Invert Investment
STEEL STOCKS: How NOT TO LOSE MONEY on them
InvertInvestment
Publish date: Sat, 01 Sep 2018, 12:49 PM
Earlier this year, I've made a 202.22% gain in Masteel after holding it for 18 months. The exit was beautiful. But soon I made a critical mistake of re-entering steel stocks (mainly due to the fact that some were trading at seemingly undervalued 3x P/E) and that makes me want to write this article to serve as reminder for me not to make the same mistake again.
There are 3 parts in this article:
(1) Recognising Steel Stocks As Cyclicals
(2) Characteristics of Cyclicals
(3) When to Buy/Sell Cyclicals
(1) Recognising Steel Stocks As Cyclicals
As you might know, steel stocks are cyclical stocks which are completely different animals from typical growth stocks. With that being said, you can buy Public Bank and Top Glove at low price and keep them for twenty years, but you wouldn't want to do the same with cyclical stocks like steel stocks. Other examples of cyclicals are automobile, airlines, tires, steel, chemical and so forth. The point to make here is that cyclicals ought to be treated differently.
(2) Characteristics of Cyclicals
Cyclicals are discussed quite extensively in "One Up On Wall Street" by Peter Lynch. The characteristics of cyclicals are:
- Sales and profits rise and fall in regular if not completely predictable fashion. They expand and contract, then expand and contract again. Share prices hence follow suit.
- Do not confuse cyclicals with stalwarts (e.g. Public Bank and Nestle) just because major cyclicals are large and well-known companies. If stalwarts like Public Bank can lose half of its value, then cyclicals like Annjoo can lose 80% in the downturn. Also, cyclicals tend to outperform stalwarts coming out of a recession into a vigorous economy, and vice versa.
- Timing is everything to detect early signs of business falling off or picking up. If you work in some profession that's connected to steel, alumninum, airlines, automobiles, etc., then you've got your edge.
- You can easily lose more than 50 perent of your investment very quickly if you buy in the wrong part of the cycle, and it may be years before you'll see another upswing.
- The worse the slump in the industry, the better the recovery.
To illustrate the cyclicality, let's take Annjoo's share price as an example, it has the best ROE in the steel industry:
| Date | Price | High/Low | +/- (%) |
| 16 May 2008 | 4.06 | High | |
| 20 Mar 2009 | 1.07 | Low | -73.65% |
| 15 Jan 2010 | 3.18 | High | +197% |
| 26 Feb 2016 | 0.63 | Low | -80.19% |
| 5 Jan 2018 | 3.89 | High | +517.46% |
| 30 Aug 2018(now) | 1.93 | -50.39% |
In the period of 10 years, you can clearly see that Annjoo's share price didn't go anywhere other than oscillating between the range 0.63-4.06. As point 1 rightfully states, cyclicals expand and contract, then expand and contract again.
If you are well-versed with cyclicals, from 0.63 to 3.89, you've got a gargantuan 517.46% gain!
Conversely, if you buy in the wrong part of the cycle, you can easily lose 80.19% of your money, from 3.18 to 0.63, all within one year and 4 days!
(3) When to Buy/Sell Cyclicals
(3a)When to Buy
One biggest telltale sign that cyclicals are at their absolute bottom is when everyone has "unanimous" negative opinion about them. The key here is "unanimous". Everyone including stock analysts, bloggers, facebook pages, sifus, newspapers, magazines will think the worst has yet to come, and that's exactly the formula to form the bottom simply because there're no more sellers.
If you understand cycles, you will have the advantage and you will have the guts to bet when everyone is feared. For example, everyone knows there are cycles in the auto industry. Cars get older and they have to be replaced. People can put off replacing cars for a year or two longer than expected, but sooner or later they are back in the dealerships.
The professional's edge is especially helpful in knowing when and when not to buy shares in companies that have been around awhile, especially those in the so-called cyclical industries. If you work in the chemical industry, then you'll be among the first to realize that demand for polyvinyl chloride going up, prices are going up, and excess inventories are going down. You'll be in a position to know that no new competitors have entered the market and no new plants are under construction, and that it takes two to three years to build one. All this means higher profits for existing companies that make the product. Whichever edge applies, the exciting part is that you can develop your own stock detection system outside the normal channels of Wall Street, where you'll always get the news late.
