptions, have been relatively mild.
The cabinet urged local authorities, especially in cities where housing prices are rising sharply, to increase the supply of affordable housing.
It reiterated that it would curb house buying for “investment and speculation purposes” and keep the minimum down payment for purchases of second homes at 40 per cent.
China’s central bank said this week that it would pay particularly close attention to the property market in 2010 while managing inflationary expectations. — Reuters
China tightening could undo risk markets
COLUMN - China tightening could undo risk markets: James Saft
Wed Dec 30, 2009 11:20am
By James Saft
HUNTSVILLE, Alabama (Reuters) - The key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.
After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.
"We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool," Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.
"Besides benchmark interest rates, we also put emphasis on managing the gap between deposit and lending rates", Zhou said.
Put simply, that implies that China may take steps to limit the amount of money banks are allowed to lend and to drive the margins between what they pay in interest and what they charge higher, both steps which will cool growth and speculation.
China's central bank on Wednesday followed up by promising to exercise tighter control over bank lending next year while reaffirming a long-standing pledge to maintain "appropriately loose" monetary policy.
Even if you don't own a million dollar apartment investment in Shanghai -- kept empty of course because cash flows are for the little people - this could spell trouble.
Zhou "today signaled the end of the global market bounce that has been in progress since the end of last winter," Lombard Street Research economist Charles Dumas wrote in a note to clients.
"The only major addition of liquidity in the world economy over the past year has been in China. That is about to be withdrawn. Risk assets look like an unwise place to be in early 2010, especially commodity futures and the government bonds of countries with large deficits and/or debts. For risky investments worldwide, this could mark a turning point from 2009's massive rally."
China's banks will lend about $1.4 trillion in 2009, roughly double 2008's allocation. Official estimates put inflation at a tepid 0.6 percent for the year to November, but this is in contrast to media reports about bulk-buying by Chinese consumers concerned about a rapid rise in the price of staple foods.
THE POWER OF NARRATIVE
Reflationary efforts in China have almost certainly had a positive impact on global economic conditions, possibly affecting market prices for securities more than fundamental demand. On the broadest measure, money supply in China is growing at an astonishing 30 percent annual clip, more or less double its usual rate of growth this decade.
By Lombard Research's reckoning, China has been doing the heavy lifting. Even with a range of extraordinary policies such as quantitative easing, combined money growth in the United States, euro zone, Japan and Britain is barely positive. But adding in China's efforts, this rises to a more normal 6 percent range.
But China could be cutting back -- through loan controls, interest rates and ultimately by allowing the yuan to rise in value -- just as other sources of liquidity such as the U.S. quantitative easing program are withdrawn. Perhaps this is all part of the grand plan, and perhaps the rise in asset prices over the past nine months will be confirmed by a self-sustaining recovery even without further growth in stimulus.
There are at least three other possibilities. First, it may be that tighter policy in China retards a recovery and hurts asset prices. But there is also a chance that China genuinely needs tighter policy but the United States, Europe and Britain do not.
If so, further signs that China is serious about addressing its nascent property bubble and inflation should be quite nasty news for equities and other risky assets. Finally, there is the possibility that China is the bellwether for inflationary issues that will crop up elsewhere soon, though this seems a long shot.
Risk assets could get hit if it looks like the Fed's hand is being forced regardless of what the U.S. central bank does about interest rates and its exit plan. Withdrawing monetary stimulus will hurt, but what might hurt even worse is if the Fed were forced to extend measures to the point at which it starts looking desperate rather than masterful.
We are operating under a common narrative in markets: that the authorities are both willing and able to do what it takes. This may or may not be true, but it gains tremendous force simply because people subscribe to it.
China may make this simple narrative quite a bit more complicated.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
http://in.reuters.com/article/economicNews/idINIndia-45053620091230?sp=tru
Wed Dec 30, 2009 11:20am
By James Saft
HUNTSVILLE, Alabama (Reuters) - The key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.
After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.
"We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool," Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.
"Besides benchmark interest rates, we also put emphasis on managing the gap between deposit and lending rates", Zhou said.
Put simply, that implies that China may take steps to limit the amount of money banks are allowed to lend and to drive the margins between what they pay in interest and what they charge higher, both steps which will cool growth and speculation.
China's central bank on Wednesday followed up by promising to exercise tighter control over bank lending next year while reaffirming a long-standing pledge to maintain "appropriately loose" monetary policy.
Even if you don't own a million dollar apartment investment in Shanghai -- kept empty of course because cash flows are for the little people - this could spell trouble.
Zhou "today signaled the end of the global market bounce that has been in progress since the end of last winter," Lombard Street Research economist Charles Dumas wrote in a note to clients.
"The only major addition of liquidity in the world economy over the past year has been in China. That is about to be withdrawn. Risk assets look like an unwise place to be in early 2010, especially commodity futures and the government bonds of countries with large deficits and/or debts. For risky investments worldwide, this could mark a turning point from 2009's massive rally."
China's banks will lend about $1.4 trillion in 2009, roughly double 2008's allocation. Official estimates put inflation at a tepid 0.6 percent for the year to November, but this is in contrast to media reports about bulk-buying by Chinese consumers concerned about a rapid rise in the price of staple foods.
THE POWER OF NARRATIVE
Reflationary efforts in China have almost certainly had a positive impact on global economic conditions, possibly affecting market prices for securities more than fundamental demand. On the broadest measure, money supply in China is growing at an astonishing 30 percent annual clip, more or less double its usual rate of growth this decade.
By Lombard Research's reckoning, China has been doing the heavy lifting. Even with a range of extraordinary policies such as quantitative easing, combined money growth in the United States, euro zone, Japan and Britain is barely positive. But adding in China's efforts, this rises to a more normal 6 percent range.
But China could be cutting back -- through loan controls, interest rates and ultimately by allowing the yuan to rise in value -- just as other sources of liquidity such as the U.S. quantitative easing program are withdrawn. Perhaps this is all part of the grand plan, and perhaps the rise in asset prices over the past nine months will be confirmed by a self-sustaining recovery even without further growth in stimulus.
There are at least three other possibilities. First, it may be that tighter policy in China retards a recovery and hurts asset prices. But there is also a chance that China genuinely needs tighter policy but the United States, Europe and Britain do not.
If so, further signs that China is serious about addressing its nascent property bubble and inflation should be quite nasty news for equities and other risky assets. Finally, there is the possibility that China is the bellwether for inflationary issues that will crop up elsewhere soon, though this seems a long shot.
Risk assets could get hit if it looks like the Fed's hand is being forced regardless of what the U.S. central bank does about interest rates and its exit plan. Withdrawing monetary stimulus will hurt, but what might hurt even worse is if the Fed were forced to extend measures to the point at which it starts looking desperate rather than masterful.
We are operating under a common narrative in markets: that the authorities are both willing and able to do what it takes. This may or may not be true, but it gains tremendous force simply because people subscribe to it.
China may make this simple narrative quite a bit more complicated.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
http://in.reuters.com/article/economicNews/idINIndia-45053620091230?sp=tru
Sunday, 10 January 2010
Why All Earnings Are Not Equal
Why All Earnings Are Not Equal
By GRETCHEN MORGENSON
Published: January 9, 2010
AFTER a rip-roaring performance in 2009, the stock market has continued its upward climb. A reason to celebrate? Sure. But also a good time to check whether a company in which you have a stake keeps its books in a way that reflects reality.
When the market is roaring and the economy isn’t, executives come under increased pressure to make sure that their companies’ results justify higher valuations. That’s why smart investors keep an eye on them, by scrutinizing how their profits are figured.
Such is the view of Robert A. Olstein, a veteran money manager who dissects financial statements to uncover stocks he thinks other investors are valuing improperly. Since 1995 he has overseen the Olstein All-Cap Value fund, and although he had a horrific 2008 (down 43 percent), his 14-year results exceed the Standard & Poor’s 500-stock index by an average of 3.25 percent annualized, net of fees.
Mr. Olstein’s 2008 troubles have made him more determined than ever to scrub companies’ results. “As the market goes higher, it becomes more important to measure the quality of corporate earnings,” he said. “You have to look behind the numbers.”
Adjustments that investors need to make now, in Mr. Olstein’s view, are a result of disparities between a company’s reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.
SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures.
To ensure growth, companies invest in things like new facilities or additional equipment. As time goes on, plants and equipment lose value — the way a car does the moment you drive it away from the dealer — and companies are allowed to write off a portion of these values each year based on management estimates of how long they will generate revenue.
The write-offs are known as depreciation, and the more a company chooses to write off, the greater its earnings are reduced. So managers interested in plumping their profits may depreciate less than they otherwise would or should. Conversely, heavy depreciation amounts can make earnings appear more depressed than the company’s cash flows indicate.
“It’s an investor’s job to determine the economic realism of management’s assumptions,” Mr. Olstein said. “There is nothing illegal here, but maybe their depreciation assumptions are unrealistic.”
One way to assess the accuracy of management’s estimates is to compare, over time, how much a company spends on new plant and equipment and how much it deducts in depreciation each year. Some of the discrepancies that emerge can be temporary, caused by the lag time between an initial investment and subsequent write-downs for depreciation.
Companies in a growth phase, for instance, will show greater capital expenditures than depreciation as they increase investments in plant and equipment.
But that should be only temporary. If such discrepancies appear on a company’s books year in and out, then investors might well question the depreciation assumptions. Investors confronted by large disparities should discount those companies’ earnings by the amount of excess capital expenditures. Such an exercise reveals how much free cash flow is available to stockholders.
Conversely, if depreciation exceeds capital expenditures, Mr. Olstein says that the earnings at these companies are actually better than they appear — and that this shows up in the cash flows.
Mr. Olstein has spotted several companies whose depreciation and capital expenditures have shown significant discrepancies in recent years. For some, heavy depreciation schedules are punishing earnings temporarily. At other companies, modest depreciation means earnings look better than cash flows.
Two retailing companies provide examples of how depreciation can hurt earnings but mask solid cash flows. They are Macy’s and Home Depot, and both are coming off recent expansion programs that are still being felt in the financials, Mr. Olstein said. He owns both in his fund.
Macy’s earned just a penny a share in the first nine months of 2009 but generated per-share cash flow of $1.41. Home Depot posted per-share profits of $1.40 for the period, while its cash flow reached $1.87 a share.
The flipside is represented by companies like railroads where depreciation is not keeping up with spending. Railroad operations are capital intensive, to be sure, but for the last four years, some companies’ expenditures have exceeded their write-downs by significant margins.
For instance, Union Pacific put $3.64 a share into capital expenditures in the first nine months of 2009. But its depreciation during that period totaled just $2.12 a share. In 2008, the company spent $5.40 a per share in capital expenditures compared with $2.69 in depreciation. Since 2005, Union Pacific has recorded $17.81 a share in capital spending but has depreciated about half that much — just $9.54 a share.
“The railroads are not bad businesses, but their stocks are overpriced when you look at what their cash flows are,” Mr. Olstein said. For the first nine months of last year, Union Pacific’s free cash flow was 99 cents a share; earnings were $2.51.
Another company with a sizable gap between depreciation and capital expenditures is the Carnival Corporation, the cruise ship company. Over the last four years, it has spent $16.48 a share on assets but it has written down just $6.01 a share.
Donna Kush, a Union Pacific spokeswoman, said it’s common for capital spending to exceed depreciation in her industry. “When you have long-life assets, you will have a mismatch,” she said, “because we need to constantly upgrade for safety and to serve our customers.”
And David Bernstein, chief financial officer of Carnival, said that at some point his company’s growth would wind down and its capital expenditures and depreciation would be more aligned. But in the meantime, he said, it is “simplistic” to expect the two figures to match up.
