“Without reflection, we go blindly on our way, creating more unintended consequences, and failing to achieve anything useful.” Margaret J. Wheatley

I wrote my first article about the pitfalls in investing in i3investor during the last Christmas here:

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

In that article, I specifically singled out nine companies in Bursa and discussed in great details on what were the problems with these stocks and why should we avoid them. A year has passed and it is time we reflect on the performance of these hot stocks.

One year ago on 25^th December 2013, the portfolio of the nine stocks had already lost a median of 23% as shown in column 6 of Table 1 in the Appendix since it was first tracked by me as compared to the gain of 19.2% of the FTSE Mid70, or a negative alpha of a whopping 42%!

Just when everybody was thinking that those stocks had reached their bottom prices during the last Christmas, and it was time to bet on the turnaround of those stocks, the median return of the portfolio has lost another 27% as compared to the loss of just 8.4% of the broad market for the past one year as shown in column 7 in Table 1 in the Appendix. This is another negative alpha of 18.6%.

What happened to those nine hot stocks? I have written another article three months ago detailing what continued to go wrong on all these stocks in the link below:

http://klse.i3investor.com/blogs/kcchongnz/59866.jsp

In the above article I have made some further detail analysis and explained why nothing fundamentally had changed and a lemon remained as a lemon, and maybe more rotten. All the share prices of the nine stocks deteriorate badly since last Christmas with the exception of KNM. I had written about KNM “celebrating its success” in the same article.

Here I would like to single out three interesting stocks for further discussion of their performance for the past one year.

The losing-its-shine star KNM

I have talked about in details on the fundamentals of KNM in the post below which described nothing fundamental has changed. I am indeed crystal clear about KNM’s fundamentals. The writings are all over the wall.

http://klse.i3investor.com/blogs/kcchongnz/59866.jsp

In this article, we will just talk about its share price performance which is the topic of interest of most investors. I always say share price movement has little to do with the fundamentals most of the time.

Figure 1 below shows the share price performance of KNM in the past two years.

The share price of KNM started to rise from last Christmas at 43.5 sen to a peak of RM1.10 on 4^th August 2013, or a 53% gain. At that time, there were so much euphoria about the company. There were news spread that Borsig would be listed in Singapore soon, that they are going to get multi-million, or billion contracts from Pengarang (?), that the sky is the limit for the prospect for KNM as expressed by its major shareholder/management who appeared in multi-media and at the front page. Nobody could beat the confidence and the oral skill of General Lee has for his company. Even EPF has been mopping up its shares. Three investment banks had given target prices ranging from RM1.20 to RM1.50. How could anything go wrong for KNM? There are very few lone rangers having contrarian view on KNM such as the one in the link here:

http://klse.i3investor.com/blogs/kcchongnz/59866.jsp

There is also a proposed  right issue with an indicative “cheap” price of 72 sen. You guys are offered a Mercedes with the price of a Kanchil. Its share price indeed ran up to RM1.10 in 6 months. However, its share price retreated even faster than its rise from then to a close of just 49 sen on Christmas Eve 2014, or 55% loss in just four months. The three investment banks still maintain their target prices of 83 sen to RM1.20 for KNM.

My question is, what is the percentage of retail investors making money from the volatility of KNM’s share price in the past one year? Or most retail investors most probably suffer heavy losses from the pump and dump by insiders and manipulators? I would like to seek the truth from those dabbled in this stocks here.

Hibiscus

Hibiscus, the darling of the oil and gas sector have been announcing securing of concessions, licenses, MOUs to explore oil from all over the world owing to the great man Dr Kennet who out beat the smartest and richer oil and gas people in the world.  But one year has passed, have we seen any oil production yet? Show me the oil!

But it doesn’t matter if they have found commercial viable oil field, does it? Its share price rose to RM2.80 in December 2013 as sjhown in figure 2 above. At the close of this Christmas, its share price has retreated to just 84.5 sen, or a loss of 70% in a year! How many people gained from the rise from RM1.50 to RM2,80, and how many people suffered heavy losses from RM2.80 to 84.5 sen now?

Nowadays we hardly hear about Hibiscus any more. Where have all the cheer leaders gone?