― Peter Lynch
Speaking of edge in steel industry, leoting was the person who started writting about steel stocks since April 2016 (if I recall correctly). Remember, April 2016 was a time when all the analysts were so freaking afraid of steel stocks, but leoting has the professional's edge that he understands when steel stocks would be picking up again. His articles are invaluable and have helped many people understand the steel industry and make a lot of money.
(3b)When to Sell
By the same token, you sell when everyone unanimously thinks the earnings (and therefore the share price) of cyclicals will grow forever. It's precisely the kind of optimism that pushes the share price to dangerously high levels. Along the way towards the peak, the knowledgeable and farsighted cycle-watchers already begin selling their position to avoid the rush at the end.
From trough to peak, we can expect a few things to happen:
- Existing plants are operating at full capacity, the company begins to increase capital spending budget to add more capacity. (Yes)
- Due to the lucrative margin, there're new entrants to the market, hence increasing the competition. (Yes, Alliance Steel in Kuantan. It has an annual production capacity of more than 3.5 million tons of steel products. To give you a context of how significant the production capacity is, malaysia's steel capacity as a whole was 8.9 million tons, so the increased capacity is a hefty 40%. Although substantial amounts of their production output are slated for export, but who knows? Can you differentiate steel bars manufactured from different factories? It's not like Nike or Adidas shirts where you easily tell the brands.)
- Towards the end of cycle, inventories start building up and company can't get rid of them. (Sort of Yes, LionInd, Masteel, Annjoo and Ssteel all have the highest inventories since 2016-Q1, see Table 1 below)
- Shrinking of P/E over time as business recovers and investors look ahead towards the end of cycle. (Yes, LionInd = 3.95, Masteel = 3.58, Annjoo = 5.83, Ssteel = 3.31)
- Cost have started to rise and margin starts to shrink. (Yes, see Table 2 below)
- Falling commodity prices, usually prices of oil, steel, etc., will turn down several months before the troubles show up in the earnings. (Not sure, from the latest reports, it seems selling prices are still solid but I have no idea where could I get the latest rebar price. If you know, please comment below)
- Demand slowing down. (Yes, domestic property section is still weak and many mega infrastructure projects are either scrapped, postponed, or downsized, e.g. MRT3, HSR, ECRL, LRT3)
| Inventories (RM 000,000) | ||||||||||
| 2016-Q1 | 2016-Q2 | 2016-Q3 | 2016-Q4 | 2017-Q1 | 2017-Q2 | 2017-Q3 | 2017-Q4 | 2018-Q1 | 2018-Q2 | |
| Annjoo | 762 | 657 | 748 | 815 | 864 | 885 | 800 | 837 | 875 | 1,095 |
| Ssteel | 340 | 519 | 542 | 533 | 697 | 689 | 593 | 585 | 780 | 842 |
| Masteel | 329 | 372 | 373 | 382 | 377 | 433 | 445 | 430 | 381 | 457 |
| LionInd | 362 | 345 | 396 | 390 | 469 | 373 | 456 | 586 | 581 | 624 |
Table 1: Inventories
| PBT/Revenue | ||||||||||
| 2016-Q1 | 2016-Q2 | 2016-Q3 | 2016-Q4 | 2017-Q1 | 2017-Q2 | 2017-Q3 | 2017-Q4 | 2018-Q1 | 2018-Q2 | |
| Annjoo | 1.51% | 16.63% | 12.26% | 12.62% | 19.77% |
7.05% |
9.97% | 9.88% | 14.04% | 5.75% |
| Ssteel | -1.11% | -16.29% | 5.65% | 6.54% | 5.57% | 1.21% | 6.39% | 8.19% | 6.47% | 2.97% |
| Masteel | 2% | 4.53% | 0.92% | 1.8% | 4.04% | 4.30% | 5.98% | 3.95% | 4.59% | 1.56% |
| LionInd | -17.8% | -115.65% | 0.01% | 10.79% | 6.82% | -2.63% | 5.34% | 6.88% | 7.45% |
1.29% |
Table 2: PBT/Revenue
Reinvestment will appear most attractive in peak years, and folly in trough years, but the reverse is usually the case because trough earnings follow peak earnings, and vice versa. Capital reinvested in peak years earns sub-normal returns as the business cycle moves toward a trough, and so is typically more valuable in shareholders’ hands. Capital reinvested in trough years has the opportunity to earn super-normal returns as the business cycle moves toward a peak, but often little incremental capital can be harvested organically because earnings are in a trough. In another cruel irony, businesses find capital in abundance—both from retained earnings and outside investors—when they need it least and scarce when they need it most.
