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Choivo Capital

Author: Choivo Capital   |   Latest post: Sat, 6 Jul 2019, 5:16 PM

 

(CHOIVO CAPITAL) The MSCI World Index and its effects. (NESTLE)

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What a week for Nestle investors (and the traders who got in later). For awhile there, it looked as if the moon was really the limit for the company.

They are a few factors that give rise to this, but in my opinion, the main reason is due to its addition to the MSCI World Index.

The MSCI World index represents large- and mid-capitalization stocks across 23 developed markets around the world. It covers about 85% of the free float-adjusted market capitalization in each of its constituent countries.

Now, this is a relatively popular Index thats is used to create ETF's (Exchange Traded Funds), and the top 3 funds for this index are,

  1. Vanguard Total World Stock ETF  (USD 16 Billion AUM)
  2. Blackrock/Ishares ACWI  (USD 8.7 Billion AUM)
  3. Blackrock/Ishares MSCI  (USD 872 million AUM)

And the nature of an ETF/Index fund is this. Whatever stocks that get added to the index tracked by the fund, the fund provider will need to purchase it according to its weightage allocated, regardless of the price. And when one gets removed, it needs to sell it all, regardless of the price as well.

Now, the total AUM of just the top 3 is USD25.572 billion or approximately RM99.733 billion.

The weightage given to each company is usually 0.1% to 2%. Now, assuming a 0.1% weightage was given to Nestle. That is a minimum RM100 million additional demand for a company that has 93% of its stock held by 60 people.

Considering how incredibly thinly trader Nestle is, with the vast majority of its shareholders being investors instead of traders (good luck trading this stock, even KYY will struggle), the supply for it was definitely lacking.

I  doubt that most of the investors even knew the stock price movements of the company unless it was announced loudly in the newspapers.

Now, you might say that RM100million is still just a very small sum. It is true. But never forget, the price of the market is largely set by irrational few. Just like how the world changes to the whims of the intolerant minority.

Of course, one must never forget about the people who like buying something the higher the price goes! And with Nestle being a 100% marginable stock, as well as a perceived safe buy, I have no doubt many leveraged up to do so, which makes todays 11% drop almost expected.

I failed to predict this rise, despite knowing the information above and thus missed a potential trading buy the moment it was announced. Oh well, we live we learn.

By the way, big difference between World Index and KLSE Index, the second, has basically zero funds tracking, so no difference.

 

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Facebook: Choivo Capital
Website: www.choivocapital.com
Email: choivocapital@gmail.com

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Labels: NESTLE

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Chart Stock Name Last Change Volume 
NESTLE 145.30 0.00 (0.00%)

  Be the first to like this.
 
kcchongnz One of the perils of buying ETF.
14/03/2018 8:15 PM
Choivo Capital Yeah sifu,

I like what howard marks said, when you buy an index, you need to ask yourself what is the percentage of rubbish do you like to buy? Haha.

kcchongnz One of the perils of buying ETF.
14/03/2018 20:15
14/03/2018 8:27 PM
KLCI King Thank you, Jon, this is one of the best articles lately, informative & no biased.
14/03/2018 8:35 PM
sosfinance Normally when people ask me what PE are you going to pay, I will ask, what PEG are you getting for the next 3-5 years. (without talking about other variables yet).

When people asked me, is ROE 100% consider good, I will ask, what P/BV are you talking about? 1x or 57x.

In short, when we look at any financial metrics, please, look at it from a few angles. (many are incomplete on its own). Gearing, PE/PEG, EV/EBITDA, ROE based on what P/BV, FCF/sh, DY, etc. These are just tools for referencing for comparative purpose only.

5 minutes research

If a friend asked me, is Nestle trading at PE 56x and ROE of 100% and P/BV of 57x. Given 5 minutes only my answer is, EXPENSIVE, why, CAGR last 10 years is 7.35%. Estimating PE of 8% is natural. ROE is 100% x P/BV 57x, so it looks high. And I take a quick look at McDonald, doing at PE of 24x, so my 5 minutes answer to my friend it, HIGH. (5 minutes research can be dangerous)
01/04/2018 2:47 PM


 

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