Still, Mr. Olstein said consistent gulfs between capital spending and depreciation should concern investors. “If it keeps on deviating then you have to look at why,” he said. “You have to reconcile the differences or the market will do it for you.”
http://www.nytimes.com/2010/01/10/business/economy/10gret.html?ref=business
By GRETCHEN MORGENSON
Published: January 9, 2010
AFTER a rip-roaring performance in 2009, the stock market has continued its upward climb. A reason to celebrate? Sure. But also a good time to check whether a company in which you have a stake keeps its books in a way that reflects reality.
When the market is roaring and the economy isn’t, executives come under increased pressure to make sure that their companies’ results justify higher valuations. That’s why smart investors keep an eye on them, by scrutinizing how their profits are figured.
Such is the view of Robert A. Olstein, a veteran money manager who dissects financial statements to uncover stocks he thinks other investors are valuing improperly. Since 1995 he has overseen the Olstein All-Cap Value fund, and although he had a horrific 2008 (down 43 percent), his 14-year results exceed the Standard & Poor’s 500-stock index by an average of 3.25 percent annualized, net of fees.
Mr. Olstein’s 2008 troubles have made him more determined than ever to scrub companies’ results. “As the market goes higher, it becomes more important to measure the quality of corporate earnings,” he said. “You have to look behind the numbers.”
Adjustments that investors need to make now, in Mr. Olstein’s view, are a result of disparities between a company’s reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.
SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures.
To ensure growth, companies invest in things like new facilities or additional equipment. As time goes on, plants and equipment lose value — the way a car does the moment you drive it away from the dealer — and companies are allowed to write off a portion of these values each year based on management estimates of how long they will generate revenue.
The write-offs are known as depreciation, and the more a company chooses to write off, the greater its earnings are reduced. So managers interested in plumping their profits may depreciate less than they otherwise would or should. Conversely, heavy depreciation amounts can make earnings appear more depressed than the company’s cash flows indicate.
“It’s an investor’s job to determine the economic realism of management’s assumptions,” Mr. Olstein said. “There is nothing illegal here, but maybe their depreciation assumptions are unrealistic.”
One way to assess the accuracy of management’s estimates is to compare, over time, how much a company spends on new plant and equipment and how much it deducts in depreciation each year. Some of the discrepancies that emerge can be temporary, caused by the lag time between an initial investment and subsequent write-downs for depreciation.
Companies in a growth phase, for instance, will show greater capital expenditures than depreciation as they increase investments in plant and equipment.
But that should be only temporary. If such discrepancies appear on a company’s books year in and out, then investors might well question the depreciation assumptions. Investors confronted by large disparities should discount those companies’ earnings by the amount of excess capital expenditures. Such an exercise reveals how much free cash flow is available to stockholders.
Conversely, if depreciation exceeds capital expenditures, Mr. Olstein says that the earnings at these companies are actually better than they appear — and that this shows up in the cash flows.
Mr. Olstein has spotted several companies whose depreciation and capital expenditures have shown significant discrepancies in recent years. For some, heavy depreciation schedules are punishing earnings temporarily. At other companies, modest depreciation means earnings look better than cash flows.
Two retailing companies provide examples of how depreciation can hurt earnings but mask solid cash flows. They are Macy’s and Home Depot, and both are coming off recent expansion programs that are still being felt in the financials, Mr. Olstein said. He owns both in his fund.
Macy’s earned just a penny a share in the first nine months of 2009 but generated per-share cash flow of $1.41. Home Depot posted per-share profits of $1.40 for the period, while its cash flow reached $1.87 a share.
The flipside is represented by companies like railroads where depreciation is not keeping up with spending. Railroad operations are capital intensive, to be sure, but for the last four years, some companies’ expenditures have exceeded their write-downs by significant margins.
For instance, Union Pacific put $3.64 a share into capital expenditures in the first nine months of 2009. But its depreciation during that period totaled just $2.12 a share. In 2008, the company spent $5.40 a per share in capital expenditures compared with $2.69 in depreciation. Since 2005, Union Pacific has recorded $17.81 a share in capital spending but has depreciated about half that much — just $9.54 a share.
“The railroads are not bad businesses, but their stocks are overpriced when you look at what their cash flows are,” Mr. Olstein said. For the first nine months of last year, Union Pacific’s free cash flow was 99 cents a share; earnings were $2.51.
Another company with a sizable gap between depreciation and capital expenditures is the Carnival Corporation, the cruise ship company. Over the last four years, it has spent $16.48 a share on assets but it has written down just $6.01 a share.
Donna Kush, a Union Pacific spokeswoman, said it’s common for capital spending to exceed depreciation in her industry. “When you have long-life assets, you will have a mismatch,” she said, “because we need to constantly upgrade for safety and to serve our customers.”
And David Bernstein, chief financial officer of Carnival, said that at some point his company’s growth would wind down and its capital expenditures and depreciation would be more aligned. But in the meantime, he said, it is “simplistic” to expect the two figures to match up.
Still, Mr. Olstein said consistent gulfs between capital spending and depreciation should concern investors. “If it keeps on deviating then you have to look at why,” he said. “You have to reconcile the differences or the market will do it for you.”
http://www.nytimes.com/2010/01/10/business/economy/10gret.html?ref=business
So you cashed out when the economy crashed, what next?
Dear Guru,
"When the global economy crashed last year, I cashed out my investments and stuffed all the money into my mattress. But now my mattress is getting lumpy and difficult to sleep on, so I think I might invest in something. Can you suggest anything?"
$$$$
via email
The reply by Malaysian guru Kam Raslan: But I get worried when the stock markets go up like this, because it's probably more wishful thinking than reality. Whenever stock prices crash, the markets will instantly shut down, because people don't want to lose all their money. Why not shut down the markets when prices suddenly go up as well? It might save us all a lot of trouble.
The above was a email and partial reply published by the Edge magazine on January 11, 2010.
There are some lessons to learn from this investor's behaviour.
"When the global economy crashed last year, I cashed out my investments and stuffed all the money into my mattress. But now my mattress is getting lumpy and difficult to sleep on, so I think I might invest in something. Can you suggest anything?"
$$$$
via email
The reply by Malaysian guru Kam Raslan: But I get worried when the stock markets go up like this, because it's probably more wishful thinking than reality. Whenever stock prices crash, the markets will instantly shut down, because people don't want to lose all their money. Why not shut down the markets when prices suddenly go up as well? It might save us all a lot of trouble.
The above was a email and partial reply published by the Edge magazine on January 11, 2010.
There are some lessons to learn from this investor's behaviour.
Jobstreet wins Singapore deal
By Karamjit Singh
Last November, JobStreet.com announced that it had won a tender to supply the Singapore government with an online recruitment service worth S$134,000 (RM325,000) over a period of two years.
For JobStreet, it was a significant win. The deal enhances JobStreet's credibility in the Singapore market. "It was a very competitive bid and to win it against global players just shows the government's trust in us," says CFO Gregory Poarch.
There could also be potential upside in the deal as it will give the company the opportunity to work with about 100 government bodies in Singapore, each of which will have different recruitment needs.
While Singapore looks good, JobStreet is still behind the market leader, JobsDB.com.
It is also trying harder in China, where it has indirect exposure through its 17% stake in 104 Corp, the leading Taiwanese online recruitment company. "It is the dominant player in the Taiwanese market and have been in operations since around the time we started in Malaysia," says CEO Mark Chang.
With so many Taiwanese companies operating in China, 104 Corp has a firm foothold in mainland China, JobStreet has already established itself as a "strong No 1" in the Philippines. The booming business process outsourcing and contact centre industry there is estimated to create one million new jobs over the next five years. "That's good for our business," says Poarch.
Indeed, with JobStreet only collecting money from companies which post job listings on its website, it is easy to see why it likes its Philippines business. JobStreet set up in the Philippines about four years after Malaysia and has almost two million users there (meaning resumes posted on its Philippine site) and has about 70% market share, says Poarch.
JobStreet's definition of users is when someone registers on the site, posts his or her resumes and creates a profile of what jobs they would be interested in, and they must leave an email ID where JobStreet can reach them should it find a job match. But if the email bounces or is full, JobStreet does not consider them a registered user, explains Poarch. Typically it has 10% of its user base actively seeking jobs, but Poarch notes that in December, this goes down to almost zero as people are waiting for their bonuses.
How has the recession impacted this business?
The company was fortunate to have a near-record cash position and this allowed it to expand while others were scaling down or going into defensive mode.
It began to see a recovery in companies hiring since last March. In total, JobStreet had about 5.7 million users at the beginning of 2009 and ended the year with almost 6.8 million users.
This large number is akin to the circulation of a newspaper which keeps attracting companies to post their listings with JobStreet, notes Poarch.
"It is not a very sexy model but it works for us." Mark Chang couldn't have put it better.
The Edge Malaysia
January 11, 2010
Last November, JobStreet.com announced that it had won a tender to supply the Singapore government with an online recruitment service worth S$134,000 (RM325,000) over a period of two years.
For JobStreet, it was a significant win. The deal enhances JobStreet's credibility in the Singapore market. "It was a very competitive bid and to win it against global players just shows the government's trust in us," says CFO Gregory Poarch.
There could also be potential upside in the deal as it will give the company the opportunity to work with about 100 government bodies in Singapore, each of which will have different recruitment needs.
While Singapore looks good, JobStreet is still behind the market leader, JobsDB.com.
It is also trying harder in China, where it has indirect exposure through its 17% stake in 104 Corp, the leading Taiwanese online recruitment company. "It is the dominant player in the Taiwanese market and have been in operations since around the time we started in Malaysia," says CEO Mark Chang.
With so many Taiwanese companies operating in China, 104 Corp has a firm foothold in mainland China, JobStreet has already established itself as a "strong No 1" in the Philippines. The booming business process outsourcing and contact centre industry there is estimated to create one million new jobs over the next five years. "That's good for our business," says Poarch.
Indeed, with JobStreet only collecting money from companies which post job listings on its website, it is easy to see why it likes its Philippines business. JobStreet set up in the Philippines about four years after Malaysia and has almost two million users there (meaning resumes posted on its Philippine site) and has about 70% market share, says Poarch.
JobStreet's definition of users is when someone registers on the site, posts his or her resumes and creates a profile of what jobs they would be interested in, and they must leave an email ID where JobStreet can reach them should it find a job match. But if the email bounces or is full, JobStreet does not consider them a registered user, explains Poarch. Typically it has 10% of its user base actively seeking jobs, but Poarch notes that in December, this goes down to almost zero as people are waiting for their bonuses.
How has the recession impacted this business?
The company was fortunate to have a near-record cash position and this allowed it to expand while others were scaling down or going into defensive mode.
It began to see a recovery in companies hiring since last March. In total, JobStreet had about 5.7 million users at the beginning of 2009 and ended the year with almost 6.8 million users.
This large number is akin to the circulation of a newspaper which keeps attracting companies to post their listings with JobStreet, notes Poarch.
"It is not a very sexy model but it works for us." Mark Chang couldn't have put it better.
The Edge Malaysia
January 11, 2010
Tenaga inches up, tariff worries overblown
Tenaga inches up, tariff worries overblown
Tags: OSK Research | tariffs | Tenaga
Written by Joseph Chin
Friday, 08 January 2010 09:50
KUALA LUMPUR: Shares of TENAGA NASIONAL BHD [] rose in early trade on Friday, Jan 8 after OSK Investment Research said investors' worries about the tariffs were overblown.
At 9.44am, Tenaga was up three sen to RM8.23. There were 165,100 shares done.
On Thursday, Tenaga closed at RM8.20, its lowest since October last year as investors were concerned that it would not be able to get its proposed tariffs approved by the government. It hit an intra-day low of RM8.08.
"While we are maintaining our forecasts with an assumption of there being no tariff hike and coal at US$88 per tonne unchanged, we carried out a sensitivity analysis just to determine whether tariffs or cold weather would have a bigger impact on Tenaga," it said.