― Tobias E. Carlisle "Deep Value"
One extremely important tip which has helped earn me 202.22% in Masteel:
Once you've bought at the bottom of cycle, you should keep it tightly and only sell at the top (Yes I know, it's easier said than done). It will not be a smooth journey, sometimes you could see a 20-30% retrace due to profit takings. Don't get faked out and don't try to be the smart guy to capture the short-term ups-and-downs because... it will backfire! For example, you think the share price is going to retrace so you sell. Guess what? it goes further up and now you're in a tough position because you'll be reluctant to buyback, thus losing the entire full ride to the peak.
Conclusion:
With all the above, I'm convinced to say that the prime time of steel stocks was over, the easy money has been made in the last cycle, steel stocks are currently into their downtrends. I'm not saying you cannot make money until the next big trend reversal, it's just that:
1. When buying cyclical stocks in uptrends, it's easy to make money.
2. On the other hand, when buying cyclical stocks in downtrends, it depends on how skilled you are in predicting ephemeral rebounds. I reckon that's not my game.
If you enjoy this article, feel free to like my Facebook page to see more articles like this. They are coming out weekly. Cheers.
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1 Sep 2018
- InvertInvestment
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Discussions
4 people like this. Showing 36 of 36 comments
When to hit the bottom is unpredictable. According to your data, it has oscillated between 0.63-4.06. The average of the max and min values is 2.345. The current price is 1.93. As it is the below the average, I think it is not disappointing to buy the stock at the current price. If you can hold it for some time, it is likely that you will get profit.
2018-09-01 13:39
For sure, buying now at 1.93 is definitely better than buying at 4.06. You can buy now and hold for years, I guarantee you will make money. I'm not worried about the fundamentals of Annjoo, it has been through so many business cycles since 1946.
But why catch the falling knife now, why don't wait some more?
Posted by tecpower > Sep 1, 2018 01:39 PM | Report Abuse
When to hit the bottom is unpredictable. According to your data, it has oscillated between 0.63-4.06. The average of the max and min values is 2.345. The current price is 1.93. As it is the below the average, I think it is not disappointing to buy the stock at the current price. If you can hold it for some time, it is likely that you will get profit.
2018-09-01 14:15
Annjoo has fixed a dividend policy payout of 60% its of net profit. Any increase or decrease in future profit would impact the current dividend yield of 9%. Investors may factor in potential reduction future profit for next 2 quarters in steel sector given uncertainty in mega projects and dropping demand from property sector as well as depreciation of RM against USD.
2018-09-01 14:57
got people buy cyclical stock for dividend meh? seem like u did not get anything from the article. haha
2018-09-01 15:02
Just put Annjoo into watchlist and wait for another round. Maybe five years, or ten years. Buy below RM1.00, good dividend stock.
2018-09-01 15:03
Perstima is another cyclical stock that is offering potential high dividend yield on riding higher earnings in next few quarters.
2018-09-01 15:07
stupidest article ever on cyclicals.cyclicals last for 10years.get your facts right.
2018-09-01 15:15
curious to know,u write stupid articles.how much have u made so far,millions?or just peanuts.pls look back at your track record on why u r losing all your life.
2018-09-01 15:17
Yup, Perstima is another great cyclical play.
Posted by Up_down > Sep 1, 2018 03:07 PM | Report Abuse
Perstima is another cyclical stock that is offering potential high dividend yield on riding higher earnings in next few quarters.
