Punting on hot stocks, risk and return

“In Bursa, there ain’t no tooth fairy”

Last Christmas, I wrote an article on the perils of speculating on some hot stocks in Bursa in the appended link below:

http://klse.i3investor.com/blogs/kcchongnz/45373.jsp

Table 1 in Appendix shows the list of hot stocks discussed in detail in the article. They were some of the hot stocks which some people in i3 forums asked me about in the past 1-2 year ago in the forum if they should invest in them. My adverse comments made some people in the forum very unhappy. However, they were honest opinions and were not intended to antagonize anyone, but with good intention to warn them about the perils of dabbling in those what I considered as rubbish stocks without understanding the fundamentals of investing.

Tons of research have shown that retail investors are always at the losing side punting and speculating against the syndicate players, investment bankers, remisiers, insiders and manipulators who have all the resources to put you into their pockets. Some (<10%?) of small time retail investors made some money merely due to chance. The question is, are you those lucky few?

Return of the hot stocks

The broad market in Bursa returned 13.2% two years ago and 4.8% a year ago. What is the return of those hot stocks in the list within the last 1-2 years?

Table 1 in the Appendix shows that the average return of the portfolio of hot stocks was a loss of 24%. It has recovered somewhat since the last time I wrote the article on last Christmas Day to a loss of 10%. The notable “shining stars” are KNM, London Biscuits and Ivory Property which gain 109%, 24% and 9% respectively since I first commented about them. We will come to these shining stars” later. The problems for other hot stocks seem to continue to prevail with no light at the end of the tunnel, as evidenced from the latest quarterly report ended 30^th June 2014.

The bad

Guan Chong continues to “shine” with its huge sales. For the latest two quarters, its sales was RM903m. Wow, a 2-billion dollar club member. Yes, it seems GCB has “turnaround” from past two quarters of losses, with a net profit, but at just 5.7m (EPS of 1.1 sen), or a net profit of just 0.6%. Its receivables is a whopping RM200m and inventories of RM638m. Furthermore, it has a whopping RM855m in debt. How do you like this type of performance? For me there is only one word; Run!

MPCorp continues to bleed. Its financial year ended 30^th June 2014 shows a RM16.9m sales with a net loss of RM31.6m. Cash burned in the year was RM15m. With a net debt of RM90m, and High Court summon on its RM100m+ money owed to put option by AmanahRaya Development, plus a couple more ongoing litigations, wonder how MP Corp can pull through. Even though the right issues and ICULs have been proposed, wonder who would want to further throw money into this company. Nothing is happening to the company. Meanwhile, the father, the wife and the son (?) continue to receive high director fees plus high interest charges from their loan to the company.

What about China Stationery Limited? With its mystery fire in China, delay in its quarterly report, and a sudden loss of RM241m loss the last quarter, I don’t know what else to say.

What about SMTRACK? Yeah it is the former Smartag, having a smarter name now. Still waiting for the big single contract from the Royal Custom Department on RFID tracking the containers? The third quarter 2014 result ended 30^th June 2014 shows another loss of RM5.4m from a sales of 863,000, or 2 sen per share. Cash burned for the nine months was 3.9m. It has only 3m left in its balance sheet now. It better get the contract right now or else don’t know what would happen.

Asia Media, one the darlings of the analysts two years ago, had a sales of RM11.8m for the last two quarters. It lost RM1.7m. Funny thing happening again, it purchased RM21.7m worth of plant and equipment. I guess soon it will report higher revenue and net profit again from creative accounting, yes extremely creative accounting.

Hibiscus, the darling of the oil and gas sector, show me the oil, now! I don’t want just to see concessions, licenses to explore oil from all over the world, MOUs, “profit” from selling shares, how great is your Dr Kennet or whoever who out beat the smartest oil and gas people in the world to obtain this and that concessions all over the world.  I want to see real oil gushing out from the holes!

The latest half yearly results ended 30^th June 2014 shows another loss of 9.0m. Cash burned for 6 months was 22.2m, not included 26.3m in capex and other investing.

The Shining Stars

Now come the “shining stars”, Ivory Property, London Biscuits and KNM. Wasn’t I wrong in giving negative comments when Ivory, LonBis and KNM has risen 9%, 24% and 109% to 60 sen, 84 sen and 95 sen respectively since I first commented on them? Yes, I do have to admit that I am often wrong in guessing share price. But am I really wrong in commenting that they are rubbish companies? Please read the previous article appended at the beginning of this post and tell me exactly where have I been wrong about the companies.