OSK Research said tariffs have a far larger impact on Tenaga's core net profits as well as its discounted cashflow-based fair value.
Even if cold weather does bring about a temporary spike in coal prices, the impact to Tenaga was not that significant while the lack of a tariff hike may mean some short-term knee jerk selling but ultimately this would have no impact to our earnings forecast.
"We believe that coal prices are still manageable for now and our forecasts do not include the effects of a tariff hike and therefore, any delay would also not impact on our estimates, our fair value or Buy call. Any selling should be viewed as an opportunity to Buy into weakness," it said.
http://www.theedgemalaysia.com/business-news/157055-tenaga-inches-up-tariff-worries-overblown.html
Tags: OSK Research | tariffs | Tenaga
Written by Joseph Chin
Friday, 08 January 2010 09:50
KUALA LUMPUR: Shares of TENAGA NASIONAL BHD [] rose in early trade on Friday, Jan 8 after OSK Investment Research said investors' worries about the tariffs were overblown.
At 9.44am, Tenaga was up three sen to RM8.23. There were 165,100 shares done.
On Thursday, Tenaga closed at RM8.20, its lowest since October last year as investors were concerned that it would not be able to get its proposed tariffs approved by the government. It hit an intra-day low of RM8.08.
"While we are maintaining our forecasts with an assumption of there being no tariff hike and coal at US$88 per tonne unchanged, we carried out a sensitivity analysis just to determine whether tariffs or cold weather would have a bigger impact on Tenaga," it said.
OSK Research said tariffs have a far larger impact on Tenaga's core net profits as well as its discounted cashflow-based fair value.
Even if cold weather does bring about a temporary spike in coal prices, the impact to Tenaga was not that significant while the lack of a tariff hike may mean some short-term knee jerk selling but ultimately this would have no impact to our earnings forecast.
"We believe that coal prices are still manageable for now and our forecasts do not include the effects of a tariff hike and therefore, any delay would also not impact on our estimates, our fair value or Buy call. Any selling should be viewed as an opportunity to Buy into weakness," it said.
http://www.theedgemalaysia.com/business-news/157055-tenaga-inches-up-tariff-worries-overblown.html
KNM bags RM143m contract in Thailand
KNM bags RM143m contract in Thailand
Tags: Impress Ethanol Co Ltd | KNM Group Bhd | KNM Process Systems Sdn Bhd | KNM Projects (Thailand) Co Ltd | KNMPS | KNMPT
Written by The Edge Financial Daily
Thursday, 07 January 2010 23:30
KUALA LUMPUR: KNM GROUP BHD [] has secured a RM143 million contract from Impress Ethanol Co Ltd to build a bioethanol plant in Thailand.
The contract involves the engineering, procurement, CONSTRUCTION [] and commissioning of a 200,000 litres per day cassava-based bioethanol plant in Chachaengsao, Thailand.
The new job was secured through its wholly owned subsidiary KNM Process Systems Sdn Bhd (KNMPS) and affiliated company KNM Projects (Thailand) Co Ltd (KNMPT). The project is expected to be completed within 18 months.
The order is expected to contribute positively to KNM's earnings for the financial years ending Dec 31, 2010 and Dec 31, 2011.
http://www.theedgemalaysia.com/business-news/157043-knm-bags-rm143m-contract-in-thailand.html
Tags: Impress Ethanol Co Ltd | KNM Group Bhd | KNM Process Systems Sdn Bhd | KNM Projects (Thailand) Co Ltd | KNMPS | KNMPT
Written by The Edge Financial Daily
Thursday, 07 January 2010 23:30
KUALA LUMPUR: KNM GROUP BHD [] has secured a RM143 million contract from Impress Ethanol Co Ltd to build a bioethanol plant in Thailand.
The contract involves the engineering, procurement, CONSTRUCTION [] and commissioning of a 200,000 litres per day cassava-based bioethanol plant in Chachaengsao, Thailand.
The new job was secured through its wholly owned subsidiary KNM Process Systems Sdn Bhd (KNMPS) and affiliated company KNM Projects (Thailand) Co Ltd (KNMPT). The project is expected to be completed within 18 months.
The order is expected to contribute positively to KNM's earnings for the financial years ending Dec 31, 2010 and Dec 31, 2011.
http://www.theedgemalaysia.com/business-news/157043-knm-bags-rm143m-contract-in-thailand.html
Latexx to venture into protein-free gloves
Latexx to venture into protein-free gloves
Tags: Budev | Latexx Partners | protein-free gloves
Written by Joseph Chin
Friday, 08 January 2010 19:38
KUALA LUMPUR: LATEXX PARTNERS BHD [] is teaming up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
Latexx said on Friday, Jan 8 that Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
The JV company, Total Glove Co Sdn Bhd will have a paid-up of RM9,998 or 9,998 shares of RM1 each. Latexx and Budev will subscribe for 4,999 shares each in the JV company.
Latexx said the JV would treat natural rubber latex examination and surgical gloves using its technology.
The JV company will market and distribute these gloves, which will have "non-detectable level of proteins and allergens" to prevent users from having an allergic reaction. Budev will grant an exclusive licence to the JV company for the use of the technology.
Latexx said the proposed JV would enable it to venture into a new era of technology to treat natural rubber latex examination and surgical gloves with extremely reduced levels of proteins and allergens to non-detectable level to prevent users from having an allergic reaction.
"The proposed JV will augur well for Latexx to produce innovative, value-added with excellent quality glove products in its effort to reinforce its competitive edge in the global market.
"The adoption of such new technology will be beneficial for the short and long term goals of Latexx. It is consistent with Latexx's intention to seek strategic alliances and joint ventures for synergistic benefits to enable Latexx to be competitive with innovative production methods to produce high quality gloves for its customers," it said.
http://www.theedgemalaysia.com/business-news/157118-latexx-to-venture-into-protein-free-gloves.html
Tags: Budev | Latexx Partners | protein-free gloves
Written by Joseph Chin
Friday, 08 January 2010 19:38
KUALA LUMPUR: LATEXX PARTNERS BHD [] is teaming up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
Latexx said on Friday, Jan 8 that Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
The JV company, Total Glove Co Sdn Bhd will have a paid-up of RM9,998 or 9,998 shares of RM1 each. Latexx and Budev will subscribe for 4,999 shares each in the JV company.
Latexx said the JV would treat natural rubber latex examination and surgical gloves using its technology.
The JV company will market and distribute these gloves, which will have "non-detectable level of proteins and allergens" to prevent users from having an allergic reaction. Budev will grant an exclusive licence to the JV company for the use of the technology.
Latexx said the proposed JV would enable it to venture into a new era of technology to treat natural rubber latex examination and surgical gloves with extremely reduced levels of proteins and allergens to non-detectable level to prevent users from having an allergic reaction.
"The proposed JV will augur well for Latexx to produce innovative, value-added with excellent quality glove products in its effort to reinforce its competitive edge in the global market.
"The adoption of such new technology will be beneficial for the short and long term goals of Latexx. It is consistent with Latexx's intention to seek strategic alliances and joint ventures for synergistic benefits to enable Latexx to be competitive with innovative production methods to produce high quality gloves for its customers," it said.
http://www.theedgemalaysia.com/business-news/157118-latexx-to-venture-into-protein-free-gloves.html
Why may Quek wants EONCap
How high a price Quek is willing to pay for EONCap will depend on how badly he wants to merge the two banking groups.
The biggest attraction for Quek is that a merger between HLBB and EONCap will enable the merged group to compete in an environment where competition is heating up very fast as libersailisation gathers pace.
There is, however, a view that Quek could be bulking up his banking operations domestically for bigger things in time to come. The merger will immediately raise HLBB to a higher platform, perhaps putting it in a strong position to acquire Public Bank should the opportunity arises, an industry observer notes.
Be that as it may, banking analysts say Quek has been making some really aggressive moves of late to propel both the Hong Leong Financial Group and Guoco Group to a higher platform regionally. HLBB has been making inroads into China and Vietnam, and there are rumours it is trying to get into Thailand as well. HLBB is the only Malaysian bank with a licence to operate a bank in Vietnam.
Quesk's strategy, according to an industry observer, is that for HLBB to become a significant player in the region, it has to be a bigger and stronger domestic player first. This is more so when under the new Basel 2 framework, financial strength is key. "This is why he wants scale for HLBB - it will give him the financial muscle to expand regionally... the move to buy EONCap and merge it with HLBB is all part of this bigger picture," he says.
How will Quek pay?
At RM8 a share, HLBB would have to fork out RM5.5 billion for a 100% stake in EONCap, says OSK Research. The purchase, though, may not be entirely in cash, and could be in the form of equity and cash.
The biggest attraction for Quek is that a merger between HLBB and EONCap will enable the merged group to compete in an environment where competition is heating up very fast as libersailisation gathers pace.
There is, however, a view that Quek could be bulking up his banking operations domestically for bigger things in time to come. The merger will immediately raise HLBB to a higher platform, perhaps putting it in a strong position to acquire Public Bank should the opportunity arises, an industry observer notes.
Be that as it may, banking analysts say Quek has been making some really aggressive moves of late to propel both the Hong Leong Financial Group and Guoco Group to a higher platform regionally. HLBB has been making inroads into China and Vietnam, and there are rumours it is trying to get into Thailand as well. HLBB is the only Malaysian bank with a licence to operate a bank in Vietnam.
Quesk's strategy, according to an industry observer, is that for HLBB to become a significant player in the region, it has to be a bigger and stronger domestic player first. This is more so when under the new Basel 2 framework, financial strength is key. "This is why he wants scale for HLBB - it will give him the financial muscle to expand regionally... the move to buy EONCap and merge it with HLBB is all part of this bigger picture," he says.
How will Quek pay?
At RM8 a share, HLBB would have to fork out RM5.5 billion for a 100% stake in EONCap, says OSK Research. The purchase, though, may not be entirely in cash, and could be in the form of equity and cash.
The New Year's No. 1 Investing Tip
The New Year's No. 1 Investing Tip
By Tim Hanson
December 31, 2009
Take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond. If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance.
What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.
True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.
It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).
Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.
Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.
What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.
True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.
As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.
So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).
As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.
Stock
2009 Return
America Movil
55%
Mercadolibre
217%
China Fire & Security
103%
Yongye International
425%
The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.
If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).
http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx
By Tim Hanson
December 31, 2009
Take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond. If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance.
What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.
True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.
It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway (NYSE: BRK-A), optionsXpress (Nasdaq: OXPS), and International Assets Holding (Nasdaq: IAAC).
Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.
Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.
What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.
True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.
As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.
So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil (NYSE: AMX), Mercadolibre (Nasdaq: MELI), China Fire & Security (Nasdaq: CFSG), and Yongye International (Nasdaq: YONG).
As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.
Stock
2009 Return
America Movil
55%
Mercadolibre
217%
China Fire & Security
103%
Yongye International
425%
The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.
If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).
http://www.fool.com/investing/international/2009/12/31/the-new-years-no-1-investing-tip.aspx
Warren Buffett's Priceless Investment Advice
Warren Buffett's Priceless Investment Advice
By John Reeves
December 9, 2009
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?
http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx
Read the rest of the article below...
Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.
Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).
Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?
The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.
Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.
How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.
Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.
The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.
It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.
So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.
Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.
He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.
If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.
By John Reeves
December 9, 2009
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?
http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx
Read the rest of the article below...
Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.
Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).
Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?
The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.
Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.
How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.
Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.
The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.
It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.
So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.
Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.
He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.
If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.
3 Signs of a Terrible Investment
3 Signs of a Terrible Investment
By Matt Koppenheffer
January 4, 2010 |
There's nothing wrong with fixing your focus on trying to find the next Wal-Mart (NYSE: WMT). After all, isn't that what we're here for in the first place?
But before you go diving in after that hot new small cap you found, let's take a moment to remember some of Warren Buffett's priceless investment advice: "Rule number one: Never lose money. Rule number two: Never forget rule number one."
