kcchongnz blog
What stocks to buy in this turbulent market? kcchongnz
Mr Chong,
Since the beginning of the year, I have got a job which I have been longing for. The job is in a stable industry and my salary has doubled. I am able to save an extra of $3000 a month from now on. Besides, I have a saving of about $100k which I do not need to touch for many years to come. I have been putting off the idea of investing in the stock market for some time now and with this positive development of my personal finance, I intend to start investing again.
Should I start investing now?
What stocks can I invest now?
How do I go about carrying out the analysis myself?
Johnson
Hi Johnson,
Congratulation for your new career. It is indeed refreshing to hear this good news from you amid all the doom and gloom due to the devastating effect of Covid-19 which creates havoc on individual health and economies of the whole world. Almost the whole world is lockdown for a long period of time. Millions of jobs were lost, and it is anticipated that a deep world recession will follow.
The stock market has been in great turbulence. Since the beginning of the year, the KLCI dropped by 23% to a low of 1220 points on 19 March 2020 before rebounded to 1408 points at the end of April 2020. It is still down by 11.4% since the beginning of the year. The Small cap stock suffered twice as painful. It is still down by a whopping 22% since the beginning of the year.
Will the economy recovery? Will it be a V-shape, U-shape, or a L-shape recovery? Should you invest in the stock market now?
Most economists and investment experts believe things will get worse before it gets better. I also like to repeat this saying below,
This is especially true for those who have not built up a sizable emergency fund, those who need to use the fund they have for certain important expenses in the next couple of years, those whose job security may be threatened, and those who are fully invested now, etc.
However, many economic and financial market predictions by the experts have been proven wrong too in the past. This is because the future is inherently uncertain and unpredictable. In stock investing, it has been proven that it is extremely difficult to time the market.
Moreover, every individual is different. Every individual has his own personal risk profile; some people are risk-averse who cannot sleep well when market drops, some are risk takers who would like to use margin to “sailing”. Each also has his own individual circumstances; some are fully invested; some have plenty of cash which they do not need to use it for a long time etc.
Hence, in your case, it may be alright to start investing right now by regular monthly investment when the market has been beaten down to build long-term wealth. But do be aware the risk involves.
So, what stocks to buy now?
There are indeed many good companies of which their share prices have been beaten down. Their share price may go down further with the expectation that their next few quarters results will not be good. However, stock market is a leading indicator. It leads six to nine months ahead. It is forward looking.
As business will be difficult for the near future, it is important to buy stocks with a strong balance sheet. With a strong balance sheet, the company will be able to survive during this difficult time and not go bankrupt but will thrive again when the good times come.
So how do we do that?
Here, I will use the balance sheet of Lotte Titan Chemical which just release its first quarter 2020 financial results last Thursday on 29 April 2020.
First, I must clarify that I am not advocating anyone to invest in Lotte, but merely use its balance sheet to illustrate a point when a purchaser of my book asked me this question.
On 29 April 2020, Lotte reported a net loss of RM170mil for the first quarter of its financial year ended March 31, 2020, on the back of a further contraction in sales revenue and lower product selling prices. That appears to be a big blow to its business. Many investors who are looking just at its earnings would have sold the shares.
However, if one looks at its balance sheet of Lotte, it has a net asset of RM12.6 billion, or a net asset backing of RM5.45 per share. its cash and cash equivalent amounts to RM4.03 billion, with zero debts. That cash alone is worth RM1.75 per share, more than its present share price of RM1.70. Besides, it has an investment in its associate company in Indonesia worth RM2.32b, or RM1.00 per share.
Will this cash be burnt soon when business gets into great difficulty? That is an important question. Let us look at its cash flows from operating activities.
Lctitan has generated a total of RM971m of free cash flows (FCF) for the last three years since listing, or an average of RM324m a year. Even with the RM170m loss in the last quarter, it still has positive cash flows from operations of RM271m. Lctitan’s business does not seem to be a cash burning business. Moving forward, Lctitan may or may not burn cash, but looking at the rear view mirror, it is likely that good cash flows will prevail when things get back to normal.
Now let us look at another stock, London Biscuit (LB). This stock has gone into PN17. It encountered financial distress due to its inability to pay for some loans it had taken from the banks, just a few million Ringgit of it. This happened last year even when the financial markets were bullish. A liquidator has been appointed to carry out the liquidation of the company.
Here, we will investigate its balance sheet just before it went into default of its loan and learn something in order to avoid falling into the same pitfall again in our future investment.
In its annual report with financial year ending 30 September 2018, LB has 206m shares outstanding. It has an equity of RM369m and total debts of RM387m, of which RM290m was short-term debt due within a year. Net asset or book value wise it was worth RM1.79 per share. It was traded at about 50 sen then, less than a third of its book value.
The clear and present danger of its balance sheet was it gearing (Debt/Equity) which was high with total debts the same as its total equity, much higher than the allowable of 0.5 time. Moreover, its equity is mainly made up of Property, plant and equipment (61%), which would not worth even a small fraction on liquidation, and Receivables (32%) which was highly doubtful if they were real and collectable.