2018-09-01 15:44
I bought Annjoo few months ago at 3.xx(after selling Pmetal at 5.5) because low PE, high DY, solid fundamental, favourable prospect and uptrend chart. Usually I'd cut loss at certain threshold but I hold the belief tight and it has cost me dearly, I'd even averaged down. This article summed up my painful journey buying commodity related stocks. Parted with the stock at 2 for hard to copy counters.
2018-09-01 15:46
Been there, done that. Let's learn together from our mistakes :) Cyclicals have to treated differently.
Posted by Mark Lee > Sep 1, 2018 03:46 PM | Report Abuse
I bought Annjoo few months ago at 3.xx(after selling Pmetal at 5.5) because low PE, high DY, solid fundamental, favourable prospect and uptrend chart. Usually I'd cut loss at certain threshold but I hold the belief tight and it has cost me dearly, I'd even averaged down. This article summed up my painful journey buying commodity related stocks. Parted with the stock at 2 for hard to copy counters.
2018-09-01 15:49
ok so the genius had been to Mars and even did jupiter.funny guy that thinks he can change the cyclical trends.no wonder buying stocks like masteel with heavy debts and shitty balance sheet
2018-09-01 16:02
Back then there are lots of promoters, blogs to help you understand the wonders of steel-related counters. Now I simply avoid crowded places. Try to be fearful when people are greedy.
2018-09-01 16:07
KUALA LUMPUR (Sept 1): The Kuala Lumpur-Singapore high-speed rail (HSR) mega project will be deferred for two years without penalty to either nation, The Edge weekly reported in its Sept 3 issue.
According to the report using sources, the agreement was reached “in a spirit of good neighbourliness” as Singapore recognises the strain the construction would place on Malaysia’s financial health.
The agreement will be in effect until May 31, 2020
Putrajaya could have ended up paying RM500 million in penalties to the Lion City if the RM110 billion KL-Spore HSR project was scrapped.
“It is worth noting that the legally binding agreement between the two nations for the project, signed in 2016, contains no provisions for such a postponement,” wrote The Edge.
Talking to the business weekly in May during his first press interview after he was appointed prime minister for the second time, Tun Dr Mahathir Mohamad said: “The terms of agreement (for the HSR) are such that if we decide to drop the project, it will cost us a lot of money. We have entered into an agreement with Singapore.
“If we break the agreement, we have to pay a very large sum of money. So, we are going to find out how we can reduce the amount of money we have to pay for breaking the agreement.”
Economic Affairs Minister Datuk Seri Azmin Ali led a Malaysian a team to negotiate the agreement a few days ago.
He held meetings with Singapore Transport Minister Khaw Boon Wan and the republic’s Foreign Minister Dr Vivian Balakrishnan.
“We are inching closer towards a win-win deal on HSR, thanks to the hardwork (sic) of officials from both sides,” Azmin said in a tweet on Aug 30.
Earlier last month, Azmin also said that privatisation of the HSR project is not among the options presented to the Singapore government.
"What I did was to explain the current economic situation and condition prevailing in Malaysia," Azmin said.
"Our priority is to reduce the government's expenditure, not increase our borrowings. The (Singapore) transport minister expressed appreciation over our predicament (which is) to cancel the project or defer it. Privatisation is not an offer."
Even Deputy Defence Minister Liew Chin Tong commented on the issue about a week ago, saying both the HSR and the East Coast Rail Link (ECRL) projects cost too much and mean very little to Malaysia in terms of connectivity and regional strategy.
Liew expressed doubts about the HSR’s viability, noting that the passenger-only link between Kuala Lumpur and Singapore would never generate the sort of traffic enjoyed between Beijing and Shanghai.