Maybe we should rename Warren "Captain Obvious."
But as obvious as Buffett's advice may seem, it's an important and often overlooked aspect of investing. So how do we avoid losing money? I've found a few great lessons from some of the past decade's worst investments.
1. Poor business model
In Buffett's 2007 letter to Berkshire Hathaway (NYSE: BRK-A) shareholders, he described three types of businesses: the great, the good, and the gruesome. He described the "gruesome" type as a business that "grows rapidly, requires significant capital to engender the growth, and then earns little or no money."
Buffett's prime example of a gruesome business? Airlines. And he's not alone in thinking this. Robert Crandall, the former chairman of American Airlines, once said:
I've never invested in any airline. I'm an airline manager. I don't invest in airlines. And I always said to the employees of American, 'This is not an appropriate investment. It's a great place to work and it's a great company that does important work. But airlines are not an investment.'
So then it shouldn't be much of a surprise that AMR (NYSE: AMR), American Airlines' parent, would come up as a stock that has massively underperformed the market. Though American is the only legacy airline not to have declared bankruptcy, the business has performed only marginally over the years, and its voracious appetite for capital has gobbled up all of the company's cash and then some.
Investing large amounts of capital into a business isn't a bad thing in itself. However, investors need to be sure that there's a good chance that capital investments will actually translate into healthy shareholder returns.
2. Sky-high valuation
We can take our pick of overvalued stocks when looking back 10 years, but Yahoo! (Nasdaq: YHOO) seems to stick out as a prime example.
Yahoo! had a lot going for it back in 1999 -- it was a pioneer and leader in the Internet search arena, it was growing like a weed, and by the end of 1999 was actually profitable. And, in fact, Yahoo! continued to get even more profitable and managed to expand its revenue 12-fold by the end of 2008.
However, the 259 price-to-revenue multiple that investors awarded the stock at the end of 1999 was absolutely ludicrous. Even if Google (Nasdaq: GOOG) had never come along and pushed Yahoo! aside as the industry leader, it would have been nearly impossible for the company to live up to the expectations that Yahoo!'s 1999 valuation implied.
As Buffett has said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And it's never a good idea to own even a great company at an absurd price.
3. Loss of focus
What exactly was it that made E*TRADE (Nasdaq: ETFC) so successful for so many years? That's simple: It was a leader in the online brokerage market, making it easier for Fools like us to buy and sell stocks, bonds, mutual funds, and options.
However, the need for speed on the growth front, along with the pre-crash excitement in the housing and credit markets, led E*TRADE to rapidly bulk up its lending activities and investment portfolio, including feasting on food-poisoning-inducing asset-backed securities. As it turns out, E*TRADE wasn't especially good at managing these areas, and when all hell broke loose in 2008, the company found itself on the brink of extinction.
E*TRADE competitors like optionsXpress and Charles Schwab (Nasdaq: SCHW) have either stuck to their knitting or never let their noncore operations get out of control. As a result, their stocks have held up much better through the market turmoil.
Successful companies tend to be successful because they're good at their core business -- online brokerage services in E*TRADE's case. Is it possible for a company to branch out in a related area and be successful? Absolutely, but investors should always be on high alert when a company charges full throttle into uncharted waters.
The best of both worlds
Keeping these lessons in mind when evaluating an investment will help you avoid some of the next decade's worst investments, but they may also help you achieve the goal that we started with -- finding the next Wal-Mart. After all, Wal-Mart is a company with a great business model and a laser-like focus on its core low-priced-retail strategy, and it's been a fantastic investment for those who bought at a fair price.
http://www.fool.com/investing/small-cap/2010/01/04/3-signs-of-a-terrible-investment.aspx
By Matt Koppenheffer
January 4, 2010 |
There's nothing wrong with fixing your focus on trying to find the next Wal-Mart (NYSE: WMT). After all, isn't that what we're here for in the first place?
But before you go diving in after that hot new small cap you found, let's take a moment to remember some of Warren Buffett's priceless investment advice: "Rule number one: Never lose money. Rule number two: Never forget rule number one."
Maybe we should rename Warren "Captain Obvious."
But as obvious as Buffett's advice may seem, it's an important and often overlooked aspect of investing. So how do we avoid losing money? I've found a few great lessons from some of the past decade's worst investments.
1. Poor business model
In Buffett's 2007 letter to Berkshire Hathaway (NYSE: BRK-A) shareholders, he described three types of businesses: the great, the good, and the gruesome. He described the "gruesome" type as a business that "grows rapidly, requires significant capital to engender the growth, and then earns little or no money."
Buffett's prime example of a gruesome business? Airlines. And he's not alone in thinking this. Robert Crandall, the former chairman of American Airlines, once said:
I've never invested in any airline. I'm an airline manager. I don't invest in airlines. And I always said to the employees of American, 'This is not an appropriate investment. It's a great place to work and it's a great company that does important work. But airlines are not an investment.'
So then it shouldn't be much of a surprise that AMR (NYSE: AMR), American Airlines' parent, would come up as a stock that has massively underperformed the market. Though American is the only legacy airline not to have declared bankruptcy, the business has performed only marginally over the years, and its voracious appetite for capital has gobbled up all of the company's cash and then some.
Investing large amounts of capital into a business isn't a bad thing in itself. However, investors need to be sure that there's a good chance that capital investments will actually translate into healthy shareholder returns.
2. Sky-high valuation
We can take our pick of overvalued stocks when looking back 10 years, but Yahoo! (Nasdaq: YHOO) seems to stick out as a prime example.
Yahoo! had a lot going for it back in 1999 -- it was a pioneer and leader in the Internet search arena, it was growing like a weed, and by the end of 1999 was actually profitable. And, in fact, Yahoo! continued to get even more profitable and managed to expand its revenue 12-fold by the end of 2008.
However, the 259 price-to-revenue multiple that investors awarded the stock at the end of 1999 was absolutely ludicrous. Even if Google (Nasdaq: GOOG) had never come along and pushed Yahoo! aside as the industry leader, it would have been nearly impossible for the company to live up to the expectations that Yahoo!'s 1999 valuation implied.
As Buffett has said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And it's never a good idea to own even a great company at an absurd price.
3. Loss of focus
What exactly was it that made E*TRADE (Nasdaq: ETFC) so successful for so many years? That's simple: It was a leader in the online brokerage market, making it easier for Fools like us to buy and sell stocks, bonds, mutual funds, and options.
However, the need for speed on the growth front, along with the pre-crash excitement in the housing and credit markets, led E*TRADE to rapidly bulk up its lending activities and investment portfolio, including feasting on food-poisoning-inducing asset-backed securities. As it turns out, E*TRADE wasn't especially good at managing these areas, and when all hell broke loose in 2008, the company found itself on the brink of extinction.
E*TRADE competitors like optionsXpress and Charles Schwab (Nasdaq: SCHW) have either stuck to their knitting or never let their noncore operations get out of control. As a result, their stocks have held up much better through the market turmoil.
Successful companies tend to be successful because they're good at their core business -- online brokerage services in E*TRADE's case. Is it possible for a company to branch out in a related area and be successful? Absolutely, but investors should always be on high alert when a company charges full throttle into uncharted waters.
The best of both worlds
Keeping these lessons in mind when evaluating an investment will help you avoid some of the next decade's worst investments, but they may also help you achieve the goal that we started with -- finding the next Wal-Mart. After all, Wal-Mart is a company with a great business model and a laser-like focus on its core low-priced-retail strategy, and it's been a fantastic investment for those who bought at a fair price.
http://www.fool.com/investing/small-cap/2010/01/04/3-signs-of-a-terrible-investment.aspx
Talk about laying your reputation on the line!
Nouriel Roubini's Worst Call Ever
http://www.fool.com/investing/general/2010/01/04/nouriel-roubinis-worst-call-ever.aspx
This article has a good discussion on investing in gold. There are people arguing for and others arguing against. Investing opinions are always so interesting. Depending on your frame of thinking, you are either a bull or a bear. It is difficult to predict the market. Economists have a tough job to make the call. It is a tougher job to expect them to be right all the time!
Here is a comment by a reader:
"Gold is an obsession. It can never be 'fairly' valued as demand cannot be measured in terms of physical need. The demand for gold has much more to do with the level of fear investors are feeling than with any concievable fundamentals.
I can look a company's balance sheet, listen to its conference calls, chat with fellow Fools and decide on the basis of facts whether its current stock price is fair or not.
Compare that to trying to project inflation, US government policy changes, and the reserve needs of opaque central banks in Asia. All of those things will affect the future price of gold.
Those of us who bought healthy companies in the spring of 2009 at bargain prices are already reaping the gains. Buying gold now is betting on the future $2k price which in turn is betting on future economic conditions and future investor sentiment. That's a lot of "ifs"."
Enjoy the rest of the article.
http://www.fool.com/investing/general/2010/01/04/nouriel-roubinis-worst-call-ever.aspx
This article has a good discussion on investing in gold. There are people arguing for and others arguing against. Investing opinions are always so interesting. Depending on your frame of thinking, you are either a bull or a bear. It is difficult to predict the market. Economists have a tough job to make the call. It is a tougher job to expect them to be right all the time!
Here is a comment by a reader:
"Gold is an obsession. It can never be 'fairly' valued as demand cannot be measured in terms of physical need. The demand for gold has much more to do with the level of fear investors are feeling than with any concievable fundamentals.
I can look a company's balance sheet, listen to its conference calls, chat with fellow Fools and decide on the basis of facts whether its current stock price is fair or not.
Compare that to trying to project inflation, US government policy changes, and the reserve needs of opaque central banks in Asia. All of those things will affect the future price of gold.
Those of us who bought healthy companies in the spring of 2009 at bargain prices are already reaping the gains. Buying gold now is betting on the future $2k price which in turn is betting on future economic conditions and future investor sentiment. That's a lot of "ifs"."
Enjoy the rest of the article.
Saturday, 9 January 2010
Understanding Sales Growth
In general, sales growth stems from one of four areas:
1. Selling more goods and services
The easiest way to grow is to do whatever you're doing better than your competitors, sell more products than they do, and steal market share from them.
2. Raising prices
Raising prices can also be a great way for companies to boost their top lines, although it takes a strong brand or a captive market to be able to do it successfully for very long.
3. Selling new goods or services
4. Buying another company
The fourth source of sales growth - acquisitions - deserves special attention. Unfortunately, the historical track record for acquisitions is mixed. Most acquisitions fail to produce positive gains for shareholders of the acquiring firm, and one study showed that even acquisitions of small, related businesses - which you'd think would have a good chance of working out well - succeeded only about half the time.
For the investor, the goal of this type of analysis is simply to know why a company is growing.
For example, in a beer company, you would want to know
The easiest way to grow is to do whatever you're doing better than your competitors, sell more products than they do, and steal market share from them.
2. Raising prices
If there's not much more market share to be taken or your customers are very price-sensitive, you can expand your market by selling products that you hadn't sold before. Investigate new markets.
For example, in a beer company, you would want to know
- how much growth is coming from price increases (more expensive beer),
- how much is coming from volume increase (more beer drinkers), and
- how much is coming from market share growth (more company's brand drinkers).
The 4 Sources of Growth
In the long run, sales growth drives earnings growth.
In general, sales growth stems from one of four areas:
1. Selling more goods and services
2. Raising prices
3. Selling new goods or services
4. Buying another company
Although profit growths can outpace sales growth for a while if a company is able to do an excellent job cutting costs or fiddling with the financial statements, this kind of situation simply isn't sustainable over the long haul - there's a limit to how much costs can be cut, and there are only so many financial tricks that companies can use to boost the bottom line.