London Biscuits

I wrote what I thought about London biscuits in the two posts mentioned above. I also specially wrote a detail article “discussing” about the Kenanga report about its “irresistible bite” here:

http://klse.i3investor.com/blogs/kcchongnz/60180.jsp

So I really have strong opinion about this company. Recently I saw this statements from an experienced forumer whom I respect in i3investor recommending buying of this stocks here and I really like to have some discussions about this statement for the fun of it. I must say this is purely for discussion with no intention of criticizing anyone and I wish to apologize if I offend anyone.

[Posted by ks55 > Dec 23, 2014 11:43 AM | Report Abuse

Buy Lonbis based on the following:-
1. Bonus warrant 1 for 5. If warrant worth 15 to 30 sen, it work out to be 3 to 6 sen value added to present Lonbis price.
2. Private placement and ESOS at 1.00, effectively provide good cushion for further downside.
3. If start buying at 60 sen, then prepare to buy at 55 sen, then 50 sen, 45 sen etc.
4. Lonbis still making money (provided account is genuine) and paying dividend.
5. Ability to pay dividend means that there is not much cash flow problem.
6. Share price near record low. Less downside risk, high upside potential. ]

For (1), is there such a thing as free, free warrants? Warrants represent a contingent claim to the value of the company. This claim will be to the expense of the common shareholders and hence the share price of the underlying share will have to be adjusted downwards accordingly with the “free” warrants issued. There is no free lunch in investing.

2) if the insiders were willing to come out with RM1.00 to buy 60 sen of stock, why didn’t the share price ever goes up to RM1.00? Look at the share price movement of London Biscuits below:

The share price did go up to around 90 sen after announcement of the private placement when the share price was at around 70 sen. There was a long period which the subscribers could distribute his shares at around 90 sen as you can see from Figure 3 above. So what I think even if he subscribed the private placement at RM1.00, he would still make handsome profits if he could distribute the placement shares at around 90 sen as he should also have  a lot of shares when the share price was around 70 sen.

The one who suffered losses from pump and dump I would think are the retail investors again who have bought them at around 90 sen and its price is now just 60 sen.

3) Start to buy at 60 sen? And then average down to 55 sen, 50 sen and 45 sen? First of all may I ask what is the intrinsic value of London Biscuits? I know none of my students can carry out a confident valuation on how much is the intrinsic value of London Biscuits. It is also very difficult for me to do that. That is because with the high capital expenses and net working capital requirement every year without fail for the past nine years, there is simply no free cash flow at all to give it a value based on the discount cash flow analysis as shown in Table 2 in the Apeendix! Well one can try to tweak here and there with very liberal assumptions, but still it is a difficult task to value it. This mean there is only a corporation option value for the company, without any intrinsic value, an option value is generally a small value, nothing close to 60 sen or even 30 sen.

4 and 5) London Biscuits still making money and paying dividend? In my opinion, London Biscuits may be making accounting profit every year, but there is no “real” profit, or in Buffett’s words, no owner money as every sen is spent on buying plant and machineries every year. Besides it has to put out its hands to ask money from shareholders, and borrow more and more from banks to meet the cash requirement for its business. That is also where the cash for the meagre 1 sen dividend from.

6) Share price record low? Why not if you care to look in details how it has been performing and how the management has been acting., one of the worst shareholder destroyer I can think of. So is 60 sen cheap? No more downside risk? And high upside potential? Share price has nothing to do with underlying business and fundamentals for hot stocks. Its share price could well go up to its peak at RM2.50 in 2005, but I won’t bet a sen on it to buy anywhere close to its market price now. Do you?

Conclusions

Again it is always not easy to predict if a company would do well in the future and that its share price would rise. It is easy to see if a company is likely not to do well. Normally the writing is all over the walls in its financial statements. You can see that I was almost 100% spot on when I first wrote an article on this. Knowing how to avoid these pitfalls would enhance one’s investment returns.

Do you know how to evaluate for yourself when you are informed of the next best hot stock? Please contact me at the email address for a fee-based online finance and investment course.

ckc13invest@gmail.com

KC Chong on Christmas Day 2014

Table 1: Return of some hot stocks in Bursa

Table 2: Cash flow of London Biscuits