And let me remind you their share price was RM1.37, RM1.02 and RM3.16 five years ago when KLCI was at 1217. KLCI has since risen by 53% from then.

Ivory Property made a net profit of RM13.7m, or a EPS of 3.15 sen in the last two quarters, not bad at all. Is it turning around? Alas, the cash flow from operations is again a negative of RM30.5m. Show me the money! With a relative high debt of RM328m, shareholders should be prepared to come out with money for right issues soon. I think it was a blessing in disguise for shareholders when the Plaza Rakyat acquisition fell through.

London Biscuit seems to be having a turnaround story going around. Is it plausible? Its financial results shows an increase in turnover by a fair bit of 24% to RM360m, not bas at all. However, net profit increased by 14% to RM17.2m, or a miserable net profit margin of 4.8%. The huge RM737m in total assets utilized for the business yields just 2.3% a year. What kind of business is that?

But wait a minute. A bad company can also be a good investment, can’t it? At 84 sen a piece, the PE ratio of LonBis is just 8.7. However with so much net debt, minority interest, PE ratio is just too simplistic for back-of-hand valuation. We have to look at its enterprise value. Alas, its enterprise value is 13 times it earnings before interest and tax of RM35.6m. I won’t even pay a EV/Ebit of 8 for a company like LonBis.

Wait another minute, what about its assets. It has a net book value of RM2.11 per share. At a market price of 84 sen, isn’t it a steal? Alas. Its asset is almost all made up of property, plant and equipment of RM571m, or RM3.50 per share! How much they can fetch if put on sale in the market?

The most shining star

What about KNM? I must be dead wrong with my negative comments when Its share price was fired up from 45 sen to 95 sen now, for a whopping ain of 110%!

Looking at its latest second quarter result ended 30^th June 2014. Its sales is as usual, huge at RM983m, another 2-billion dollar club member. However, net profit is RM24.1m, or just 2.4%, as usual very miserable. If you consider its foreign exchange loss of 50.4m, it actually lost RM26m. Total assets utilized in the business is a whooping 4.04b!

Again KNM is burning cash, not much by just RM7.5m. Where is the cash? Again you can see the culprit. Receivables increased by 108m to a whopping 1.2b. Holly cow, a net profit of just 24m with a total assets of 4.04b and debtors owe you RM1.2b! What kind of business is that?  Oh yeah, it has a book value RM2.13b, or RM1.30 per share. But wait a minute. The book value is mostly made up of RM1.2b in receivables of which not sure how much is collectible; intangible assets (untouchable?) of RM1.37b, and PPE of 787m. What kind of quality is these assets?

Oh there are many stories here which caused its share price to rise. Let us listen to some of the stories which could provide us clues to why KNM is so “good”.

1. Its business is turning around.
2. EPF has been buying up KNM shares
3. Many Investment banks recommending KNM shares
4. Got big jobs from PENGERANG INTEGRATED COMPLEX PROJECT
5. Listing of Borsig in Singapore
6. There are many good news in the media, newspapers, business magazines, director going on the air, in TV, radio etc.

My questions are:

1. Is there any sign of significant turning around in its performance the last quarter result as explained above?
2. As a tax payer, I think you should get a good answer from EPF on why did they put your money at such high risk with little hope of gain in this trash. It is horrendous! @#%&*
3. Do you really follow investment bankers recommendations to buy shares? What were the outcomes from those investments? @#%&*
4. Haven’t KNM been having big jobs all the time, billions Ringgit in turnover every year? What has been the bottom line from these huge projects? Why was the share dropped from a high of more than RM10 seven years ago to now of less than RM1 when having big jobs?
5. How long have we been hearing this Borsig listing in Singapore thingy? 3 years?
6. Having a lot of news? That is the time you should be the most cautious. Haven’t you been through that before?

So how long more this share price of 95 sen of KNM can be sustained?

Conclusions

Know how to avoid these pitfalls is as important as trying to make extra-ordinary return from the stock market, if not more important, for the well being of your personal finance and for retirement planning and wealth building for the long term. There is a jungle out there. Are you equip with the necessary skills?  If not, are you prepared to join me in my online finance and investment course?

If you are interested to learn about fundamentals of investing to have a better chance in building up your long term wealth through the stock market, please email me at

ckc14training@gmail.com

K C Chong (14 September 2014)

Appendix

Table 1: Return on hot stocks past 1-2 year