In general, sales growth stems from one of four areas:
1. Selling more goods and services
2. Raising prices
3. Selling new goods or services
4. Buying another company
Although profit growths can outpace sales growth for a while if a company is able to do an excellent job cutting costs or fiddling with the financial statements, this kind of situation simply isn't sustainable over the long haul - there's a limit to how much costs can be cut, and there are only so many financial tricks that companies can use to boost the bottom line.
Source and Quality of a company's growth
In search of high growth, we cannot just look at a series of past growth rates and assume that they will predict the future - if only investing were that easy!
It is critical to investigate the SOURCE of a company's growth rate and assess the QUALITY of the growth.
HIGH QUALITY GROWTH that comes from selling more goods and entering new markets is more sustainable than LOW QUALITY GROWTH that's generated by cost-cutting or accounting tricks.
It is critical to investigate the SOURCE of a company's growth rate and assess the QUALITY of the growth.
HIGH QUALITY GROWTH that comes from selling more goods and entering new markets is more sustainable than LOW QUALITY GROWTH that's generated by cost-cutting or accounting tricks.
High growth rates are heady stuff and not very persistent over a series of years
The allure of strong growth has probably led more investors into temptation than anything else.
High growth rates are heady stuff - a company that manages to increase its earnings at 15% for 5 years will double its profits, and who wouldn't want to do that?
Unfortunately, a slew of academic research shows that strong earnings growth is NOT VERY PERSISTENT over a series of years; in other words, a track record of high earnings growth does not necessarily lead to high earnings growth in the future.
Why is this?
High growth rates are heady stuff - a company that manages to increase its earnings at 15% for 5 years will double its profits, and who wouldn't want to do that?
Unfortunately, a slew of academic research shows that strong earnings growth is NOT VERY PERSISTENT over a series of years; in other words, a track record of high earnings growth does not necessarily lead to high earnings growth in the future.
Why is this?
- Because the total economic pie is growing only so fast - after all, the long-run aggregate growth of corporate earnings has historically been slightly slower than the growth of the economy - strong and rapidly growing profits attract intense competition.
- Companies that are growing fast and piling up profits soon find other companies trying to get a piece of the action for themselves.
Friday, 8 January 2010
Value of Equity Offerings in Malaysia in 2009
Malaysia equity offerings
Year RM mil (No. of issue) % chg
2009 15,234 (26) 857.51%
2008 1,591 (24) -81.22%
2007 8,472 (48) 130.84%
2006 3,670 (45) -8.14%
2005 3,995 (86) -19.71%
2004 4,976 (72) 62.67%
2003 3,059 (49)
Source: Bloomberg
Malaysia's equity market expanded more than eight times to RM 15.23 billion year-on-year in 2009, helped by Maxis Bhd's mega initial public offering (IPO) as well as the liberalisation of bumiputera equity rules. This came after a 81.2% year-on-year slump in activity to RM 1.59 billion in 2008 from the pre-Lehman collapse heydays of 2007 that saw RM 8.47 billion raised from 48 issuances.
"The sharp increase in equity market activity could be attributed to the easing of listing regulations on Bursa Malaysia. This encourages more foreign companies to list on Bursa Malaysia, which saw three Chinese companies listed in 2009," Bloomberg said in its latest annual review of Malaysia's capital market.
The number of equity offerings was only up marginally to 26 in 2009 from 24 in 2008.
CIMB topped 2009's list of investment banks that sold and underwrote a company's securities in Malaysia.
Malaysian corporate bond
Total Malaysian corporate bond issuances:
2009 RM 52.46 billion (+8.25% from last year)
2008 RM 48.63 billion
Malaysian Islamic Bond Issuances (component of Total Malaysian corporate bond issuances)
2009 RM 32.17 billion (+42.5% from last year)
The 42.5% jump in Malaysian Islamic bond issuances last year made up for the 21.42% slide in corporate bond issuances in 2009.
The volume of syndicated loans market in Malaysia, meanwhile, slumped.
2009 US$4.55 billion ( -53.44% from last year)
2008 US$9.77 billion
The Edge Financial Daily
2008 1,591 (24) -81.22%
2007 8,472 (48) 130.84%
2006 3,670 (45) -8.14%
2005 3,995 (86) -19.71%
2004 4,976 (72) 62.67%
2003 3,059 (49)
- CIMB topped the 2009 Malaysian Ringgit Bonds table, having arranged issuances worth RM 18.63 billion in proceeds.
- CIMB also topped the 2009 Malaysian Ringgit Islamic Bonds table with RM 12.61 billion in proceeds arranged, cornering 39.2% market share, according to data from Bloomberg's Malaysia Capital Markets Review.
2009 RM 52.46 billion (+8.25% from last year)
2008 RM 48.63 billion
2009 RM 32.17 billion (+42.5% from last year)
Syndicated Loans Market
2009 US$4.55 billion ( -53.44% from last year)
2008 US$9.77 billion
The Edge Financial Daily
Upward trend intact, stock picking is key
KLCI Valuation
Support from strong growth outlook and positive market drivers
Longer term uptrend intact. The KLCI is now trading at 15 times 2010 earnings (above its post-crisis average of 14 times) and 1.8 times book value (above its post-crisis average of 1.7 times).
Following strong GDP growth in the last two quarters, we upgraded our projected GDP growth to 5% for 2010, a turnaround from -2.4% in 2009. Corporate earnings in the last two quarters have been upgraded by 6.7% for 2009 and 11.9% for 2010.
With that, we expect 2010 earnings to exceed pre-crisis levels. On the back of strong growth outlook and positive market drivers, the longer-term upward trend is intact. And riding on strong liquidity, multiples could be higher over the longer term.
Our end-2010 KLCI target of 1,448 is based on higher 16 times 2011 earnings, achieved in the 2007 upswing. KLCI's valuations remain higher compared to regional markets. This could result in Malaysia lagging regional markets. This could result in Malaysia lagging regional markets in an upswing.
That said, the stellar 50% gain from the March low is likely to result in intermittent profit-taking. In 1998 and 2001, the market rebounded by 26% - 136% over five months.
After the initial rebound, the KLCI corrected 15% - 20% over two months in both cases. In this recovery, the KLCI is up 50% from March, and the sharpest correction since was only a 6% drop. In 1998 and 2001, the market went on to reach new record highs, post-correction.
Ref: HwangDBS Vickers Research
Effect of possible Ringgit appreciation
By end-2010, we expect the ringgit to appreciate about 5% against the US dollar (to RM 3.24/USD).
Beneficiaries will include:
Losers will include:
The prospect of an appreciating ringgit could further boost returns for foreign investors.
Ref: HwangDBS Vickers Research
Beneficiaries will include:
- aviation (MAS, Air Asia) and
- the steel sector (Southern Steel, Kinsteel),
Losers will include:
- exporters (Evergreen Fibreboard) and
- MISC.
The prospect of an appreciating ringgit could further boost returns for foreign investors.
Ref: HwangDBS Vickers Research
Low Foreign Ownership in Malaysian Stock Market
Foreign investors were conspicuosly absent from the scene whenthe Malaysian stock market jumped 50% between mid-March 2009 and now.
This was evident in the insignificant level of trading activity by foreign investors (just 25% of trading value in Jan-Sept 2009) and the persistent net portfolio investment quarterly outflows (since 3Q07) with foreign ownership standing at a five-year low.
That may soon change. Among the speculated reasons are:
Ref: HwangDBS Vickers Research
- Coming off from a depleted base, foreign funds could trickle back into Malaysia, especially if global equities turn increasingly volatile ahead.
- As the risk-reward profile tilts in the opposite direction because of stretched valuations, strategiests may be tempted to make a gradual tactical switch to more defensive low-beta markets like Malaysia.
- The prospect of an appreciating rinngit is an added appeal for investors in search of incremental investmen returns.
Some under-owned stocks - with foreign shareholdings far below their recent peaks - that could increasingly come under the investment radar of foreign investors again are:
- CIMB (33% foreign shareholding in June 09),
- IJM Corp (34%),
- MRCB (19%),
- SP Setia (28%) and
- Tenaga (11%)
Ref: HwangDBS Vickers Research
Best Performers in the KLCI
From March 09 low (%)
Genting 122
AMMB 111
CIMB Group 107
Axiata Group 86
Maybank 86
Astro 84
MMC Corp 79
PPB Group 70
Public Bank 58
KL Kepong 57
Hong Leong Bank 56
Parkson Holdings 53
IOI Corp 50
RHB Capital 48
KLCI 50
From 4Q09 (%)
Hong Leong Bank 24
AMMB 16
CIMB Group 15
KL Kepong 13
Tanjong 10
Public Bank 7
Sime Darby 7
IOI Corp 4
Tenaga Nasional 4
PPB Group 4
RHB Capital 3
Genting 3
Digi.com 3
MAS 2
Parkson Holdings 2
KLCI 5
Biggest contributors to the KLCI's gain from March 2009 low
39% Banks
25% Plantation
10% Gaming
8% Telco
7% Power
7% Others
Source: DBS Vickers, Bloomberg
Genting 122
AMMB 111
CIMB Group 107
Axiata Group 86
Maybank 86
Astro 84
MMC Corp 79
PPB Group 70
Public Bank 58
KL Kepong 57
Hong Leong Bank 56
Parkson Holdings 53
IOI Corp 50
RHB Capital 48
KLCI 50
From 4Q09 (%)
Hong Leong Bank 24
AMMB 16
CIMB Group 15
KL Kepong 13
Tanjong 10
Public Bank 7
Sime Darby 7
IOI Corp 4
Tenaga Nasional 4
PPB Group 4
RHB Capital 3
Genting 3
Digi.com 3
MAS 2
Parkson Holdings 2
KLCI 5
Biggest contributors to the KLCI's gain from March 2009 low
39% Banks
25% Plantation
10% Gaming
8% Telco
7% Power
7% Others
Source: DBS Vickers, Bloomberg
Thursday, 7 January 2010
More gloves shipped at higher average selling prices
Supermax says glove demand strong, profit up
Written by Reuters
Thursday, 07 January 2010 20:34
KUALA LUMPUR: Malaysia's No 2 rubber glove maker Supermax expects another year of strong profit growth as fears about a resurgence of the H1N1 flu fuel demand for its products, a top executive told Reuters today.
Supermax may upgrade its earnings target for 2010 when it announces its full-year earnings for 2009 in February, managing director Datuk Seri Stanley Thai said.
The glove maker had previously guided for a net profit of RM133 million for 2010.
"2010 will continue to be a good year for the glove industry. We expect handsome profits," Thai said in a telephone interview.
Supermax has already received glove orders that will keep its factories busy for the next four to five months, he said.
Thai also said fourth-quarter net profit will be better than the third-quarter.
"We shipped more gloves at higher average selling prices in the fourth-quarter than the third-quarter," he said. — Reuters
Written by Reuters
Thursday, 07 January 2010 20:34
KUALA LUMPUR: Malaysia's No 2 rubber glove maker Supermax expects another year of strong profit growth as fears about a resurgence of the H1N1 flu fuel demand for its products, a top executive told Reuters today.
Supermax may upgrade its earnings target for 2010 when it announces its full-year earnings for 2009 in February, managing director Datuk Seri Stanley Thai said.
The glove maker had previously guided for a net profit of RM133 million for 2010.
"2010 will continue to be a good year for the glove industry. We expect handsome profits," Thai said in a telephone interview.
Supermax has already received glove orders that will keep its factories busy for the next four to five months, he said.
Thai also said fourth-quarter net profit will be better than the third-quarter.
"We shipped more gloves at higher average selling prices in the fourth-quarter than the third-quarter," he said. — Reuters
Focus on the companies with Economic Moats
Economic moats are long-term competitive advantages that allow companies to earn oversized profits over time. These are the companies you should focus your attention on.
There are 4 main types of economic moats:
The more types of economic moats a company has, the better.
The longer a firm can sustain its competitive advantage, the wider its economic moat.