Its short-term liquidity is also precarious with current ratio and quick ratio of just 1.1 (<1.5) and 1.0 (<1.2). Furthermore, the major part of its current asset was made up of Receivables (80%). This means LB would not be able to fulfil its liability obligation when called for.
Figure 1 below shows the distribution of the assets of LB.
To make matter worse, although LB made a profit of RM14m in 2018, it had negative cash flows from operating activities (CFFO) of RM13m. It was much worse in 2017 when it had a whopping negative CFFO of RM109m. And yet the company spent a whopping RM59 million in purchasing plant and equipment. This resulted in huge outflow of cash, every year.
The bankruptcy risk of LB was clear and present, and it did go into bankruptcy shortly after that. Investors lost every penny invested in the company.
Mind you again that happened when most things were rosy at that time. Currently when deep recession is looming, it is more important to first look at the balance sheet of the company before investing in it. There are many companies with these similar characteristics as LB.
Many investors lost big in LB and many other stocks because they either do not care or do not know how to read the balance sheet. If one does that, to avoid investing in lemon stock is a No-brainer, although to identify what stocks to invest in entails a lot more other considerations.
Next for your question on what stocks should you invest in? Here is the link,
How can you go about carrying out the analysis yourself like the above?
There are a lot of resources in the internet and good investment books in the market which you can learn from, and here is another one,
“Investment knowledge pays the best interest”
This book is available in the major book shops such as MPH and Popular. I have sold out all my first print of the books, and the second print is on the way. If you are interested in my second print to learn the fundamentals of investing; that is to treat investing in a stock as investing in part of a business during this lockdown period, you can email me at
ckc15training2@gmail.com
This book also provides you with several proven successful investment strategies which you can apply in your investment process to build long-term wealth steadily, safely but surely.
Conclusions
In this turbulent market when we do not know how long the rout will persist, survival is of utmost important. If you wish to invest, make sure the stocks you intend to invest have strong balance sheets, and it is not a cash burning business. It will then be likely to survive the downturn which is inevitable and thrive when the industry and business turns around.
KC Chong
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Discussions
5 people like this. Showing 48 of 48 comments
value investors and kc chong with rear view mirrors are like your average bankers......
philips is like the extra careful banker....
like what they say, an excellent banker says No 100 times for every Yes they say.......
but if every broker like Philips, all stock broking houses bankrupt ..........
2020-05-04 11:36
its almost by definition, all so called value investors are rear view mirror investors.........
but who can be a competent entrepreneur with business sense?
2020-05-04 11:41
and who can wag rubber gloves when everyone know rubber gloves are doing well and shares at record highs and there are so many shares at record lows?
?
2020-05-04 11:44
buy record high or record low is a question of character and attitude as much as it is about experience and knowledge..........
2020-05-04 11:46
stock market is different thing to different people.....Can u be like KYY one stock at a time, sailang and margin one stock at a time?
that takes a special kind of people with special character and attitude.
2020-05-04 11:53
Philip,
Need to understand loh...Yes Pchem can used naptha too, instead of usual natural gas....but do u know ?...Pchem business is integrated with Petronas Mah.....they are supplying natural gas to Pchem...just bcos naptha has a big advantage over gas recently....Fuck pchem switch all to naptha ah ??
Fuck lah....where Petronas going to store are their fucking unused natural gas leh ??
So effectively Pchem can curi curi use a little bit of naptha....but they cannot switch completely to naptha....they still look at the parent Petronas for direction loh...!!
In other words this time Pchem has no competitive advantage against Lctitan mah....!!
Posted by Philip ( buy what you understand) > May 2, 2020 11:02 AM | Report Abuse
xterrorsinx, you do know that LCTITAN has to import all of its feedstock right?
While PCHEM production supply refinery is just next door which is Pangerang Integrated Complex, crude oil is delivered there, and it also produces naphta directly ( it says so in the website, got naphta crackers).
https://www.nsenergybusiness.com/projects/pengerang-integrated-petrole...
How much is LCTITAN delivery cost? How much is PCHEM delivery cost?
>>>>>>>>>>
Posted by xterrorsinx > May 2, 2020 10:23 AM | Report Abuse
https://www.icis.com/explore/resources/news/2020/04/14/10495899/podcas... PCHEM's advantage is over as it uses Ethane as feedstock. IT's LCTITAN's Time to shine
2020-05-04 11:56
Do not listen to this Philip conman loh....!!
U ask yourself why mega Jumbo Boeing 747 not in service today ?
This bcos it is not cost effective mah....thats why cannot compete with smaller plane mah.....!!
So Mega Petronas chemical could suffer the same fate as Boeing 747 bcos it is designed too big capacity & thus not cost effective mah...!!
Just imagine u take a bus to pick up 3 passengers, when a taxi will do just fine loh...!!
I m sure the Mega chemical plant capex cost is very high, thus there would need to recover, its minimum investment whereas Lctitan & nimble and efficient and huge part of its capex investment already recover & depreciated.
