Intelligent Investing
The boom of glove counters reminiscent the bust of the past
Probably the hottest talk in town right now has to be glove stocks. And rightly so, COVID19 has put a lot of attention on this industry as linear thinking tells you there's a tailwind: more COVID19 cases + lockdown easing increase probability of surge in number + lack of vaccine in the market = higher demand for gloves
As we can already see some of the main counters' share price have increased by 100% year to date:
Supermax: $1.38 - $5.34 (+ 286%)
Topglove: $4.65 - $11.98 (+165%)
Hartalega: $5.35 - $9.76 (+ 82%)
Kossan: $4.16 - $8.17 (+ 95%)
Comfort: $0.79 - $2.87 (+ 263%)
Now, of course there is a lot of justification why they will keep going higher, in part due to some of the major tailwinds mentioned above. I'm reading somewhere there a target price of $5 for Comfort. Insane? Hardly. If you think something can't go higher or fall to a certain price, you're always the patsy. But I've seen this kind of target price before. They get dole out like candies after a significant run up in share price (and that's important). It is as if the target price is not worth mentioning or inaccurate until the crowd take interest in that counter. So all these target price are somehow a reminiscent of the past.
Remember Focus lumber? There was a surge of interest from the crowd in the 2nd half of 2015 when MYR continue to depreciate against USD. The market reckon this tailwind will benefit Focus Lumber, and in particular, export stocks and furniture related stocks. Focus Lumber's share price increased by 100% in a span of 4 months from $1.50 to almost $3. And many came out with their estimated EPS (so-called extrapolation) and P/E 10 that it remains undervalued at that high price.
You see, it is very simple. When you dole out candies, how the candies taste is important (it has to be sweet, stupid), but more importantly the packaging has to be colorful and shiny. Same goes for stocks, when you want to sell something, keep it simple. Give them an optimistic earning per share and P/E 10 (anything times 10 is easier to do in the head than say ask them to time EPS by 12.5, which is harder). Comfort at $5, sure, find an EPS x 10 = $5. We have seen it being done successfully in Focus Lumber. And Latitude as well.
Latitude caught the same fever as Focus Lumber. At its peak of around $7.50, most people would tell you P/E 10 x EPS is worth $9. Candies are easier to sell when 1) You see everyone is buying it (the crowd) 2) Great packaging (nice storyline + potential future). Or how about fast forward to 2018.
Great storyline is essential to sell candies. Shell sold their stake in Malaysia to a Chinese sold their business to Chinese private refinery which later rename the counter as Hengyuan. When the price is going up into the stratosphere, it is not that hard to sell a story that chinese is more hardworking than the previous management, as stupid as it may sound now in hindsight. But as they say, whatever that makes you convince it is a good buy. Someone even compared Hengyuan to Dutch Lady, hence should deserve P/E 30, essentially valuing Hengyuan at $120 per share. But of course, selling Hengyuan at $30-40 (P/E 10) is enough to convince everyone that they're getting a bargain. Comfort at $5? That's nothing. I've seen other worse prediction.
The irony of these stories is that those that dole out the candies (EPS x P/E10) are happy to sell you whatever you want to hear, which often involve the future prospect of the business, but the future prospect only matters as long as the music keep singing. The moment the music stops, they're happy to sell you another flavour of candies. Their interest changes as soon as the music stops. As Ben Franklin said, if you want to persuade, appeal to interest not to reason.
Of course, the question always come down to should I buy or not? Everyone is hoping to make a 'quick profit' and get out before the music stops. Since no one knows when the music is gonna stop, so keep dancing as long as you're confident you won't be the last to leave the party. But of course, if one isn't confident, they won't have join the party in the first place. If you ever wonder why others always fall for online scam time and time again, we have a lot of case studies here.
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1 person likes this. Showing 10 of 10 comments
I'm not sure why your article isn't trending. Timely advice for us to stay cautious.
2020-05-22 12:07
This round also pushed by all IBs as you can see they upgraded Top Gloves and Supermax to a very high TP due to high projected earnings and more than 10 months lead time. This round may be slightly longer.
2020-05-22 14:16
exceptional profits X upgraded PE = sky high targets..........
tp are always based on rationalisations in a speculative phase....
eg..A X B X C = fill in the blanks.
u can rationalise almost any thing , when there is a hot streak.
but the brilliance lies in recognizing early, gloves are the only game in town...and take it as far as it can go.
one day, the earnings will be back be normal, PE also back to normal ( if financial theory has any meaning).....so, its game on...for now...........
2020-05-22 14:39
normalised earnings X normalised PE means whole thing comes crashing down..............but..........that is for another time, other people.
2020-05-22 14:41
another 3 months before next results season.....3 months is life time away.............
2020-05-22 14:43
Henry8833 This round also pushed by all IBs as you can see they upgraded Top Gloves and Supermax to a very high TP due to high projected earnings and more than 10 months lead time. This round may be slightly longer.
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in theory, abnormal earnings should be matched with lower PE...........but that is only theory in textbooks.....
in speculations, high abnormal earnings should be matched with extra high PE..........die or not?
2020-05-22 14:46
With the expected superprofit, there will be high dividend and bonus issue etc as gloves companies are generally cash rich companies.
2020-05-22 14:56
Henry8833 > May 22, 2020 2:56 PM | Report Abuse
With the expected superprofit, there will be high dividend and bonus issue etc as gloves companies are generally cash rich companies.
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its all about character/ attitude....character/ attitude of KYY/OTB types....either u have or u don't.
every thing else is rationalizations, justifications.
2020-05-22 15:04
Well, how do IBs make money? Commission, not the accuracy of their TP. Incentive is a superpower.
And under the context of confirmation bias, IB's TP is irrelevant. IF they provide a higher TP, the crowd use to rationalise their decision; if their TP is lower, the crowd rationalise that as an act to get the market to sell down so they can accumulate.
2020-05-22 15:48
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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Very hard to resist the temptation of making a fast buck when glove stocks are making more money each day.
But what I tell myself is that, this kind of investment method is not for me.
2020-05-22 12:06