The Bottom Line
There are 4 main types of economic moats:
- Low-cost producer or Economies of Scale
- High switching costs
- Network effect
- Intangible assets
The more types of economic moats a company has, the better.
The longer a firm can sustain its competitive advantage, the wider its economic moat.
The Bottom Line
- While having these four types of of moats, or competitive advantages, as guidelines is helpful, there is still a lot of art to determining whether a firm has a moat.
- At the heart of it, the harder it is for a firm's advantage to be imitated, the more likely it is to have a barrier to entry in its industry and a defensible source of profit.
Looking for the firm with an economic moat (Evaluating Profitability)
The first thing we need to do is look for hard evidence that a firm has an economic moat by examining its financial results. (Figuring out whether a company might have a moat in the FUTURE is much tougher.)
What we are looking for are firms that can earn profits (ROIC) in excess of their cost of capital (WACC) - companies that can generate substantial cash relative to the amount of investments they make.
Use the metrics in the following questions to evaluate profitability:
1. Does the firm generate free cash flow? If so, how much?
Firms that generate free cash flow essentially have money left over after reinvesting whatever they need to keep their businesses humming along. In a sense, free cash flow is money that could be extracted from the firm every year without damaging the core business.
FCF Margin: Divide FCF by sales (or revenues). This tells what proportion of each dollar in revenue the firm is able to convert into excess profits.
If a firm's FCF/Sales is around 5% or better, you've found a cash machine.
Strong FCF is an excellent sign that a firm has an economic moat.
(FCF/Total Capital Employed or FCF/Enterprice Value are some measures.)
2. What are the firm's net margins?
Net margins look at probability from another angle.
Net margin = net income/ Sales
It tells how much profits the firm generates per dollar of sales.
In general, firms that can post net margins above 15% are doing something right.
3. What are the returns on equity?
ROE = net income/shareholders' equity
It measures profits per dollar of the capital shareholders have invested in a company.
Although ROE does have some flaws -it still works well as one tool for assessing overall profitability.
As a rule of thumb, firms that are able to consistently post ROEs above 15% are generating solid returns on shareholders' money, which means they're likely to have economic moats.
4. What are returns on assets?
ROA = (net income + Aftertax Interest Expense )/ firm's average assets
It measures how efficient a firm is at translating its assets into profits.
Use 6% to 7% as a rough benchmark - if a firm is able to consistently post ROAs above these rates, it may have some competitive advantage over its peers.
The company's aftertax interest expense is added back to net income in the calculation. Why is that? ROA measures the profitability a company achieves on all of its assets, regardless if they are financed by equity holders or debtholders; therefore, we add back in what the debtholders are charging the company to borrow money.
Study these metrics over 5 or 10 years
When looking at all four of these metrics, look at more than just one year.
A firm that has consistently cranked out solid ROEs, ROA, good FCF, and decent net margins over a number of years is much more likely to truly have an economic moat than a firm with more erratic results.
Five years is the absolute minimum time period for evaluation, 10 years is even better, if you can.
Consistency is Important
Consistency is important when evaluating companies, because it's the ability to keep competitors at bay for an extended period of time - not just for a year or two - that really makes a firm valuable.
These benchmarks are rules of thumb, not hard-and-fast cut-offs.
Comparing firms with industry averages is always a good idea, as is examining the trend in profitability metrics - are they getting higher or lower?
There is a more sophisticated way of measuring a firm's profitability that involves calculating return on invested capital (ROIC), estimating a weighted average cost of capital (WACC), and then looking at the difference between the two.
Using a combination of FCF, ROE, ROE and net margins will steer you in the right direction.
Additional notes:
DuPont Equation
ROA = Net Profits / Average Assets
ROA = Asset Turnover x Net Profit Margin
ROA
= (Sales/Average Assets) x (Net Profits/Sales)
= Net Profits/Average Assets
ROE = Net Profits / Average Shareholder's Equity
ROE = Asset Turnover x Net Profit Margin x Asset/Equity Ratio*
ROE
= (Sales/Average Assets) x (Net Profits/Sales) x (Average Assets/Average Equity)
= Net Profits./ Average Equity
*Asset/Equity Ratio = Leverage
What we are looking for are firms that can earn profits (ROIC) in excess of their cost of capital (WACC) - companies that can generate substantial cash relative to the amount of investments they make.
Use the metrics in the following questions to evaluate profitability:
1. Does the firm generate free cash flow? If so, how much?
Firms that generate free cash flow essentially have money left over after reinvesting whatever they need to keep their businesses humming along. In a sense, free cash flow is money that could be extracted from the firm every year without damaging the core business.
FCF Margin: Divide FCF by sales (or revenues). This tells what proportion of each dollar in revenue the firm is able to convert into excess profits.
If a firm's FCF/Sales is around 5% or better, you've found a cash machine.
Strong FCF is an excellent sign that a firm has an economic moat.
(FCF/Total Capital Employed or FCF/Enterprice Value are some measures.)
2. What are the firm's net margins?
Net margins look at probability from another angle.
Net margin = net income/ Sales
It tells how much profits the firm generates per dollar of sales.
In general, firms that can post net margins above 15% are doing something right.
3. What are the returns on equity?
ROE = net income/shareholders' equity
It measures profits per dollar of the capital shareholders have invested in a company.
Although ROE does have some flaws -it still works well as one tool for assessing overall profitability.
As a rule of thumb, firms that are able to consistently post ROEs above 15% are generating solid returns on shareholders' money, which means they're likely to have economic moats.
4. What are returns on assets?
ROA = (net income + Aftertax Interest Expense )/ firm's average assets
It measures how efficient a firm is at translating its assets into profits.
Use 6% to 7% as a rough benchmark - if a firm is able to consistently post ROAs above these rates, it may have some competitive advantage over its peers.
The company's aftertax interest expense is added back to net income in the calculation. Why is that? ROA measures the profitability a company achieves on all of its assets, regardless if they are financed by equity holders or debtholders; therefore, we add back in what the debtholders are charging the company to borrow money.
Study these metrics over 5 or 10 years
When looking at all four of these metrics, look at more than just one year.
A firm that has consistently cranked out solid ROEs, ROA, good FCF, and decent net margins over a number of years is much more likely to truly have an economic moat than a firm with more erratic results.
Five years is the absolute minimum time period for evaluation, 10 years is even better, if you can.
Consistency is Important
Consistency is important when evaluating companies, because it's the ability to keep competitors at bay for an extended period of time - not just for a year or two - that really makes a firm valuable.
These benchmarks are rules of thumb, not hard-and-fast cut-offs.
Comparing firms with industry averages is always a good idea, as is examining the trend in profitability metrics - are they getting higher or lower?
There is a more sophisticated way of measuring a firm's profitability that involves calculating return on invested capital (ROIC), estimating a weighted average cost of capital (WACC), and then looking at the difference between the two.
Using a combination of FCF, ROE, ROE and net margins will steer you in the right direction.
Additional notes:
DuPont Equation
ROA = Net Profits / Average Assets
ROA = Asset Turnover x Net Profit Margin
ROA
= (Sales/Average Assets) x (Net Profits/Sales)
= Net Profits/Average Assets
ROE = Net Profits / Average Shareholder's Equity
ROE = Asset Turnover x Net Profit Margin x Asset/Equity Ratio*
ROE
= (Sales/Average Assets) x (Net Profits/Sales) x (Average Assets/Average Equity)
= Net Profits./ Average Equity
*Asset/Equity Ratio = Leverage
Tuesday, 5 January 2010
UMW Hldgs raised to 'outperform'
Published: 2010/01/05
UMW Holdings Bhd, a Malaysian assembler of Toyota cars, was upgraded to “outperform” from “neutral” at CIMB Investment Bank Bhd which sees auto sales gradually recovering in the country.
Its share price forecast was raised to RM8.10 from RM7.25, the research house said in a report today. -- Bloomberg
UMW Holdings Bhd, a Malaysian assembler of Toyota cars, was upgraded to “outperform” from “neutral” at CIMB Investment Bank Bhd which sees auto sales gradually recovering in the country.
Its share price forecast was raised to RM8.10 from RM7.25, the research house said in a report today. -- Bloomberg
InsiderAsia model portfolio
InsiderAsia model portfolio
Written by InsiderAsia
Monday, 04 January 2010 00:00
Our basket of 18 stocks fared extremely well last week, surging 3.2% for the week compared with the FBM KLCI's 0.7% rise. Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 2.4% to RM524,875.
Our model portfolio's total value and returns represent a significant achievement compared with our initial capital of just RM160,000. We started the model portfolio on March 3, 2003.
Our total profits are very substantial at RM364,875. Of this amount, RM223,866 has already been realised from earlier sales.
Since its inception, our model portfolio has registered a hefty return of 228% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 96.8% over the same period, even though it has been less representative of the broader market's performance. Plus, our portfolio holds a significant amount of non-interest yielding cash at all times for prudence sake.
We currently have surplus cash of RM127,815 for future investments, and the portfolio's equity weighting currently stands at 76%, which we are comfortable with.
Last week, we had 14 gaining stocks and four losing ones.
HELP International Corp was the week's biggest gainer, rising 11.6% to RM1.92 after reporting a sterling set of final results for FY Oct 2009 that saw net profit rise 31% to a record RM15.5 million despite the recession last year. This continues its double-digit growth trend underscores the education company's resilience and strong branding.
Other major gainers for the week include Muhibbah (up 7%), Faber Group (up 5.2%), Notion VTec (up 5%), Dijaya and Selangor PROPERTIES [] (both up 4.8%). The week's losers were marginal, led by 3A Resources (down 2.6%) and MyEG (down 1.1%)
We are keeping our portfolio unchanged.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
http://www.theedgemalaysia.com/business-news/156667-insiderasia-model-portfolio.html
Written by InsiderAsia
Monday, 04 January 2010 00:00
From March 2003 to January 2010 ( a period of 6.75 years), this portfolio has returned a CAGR of 19.2%.
Portfolio review
Our basket of 18 stocks fared extremely well last week, surging 3.2% for the week compared with the FBM KLCI's 0.7% rise. Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 2.4% to RM524,875.
Our model portfolio's total value and returns represent a significant achievement compared with our initial capital of just RM160,000. We started the model portfolio on March 3, 2003.
Our total profits are very substantial at RM364,875. Of this amount, RM223,866 has already been realised from earlier sales.
Since its inception, our model portfolio has registered a hefty return of 228% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 96.8% over the same period, even though it has been less representative of the broader market's performance. Plus, our portfolio holds a significant amount of non-interest yielding cash at all times for prudence sake.
We currently have surplus cash of RM127,815 for future investments, and the portfolio's equity weighting currently stands at 76%, which we are comfortable with.
Last week, we had 14 gaining stocks and four losing ones.
HELP International Corp was the week's biggest gainer, rising 11.6% to RM1.92 after reporting a sterling set of final results for FY Oct 2009 that saw net profit rise 31% to a record RM15.5 million despite the recession last year. This continues its double-digit growth trend underscores the education company's resilience and strong branding.
Other major gainers for the week include Muhibbah (up 7%), Faber Group (up 5.2%), Notion VTec (up 5%), Dijaya and Selangor PROPERTIES [] (both up 4.8%). The week's losers were marginal, led by 3A Resources (down 2.6%) and MyEG (down 1.1%)
We are keeping our portfolio unchanged.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
http://www.theedgemalaysia.com/business-news/156667-insiderasia-model-portfolio.html
Cash flow is what matters, not earnings.
Cash flow is the true measure of a company's financial performance, not reported earnings per share.
http://spreadsheets.google.com/pub?key=tN-V5a_7mURGCfW1tcwuQPw&output=html
http://spreadsheets.google.com/pub?key=tufSQpXxzs0bnXVndLmEitA&output=html
At the end of the day, cash flow is what matters, not earnings.