"I have doubts if HSR can even generate income to pay for operations, not to mention to have returns on investments."
https://www.edgeprop.my/content/1419195/report-malaysia-singapore-hsr-deferred-two-years
2018-09-01 16:35
Win-win deal on HSR inching closer assures Malaysian Minister
https://www.icompareloan.com/resources/win-win-deal-on-hsr/
2018-09-01 16:37
Gov't received offers to build ECRL for RM10bil: Dr M
https://www.nst.com.my/news/government-public-policy/2018/08/405724/govt-received-offers-build-ecrl-rm10bil-dr-m
2018-09-01 16:43
Existing revenue mainly generate from project MRT2/LRT3 (infra part). All these still ongoing so nx few qr revenue can expect still sustainable.
Hsr not even start.. no much impact yet.
Btw, trx & bbcc also ongoing eh..
2018-09-02 00:53
Some new property project along the hsr/ecrl route might get affect.. but those propety alrd start construct will not stop suka suka hati..
My view is the steel demand still can tahan 2 years. Who know nx year Tun M create more construction work?
Anyway, this article at least remind us when is the peak to exit where i dont think now is the time
2018-09-02 00:59
ming, you see, the expectation of those mega infra works are cooked into previous high prices. That's why they are beaten down now. With the gradual increased production capacity, it's not likely to be sustainable for long IMO.
Posted by ming > Sep 2, 2018 12:53 AM | Report Abuse
Existing revenue mainly generate from project MRT2/LRT3 (infra part). All these still ongoing so nx few qr revenue can expect still sustainable.
Hsr not even start.. no much impact yet.
Btw, trx & bbcc also ongoing eh..
2018-09-02 01:36
Agreed Prospect had minus score after delay/cancel ecrl/hsr.
But i dont see the effect of increasing supply yet.. in contrast, the demand also growing as well..
if compare the 4 steel company revenue (y-y), there are still increasing (double digit growth) while the avearge steel price actually remain around 2400/mt since 2017 (prove of demand growing), except apr-jun 2017 @ 21xx & jan-mar 2018 @ 26xx
Retailer hard to judge the actual demand/supply ; but we may follow the steel price to know demand/supply situation and which is able to trace weekly
2018-09-02 02:25
ming, let me quote from the latest quarter reports of the 4 steel makers.
Annjoo "The Group expects to increase its proportion of export sales amidst lacklustre near-term domestic demand."
Masteel: "In the ensuing months, the domestic steel market is expected to be well supplied resulting in steel prices remaining subdued"
Ssteel: "With the reviews on some of the infrastructure projects by the Government, demand is expected to slow down temporarily"
Lionind "The operating environment is anticipated to remain challenging in the next financial year in view of the prevailing market conditions."
Domestic demand is slowing down whilst getting well suppled, it's not hard to see where steel price is heading towards. By the way, do you mind share about this -> "we may follow the steel price to know demand/supply situation and which is able to trace weekly"?
2018-09-02 10:41
Lol...every thread that related to steel, sure will somehow see the word otb. Qqq3, u been burn burn by him ah? Come, tell us ur side of the story. We let ur dry ur tears here while we get to learn something with the hope of not stepping the landmines.
2018-09-02 11:34
The article below suggests that the government will be able to start spending much more on infrastructure in two years.
---
KUALA LUMPUR (Sept 1): The Kuala Lumpur-Singapore high-speed rail (HSR) mega project will be deferred for two years without penalty to either nation, The Edge weekly reported in its Sept 3 issue.
2018-09-02 12:24
JPMorgan Sees MSCI China Rebounding 14% as Sell-off Is Overdone
https://www.bloomberg.com/news/articles/2018-08-29/jpmorgan-sees-msci-china-rebounding-14-as-sell-off-is-overdone
2018-09-02 12:27
May be you can some rebar price from this site.
http://www.sunsirs.com/uk/prodetail-927.html
2018-09-04 19:32
Thanks LoiTC, appreciate it
Posted by LoiTC > Sep 4, 2018 07:32 PM | Report Abuse
May be you can some rebar price from this site.
http://www.sunsirs.com/uk/prodetail-927.html
2018-09-04 23:49
Mr Calvin, since steel stock look like down trend, so at this time masteel or annjoo is not a good buy ? TQ
2019-03-26 10:38
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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....
probability
whatever stock we touch all seem to be reporting poor earnings...
is Banking stock defensive?
in this time of uncertainties
2018-09-01 12:54