For a host of reasons, accounting-based earnings per share can be made to say just about whatever a company's management wants them to, but cash flow is much harder to fiddle with.
The statement of cash flows can yield a ton of insight into the true health of a business, and you can spot a lot of blowups before they happen by simply watching the trend of operating cash flow relative to earnings. One hint: If operating cash flows stagnate or shrink even as earnings grow, it's likely that something is rotten.
Also read:
Using Yield-based measures to value stocks: Say Yes to Yield
http://myinvestingnotes.blogspot.com/2010/01/using-yield-based-measures-to-value.html
http://spreadsheets.google.com/pub?key=tN-V5a_7mURGCfW1tcwuQPw&output=html
http://spreadsheets.google.com/pub?key=tufSQpXxzs0bnXVndLmEitA&output=html
At the end of the day, cash flow is what matters, not earnings.
For a host of reasons, accounting-based earnings per share can be made to say just about whatever a company's management wants them to, but cash flow is much harder to fiddle with.
The statement of cash flows can yield a ton of insight into the true health of a business, and you can spot a lot of blowups before they happen by simply watching the trend of operating cash flow relative to earnings. One hint: If operating cash flows stagnate or shrink even as earnings grow, it's likely that something is rotten.
Also read:
Using Yield-based measures to value stocks: Say Yes to Yield
http://myinvestingnotes.blogspot.com/2010/01/using-yield-based-measures-to-value.html
Monday, 4 January 2010
Never forget that buying a stock is a major purchase and should be treated like one
You wouldn't buy and sell your car, your refrigerator, or your DVD player 50 times a year.
Investing should be a long-term commitment because short-term trading means that you're playing a loser's game.
The costs really begin to add up - both the taxes, the brokerage costs, and the spread - and create an almost insurmontable hurdle to good performance.
The amount you rack up in commissions and other expenses is money that can't compound for you next year.
Investing should be a long-term commitment because short-term trading means that you're playing a loser's game.
The costs really begin to add up - both the taxes, the brokerage costs, and the spread - and create an almost insurmontable hurdle to good performance.
The amount you rack up in commissions and other expenses is money that can't compound for you next year.
Sunday, 3 January 2010
Conservative valuation is a crucial part of the investment process.
The key thing to remember for now is simply that if you don't use discipline and conservatism in figuring out the prices you're willing to pay for stocks, you'll regret it eventually. Valuation is a crucial part of the investment process.
One simple way to get a feel for a stock's valuation is to look at its historical price/earnings ratio (P/E) - a measure of how much you're paying for every dollar of the firm's earnings - over the past 10 years or more. If a stock is currently selling at a P/E ratio of 30 and its range over the past 10 years has been between 15 and 33, you're obviously buying in at the high end of historical norms.
To justify paying today's price, you have to be plenty confident that the company's outlook is better today than it was over the past 10 years. Occasionally, this is the case, but most of the time when a company's valuation is significantly higher now than in the past, watch out. The market is probably overestimating growth prospects, and you'll likely be left with a stock that underperforms the market over the coming years.
One simple way to get a feel for a stock's valuation is to look at its historical price/earnings ratio (P/E) - a measure of how much you're paying for every dollar of the firm's earnings - over the past 10 years or more. If a stock is currently selling at a P/E ratio of 30 and its range over the past 10 years has been between 15 and 33, you're obviously buying in at the high end of historical norms.
To justify paying today's price, you have to be plenty confident that the company's outlook is better today than it was over the past 10 years. Occasionally, this is the case, but most of the time when a company's valuation is significantly higher now than in the past, watch out. The market is probably overestimating growth prospects, and you'll likely be left with a stock that underperforms the market over the coming years.
Patience
The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.
Stick to your philosophy and valuation discipline. Be patient.
Stick to your philosophy and valuation discipline. Be patient.
Stick to a valuation discipline: For every Wal-Mart, there's a Woolworth's
"If you don't buy today, you might miss the boat forever on the stock."
Sticking to a valuation discipline is tough for many people because they're worried that if they don't buy today, they might miss the boat forever on the stock.
That's certainly a possibility - but it is also a possibility that the company will hit a financial speed bump and send the shares tumbling. The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.
As for the few that jsut keep going straight up year after year - well, let's just say that NOT MAKING money is a lot less painful than LOSING money you already have. For every Wal-Mart, there's a Woolworth's,
A great company can be a lousy investment. Always incorporate a margin of safety.
The difference between the market's price and our estimate of value is the margin of safety.
The goal of any investor should be to buy stocks for less than they're really worth.
Unfortunately, it is easy for estimates of stock's value to be too optimistic - the future has a nasty way of turning out worse than expected. We can compensate for this all-too-human tendency by buying stocks only when they're trading for substantially less than our estimate of what they're worth (margin of safety).
For example:
There is no question that Coke had a solid competitive position in the late 1990s, and we can make a strong argument that it still does. But those who paid 50x earnings for Coke's shares have had a tough time seeing a decent return on their investment because they ignored a critical part of the stock-picking process: having a margin of safety.
Not only was Coke's stock expensive, but even if you thought Coke was worth 50x earnings, it didn't make sense to pay full price - after all, the assumptions that led you to think Coke was worth such a high price might have been too optimistic. Better to have incorporated a margin of safety by paying, for example, only 40x earnings in case things went awry.
The goal of any investor should be to buy stocks for less than they're really worth.
Unfortunately, it is easy for estimates of stock's value to be too optimistic - the future has a nasty way of turning out worse than expected. We can compensate for this all-too-human tendency by buying stocks only when they're trading for substantially less than our estimate of what they're worth (margin of safety).
For example:
There is no question that Coke had a solid competitive position in the late 1990s, and we can make a strong argument that it still does. But those who paid 50x earnings for Coke's shares have had a tough time seeing a decent return on their investment because they ignored a critical part of the stock-picking process: having a margin of safety.
Not only was Coke's stock expensive, but even if you thought Coke was worth 50x earnings, it didn't make sense to pay full price - after all, the assumptions that led you to think Coke was worth such a high price might have been too optimistic. Better to have incorporated a margin of safety by paying, for example, only 40x earnings in case things went awry.
Always include a margin of safety into your purchase price
Always include a margin of safety into the price you're willing to pay for a stock.
If you later realize you overestimated the company's prospects, you'll have a built-in cushion that will mitigate your investment losses.
The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonably predictabvle earnings.
For example:
If you later realize you overestimated the company's prospects, you'll have a built-in cushion that will mitigate your investment losses.
The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonably predictabvle earnings.
For example:
- a 20% margin of safety would be appropriate for a stable firm such as Wal-Mart, but
- you would want a substantially larger one for a firm such as Abercrombie & Fitch, which is driven by the whims of teen fashion.
"A great company may not be a great investment."
You can't just go out and pay whatever the market is asking for the stock because the market might be demanding too high a price. And if the price you pay is too high, your investment returns will likely be disappointing.
"Buffett says the same thing every year."
That's the whole point of having an investment philosophy and sticking to it.
If you do your homework, stay patient, and insulate yourself from popular opinion, you're likely to do well.
It's when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you're likely to get into trouble.
If you do your homework, stay patient, and insulate yourself from popular opinion, you're likely to do well.
It's when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you're likely to get into trouble.
When you SHOULD NOT sell
By themselves, share-price movements convey no useful information, especially becasue prices can move in all sorts of directions in the short term for completely unfathomable reasons. The long-run performance of stocks is largely based on the EXPECTED FUTURE CASH FLOWS of the companies attached to them - it has very little to do with what the stocmk did over the past week or month.
The Stock Has Dropped
Always keep in mind that it does't matter what a stock has done since you bought it. There's nothing you can do to change the past, and the market cares not one whit whether you have made or lost money on the stock. Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding to sell a stock.
The Stock Has Skyrocketed
Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future. There's not a PRIORI reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually." Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the future.
So when should you sell?
Here are the five questions you should run through whenever you think about selling a stock, and you'll be in good shape.
Did you make a mistake?
Have the fundamental deteriorated?
Has the stock risen too far above its intrinsic value?
Is there something better you can do with the money?
Do you have too much money in one stock?
The Stock Has Dropped
Always keep in mind that it does't matter what a stock has done since you bought it. There's nothing you can do to change the past, and the market cares not one whit whether you have made or lost money on the stock. Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding to sell a stock.
The Stock Has Skyrocketed
Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future. There's not a PRIORI reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually." Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the future.
So when should you sell?
Here are the five questions you should run through whenever you think about selling a stock, and you'll be in good shape.
Did you make a mistake?
Have the fundamental deteriorated?
Has the stock risen too far above its intrinsic value?
Is there something better you can do with the money?
Do you have too much money in one stock?
A reasonable strategy: Selling fairly valued stock to purchase one that is very undervalued
Is there something better you can do with the money?
As an investor, you should ALWAYS be seeking to allocate your money to the assets that are likely to generate the HIGHEST RETURN RELATIVE TO THEIR RISK.
There is no shame in selling a somewhat undervalued investment - even one on which you've lost money - to free up funds to buy a stock with BETTER PROSPECTS.
Here is what one investor did.
In early 2003, he noticed that Home Depot was looking awfully cheap. The stock had been sliding for almost three years, and he thought it was worth about 50% more than the market price at the time. He didn't have much cash in his account, so he had to sell something if he wanted to buy Home Depot. After reviewing the stocks he owned, he sold some shares of Citigroup, even though they were trading for about 15% less than what he paid for them. Why? Because his initial assessment of Citigroup's value had been too optimistic, and he didn't think the shares were much of a bargain any more. So, he sold a fairly valued stock to purchase one that he thought was very undervalued.
What about his small loss on the Citi stock? That was water under the bridge and couldn't be changed. What mattered was that he had the opportunity to move funds from an investment with a very modest expected return to one with a fairly high expected return - and that was a solid reason to sell.
As an investor, you should ALWAYS be seeking to allocate your money to the assets that are likely to generate the HIGHEST RETURN RELATIVE TO THEIR RISK.
There is no shame in selling a somewhat undervalued investment - even one on which you've lost money - to free up funds to buy a stock with BETTER PROSPECTS.
Here is what one investor did.
In early 2003, he noticed that Home Depot was looking awfully cheap. The stock had been sliding for almost three years, and he thought it was worth about 50% more than the market price at the time. He didn't have much cash in his account, so he had to sell something if he wanted to buy Home Depot. After reviewing the stocks he owned, he sold some shares of Citigroup, even though they were trading for about 15% less than what he paid for them. Why? Because his initial assessment of Citigroup's value had been too optimistic, and he didn't think the shares were much of a bargain any more. So, he sold a fairly valued stock to purchase one that he thought was very undervalued.
What about his small loss on the Citi stock? That was water under the bridge and couldn't be changed. What mattered was that he had the opportunity to move funds from an investment with a very modest expected return to one with a fairly high expected return - and that was a solid reason to sell.
ALWAYS pay careful attention to valuation. NEVER ignore valuation.
The only reason you should EVER BUY a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.
The best way to MITIGATE YOUR INVESTING RISK is to pay careful attention to valuation. If the market's expectations are low, there's a much greater chance that the company you purchase will exceed them.
Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.
This one came back to haunt many people over the past few years. Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a VERY RISK BET to make. Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but ONLY IF YOU HAD GOTTEN OUT IN TIME. Can you honestly say to yourself that you would have?
The best way to MITIGATE YOUR INVESTING RISK is to pay careful attention to valuation. If the market's expectations are low, there's a much greater chance that the company you purchase will exceed them.
Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.
This one came back to haunt many people over the past few years. Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a VERY RISK BET to make. Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but ONLY IF YOU HAD GOTTEN OUT IN TIME. Can you honestly say to yourself that you would have?
Saturday, 2 January 2010
Using Yield-based measures to value stocks: Say Yes to Yield
Say Yes to Yield
1. Earnings yield
Earnings yield
= Earnings/Price
The nice thing about yields , as opposed to P/Es, is that we can compare them with alternative investments, such as bonds, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas bond payments are fixed.)
For example:
In late-2003:
Risk-free return from 10-year treasury bond: 4.5%
Earnings yield of Stock with P/E of 20 = 5% (This is a bit better than treasuries, but not much considering the additional risk taken.)
Earnings yield of stock with P/E of 12 = 1/12 = 8.3% (This is much better than the treasury bond. The investor might be induced to take the additional risk.)
2. Cash return
Cash return
= Free Cash Flow/Enterprise Value
= FCF/(Market capitalization + long term debt – cash)
However the best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E.
To calculate a cash return, divide free cash flow (FCF) by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.)
The goal of the cash return is to measure how efficiently the business is using its capital – both equity and debt – to generate free cash flow.
Essentially, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy the whole company, including the debt burden. An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash) the company has.
An example of how to use cash return to find reasonably valued investments:
Company A’s
In late 2003,
Market cap = $9.8 billion
Long-term debt = $495 million
Cash in balance sheet = $172 million
Enterprise value = $9,800 + $495 - $172 = $10,100 million or $10.1 billion.
Review its FCF over the past decade
In 2003, FCF = about $600 million
Therefore,
Cash return of Company A = $600/$10,100 = 5.9%
In late 2003:
Yield of 10-year treasuries = 4.5%
Yield on corporate bonds = 4.9% (This is higher but still relatively paltry.)
Cash return of Company A = 5.9% (Looks pretty good. Moreover, this FCF is likely to grow over time, whereas those bond payments are fixed. Thus, Company A starts to look like a pretty solid value.)
Cash return is a great first step to finding cash cows trading at reasonable prices, but don’t use cash return for financials or foreign stocks.
• Cash flow isn’t terribly meaningful for banks and other firms that earn money via their balance sheets.
• A foreign stock that looks cheap based on its cash return may simply be defining cash flow more liberally, as the definitions of cash flow can vary widely in other countries.
----
Free Cashflow to Capital
FCF/Capital
=FCF/ Total Capital Employed
= FCF/TOCE
= FCF / (Total shareholders equity + Debt)
The Stock Performance Guide published by Dynaquest Sdn. Bhd. gives data on Free Cashflow (FCF) to Capital. FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend.
FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher is this ratio, the more efficiently is the firm using its capital.
Cash cows are those companies with FCF/Capital of > 10%.
FCF/Capital is not the same as Cash Return discussed above.
1. Earnings yield
Earnings yield
= Earnings/Price
The nice thing about yields , as opposed to P/Es, is that we can compare them with alternative investments, such as bonds, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas bond payments are fixed.)
For example:
In late-2003:
Risk-free return from 10-year treasury bond: 4.5%
Earnings yield of Stock with P/E of 20 = 5% (This is a bit better than treasuries, but not much considering the additional risk taken.)
Earnings yield of stock with P/E of 12 = 1/12 = 8.3% (This is much better than the treasury bond. The investor might be induced to take the additional risk.)
2. Cash return
Cash return
= Free Cash Flow/Enterprise Value
= FCF/(Market capitalization + long term debt – cash)
However the best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E.
To calculate a cash return, divide free cash flow (FCF) by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.)
The goal of the cash return is to measure how efficiently the business is using its capital – both equity and debt – to generate free cash flow.
Essentially, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy the whole company, including the debt burden. An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash) the company has.
An example of how to use cash return to find reasonably valued investments:
Company A’s
In late 2003,
Market cap = $9.8 billion
Long-term debt = $495 million
Cash in balance sheet = $172 million
Enterprise value = $9,800 + $495 - $172 = $10,100 million or $10.1 billion.
Review its FCF over the past decade
In 2003, FCF = about $600 million
Therefore,
Cash return of Company A = $600/$10,100 = 5.9%
In late 2003:
Yield of 10-year treasuries = 4.5%
Yield on corporate bonds = 4.9% (This is higher but still relatively paltry.)
Cash return of Company A = 5.9% (Looks pretty good. Moreover, this FCF is likely to grow over time, whereas those bond payments are fixed. Thus, Company A starts to look like a pretty solid value.)
Cash return is a great first step to finding cash cows trading at reasonable prices, but don’t use cash return for financials or foreign stocks.
• Cash flow isn’t terribly meaningful for banks and other firms that earn money via their balance sheets.
• A foreign stock that looks cheap based on its cash return may simply be defining cash flow more liberally, as the definitions of cash flow can vary widely in other countries.
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Free Cashflow to Capital
FCF/Capital
=FCF/ Total Capital Employed
= FCF/TOCE
= FCF / (Total shareholders equity + Debt)
The Stock Performance Guide published by Dynaquest Sdn. Bhd. gives data on Free Cashflow (FCF) to Capital. FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend.
FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher is this ratio, the more efficiently is the firm using its capital.
Cash cows are those companies with FCF/Capital of > 10%.
FCF/Capital is not the same as Cash Return discussed above.
Stock Market Operators: Do they exist?
I believe that most of us have heard of stock market operators. They are known by many different names and they are constantly the blame for our financial losses. In some parts of the world, they are known as sharks, syndicates, big bosses, speculators, liars, cheaters or stock market manipulators. Some of us cheer their existence and their operations while some cursed them as if they are the culprits to our financial ruins. Are they our friends or foes? As the famous saying goes, know thy foes and you will have the upper hand in battle. In this post, I will challenge and dare you to swim with the sharks and eat from the crumbs of their feeds and not to be their feed. Here I would like to bring out some of my personal thoughts on this question that most newbie has.
Ok, here is the short answer. Yes, you are right. They existed and their operations are hidden from most people especially the newbie in these financial markets. I believe if we know them and how they operate, we could actually move along with them. In fact, the whole purpose of technical analysis is to determine the balance of demand and supply and the stock market operators are some of the powerful and rich individuals or groups with much buying and selling power. If we are able to track their movement, we will be able to profit from their operations. However, if we are ignorant of their existence, we could be their next meal.
Basic facts of stock market operators are listed below for your reference.
They work individually or in a group.
They rely on the market trends to help them in their mission.
The general publics are their big customers.
They together work with the public listed company owners or insiders.
They have a main mission objective to accomplish.
The bulk of their operation revolved around the accumulation and the distribution of stocks from / to the general publics.
They are rich and powerful figures but they are also humans that have emotions like all of us.
They have extensive credit facilities and lower transaction costs than the retail investors.
They do make mistakes like any one of us. Their mistake costs millions in dollars.
Market news, stock market analyst, corporate announcements, word of mouth advertising, price bidding and order queues are some of their tricks and tools that they used to achieve their main objective.
They don?t try to pick the bottom or the top like most retail investors do. Again, some of them try to do this and it costs them much sorrow and dismay.
They do attempt to manipulate the chart to trick the chartist whether you like it or not.
They are both the buyer and seller in the queue order at any given time.
They are not doing charity work. They existed to make your money. It is important to understand them well as they are big volume buyers and sellers. They can tilt the balance of demand and supply. Understanding the above traits of stock market operators will help to clear some of the myths that we have of them. Remember, they are humans like us. Some of the above points deserved to be elaborated further to bring out the secrets of trading methodologies that we will employ in our technical analysis.
Primary market trends are very important to their success and failures. If they judge wrongly on this, they could go bust easily as the power of leveraging will work against them. Remember this, they cannot fight against the trends and they don?t have the strength to do so. Don?t ever think that they can swim against the tides.
If their mission objective is to acquire stocks, they might push down the prices to cause temporary market panics to squeeze out the stocks out from the speculators and investors and this is especially true in certain countries where short-selling is not allowed. The success of this technique will depends on what sort of people that are holding the stocks. This will get rid of the intraday and short term traders. However, they will try to maintain the prices around a certain range as to keep the sellers motivated. Usually the public listed company owners and insider will work in tandem to collect the shares from the general public. After they exhausted the fearful speculators and investors, they will then turn their eyes to the stronger speculators and investors by pushing up the prices higher to catch their interests.
If their mission is to distribute stocks, they will push up the stock prices to catch the attention of speculators and investors. They will work with market analyst to create beautiful pictures of the company prospects. They will work with the public listed company owners and insiders to create scarcity of stocks. At this moment of time, they will also announce all the good news while pushing up the stock prices. They will queue up as buyers and sellers in the order queue. They will buy their own stocks to create volume to entice the crowd to follow. As they bid up and down the prices, stocks were distributed without the awareness of the general public.
I believe that this write-up will increase our trading knowledge and make us a wiser trader. I will continue to write of how we can profit from their operation in future posts whenever I managed to get my time organized.
http://stockmarket.tailou.com/viewtopic.php?f=23&t=3807&p=26266
Ok, here is the short answer. Yes, you are right. They existed and their operations are hidden from most people especially the newbie in these financial markets. I believe if we know them and how they operate, we could actually move along with them. In fact, the whole purpose of technical analysis is to determine the balance of demand and supply and the stock market operators are some of the powerful and rich individuals or groups with much buying and selling power. If we are able to track their movement, we will be able to profit from their operations. However, if we are ignorant of their existence, we could be their next meal.
Basic facts of stock market operators are listed below for your reference.
They work individually or in a group.
They rely on the market trends to help them in their mission.
The general publics are their big customers.
They together work with the public listed company owners or insiders.
They have a main mission objective to accomplish.
The bulk of their operation revolved around the accumulation and the distribution of stocks from / to the general publics.
They are rich and powerful figures but they are also humans that have emotions like all of us.
They have extensive credit facilities and lower transaction costs than the retail investors.
They do make mistakes like any one of us. Their mistake costs millions in dollars.
Market news, stock market analyst, corporate announcements, word of mouth advertising, price bidding and order queues are some of their tricks and tools that they used to achieve their main objective.
They don?t try to pick the bottom or the top like most retail investors do. Again, some of them try to do this and it costs them much sorrow and dismay.
They do attempt to manipulate the chart to trick the chartist whether you like it or not.
They are both the buyer and seller in the queue order at any given time.
They are not doing charity work. They existed to make your money. It is important to understand them well as they are big volume buyers and sellers. They can tilt the balance of demand and supply. Understanding the above traits of stock market operators will help to clear some of the myths that we have of them. Remember, they are humans like us. Some of the above points deserved to be elaborated further to bring out the secrets of trading methodologies that we will employ in our technical analysis.
Primary market trends are very important to their success and failures. If they judge wrongly on this, they could go bust easily as the power of leveraging will work against them. Remember this, they cannot fight against the trends and they don?t have the strength to do so. Don?t ever think that they can swim against the tides.
If their mission objective is to acquire stocks, they might push down the prices to cause temporary market panics to squeeze out the stocks out from the speculators and investors and this is especially true in certain countries where short-selling is not allowed. The success of this technique will depends on what sort of people that are holding the stocks. This will get rid of the intraday and short term traders. However, they will try to maintain the prices around a certain range as to keep the sellers motivated. Usually the public listed company owners and insider will work in tandem to collect the shares from the general public. After they exhausted the fearful speculators and investors, they will then turn their eyes to the stronger speculators and investors by pushing up the prices higher to catch their interests.
If their mission is to distribute stocks, they will push up the stock prices to catch the attention of speculators and investors. They will work with market analyst to create beautiful pictures of the company prospects. They will work with the public listed company owners and insiders to create scarcity of stocks. At this moment of time, they will also announce all the good news while pushing up the stock prices. They will queue up as buyers and sellers in the order queue. They will buy their own stocks to create volume to entice the crowd to follow. As they bid up and down the prices, stocks were distributed without the awareness of the general public.
I believe that this write-up will increase our trading knowledge and make us a wiser trader. I will continue to write of how we can profit from their operation in future posts whenever I managed to get my time organized.
http://stockmarket.tailou.com/viewtopic.php?f=23&t=3807&p=26266
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