Remember this NEW Mega Petrolchemical plant of Pchem need to support is Petronas raw material gas feed stocks which at much higher cost compare with naptha mah...!!
Pchem is handicapped bcos the need to Petronas whereas Lctitan has huge flexibility to use the most efficient naptha loh..!!
Pls do not be impressed with mega plants like Philip claim loh...!!
Posted by Philip ( buy what you understand) > May 2, 2020 9:07 PM | Report Abuse
stockraider, stop talking bullshit all the time. Please take a look at their new MEGA FACTORY in johor, the one that will produce right next to LCTITAN, with 5x more space, 5x more size and 5x more resources and storage.
https://pic.petronas.com/media/media-release/Pages/2019/Pengerang-Inte...
Pchem new MEGA FACTORY is completed and full run in 2021, it will produce 3.3 MTPA compared to LCTITAN 0.6MTPA
https://www.theedgemarkets.com/article/cgscimb-research-cuts-lotte-che...
Except the upcoming Pengerang PIC which is naphta based, the rest of PCHEM plants are gas based. See the pictures I attached
Do you even understand what you are talking about? JUST IPIC alone PCHEM will be selling 5x the volume of LCTITAN when it is full running, and the refinery next door naphta cracker joint ventrue with ARAMCO (the worlds most valuable company), PCHEM selling price (based on their 25% net profit historically), PCHEM will be able to sell to customers at LCTITAN production costs and STILL make a profit.
2020-05-04 11:58
oh...u are not like KYY? U just wanted average or slightly above average returns from stock market?
then all u need are 3 words........be PROACTIVE, CONSISTENT AND HAVE CONFIDENCE IN YOUR SELF.
knowledge and experience are the foundation
character and attitude are the walls.
2020-05-04 11:59
Health care stock good suggestion, tapi tak jatuh pun loh...!!
Posted by ahbah > May 4, 2020 12:00 PM | Report Abuse
Healthcare stocks lah ?
2020-05-04 12:05
Healthcare stocks tak runtuh to floor bcos they are winning the fight with covid-19 !
All other stocks got k.o. to the floor senseless by covid-19 !
2020-05-04 12:12
What will happen if there is another further new mkt low ?
The world mkt god WB did NOT buy during this mkt dip. Why ?
What stocks can survive ?
2020-05-04 12:16
Seems that Johnson is a young fella around 30 yo.
Able to save 3k a month is nothing big.
Is he married?
Is he staying with his parents?
Let say he is not married, and still staying with his parents, at most he is earning around 10k a month.
Employed in stable industry? No employment is safe under present Covid-19 situation unless in FMCG segment. But again his income will not double when he crossed over to new job!
If what he wrote is true, it may be golden opportunity since 1997/98 economic crisis.
It would be wise for him to settle down with a house to called home!
With 100k saving, prepare to use up to 80k as down payment, go and look for his dream house with 30 or 35% discount, and mortgage payable around 3k a month!
Settle basic needs first.
Be independent in all sense.
2020-05-04 12:17
I agree u want make both from alpha & beta mah.....so that u maximise your gain loh...!
Healthcare is safe but only give u alpha return loh...not wrong to invest...very safe....but wow factor rebound much lesser bcos not cheap bcos did not fall loh...!!
Posted by ahbah > May 4, 2020 12:12 PM | Report Abuse
Healthcare stocks tak runtuh to floor bcos they are winning the fight with covid-19 !
All other stocks got k.o. to the floor senseless by covid-19 !
2020-05-04 12:18
Well phillp,
What do you think of the prospect for LCTITAN's ethane based refineries in US and Indonesia?
it it worth zero?
2020-05-04 12:21
want to trade or want to invest?
people who buy LCtitan are traders just want to trade the share and make some money........but also like to pretend they are value investors
value investors got good image ....speculators got bad image.........
but if u can only buy 1 share and keep for next 5 years, will u buy Lctitan ? surely not.
its got too many uncertainties acting against it.....principally, its got too many state backed competitors ...and China is bringing on-stream another very huge complex this year..........
privately owned model.....very tough.
2020-05-04 12:21
genuine investors..........would u choose Lctitan, Tenaga, Telekom, PChem?
for genuine investors , I will choose the latter 3.......
these are called crown jewels, state monopolies....... they do not face the risks of LcTitan.........
2020-05-04 12:32
raider, if U want to play for a rebound factor, then we may need to follow our former colleague DR KIM and collect some mini warrants of half sen with long life say more than 1000 days of long life ?
U shall make 100% profit if there is a rebound during the 1000 days of long life !
Please share your thought with me. Thanks.
2020-05-04 12:33
Haha
Stockraider already make many rounds of 50% profit by q buy Netx at 0.5-1.0 cents and sell at 1.0-1.5 cents.
2020-05-04 13:04
Sslee, thanks for your feedback.
What shall we do now in this respect, please.
2020-05-04 13:11
Haha,
I already sold almost all my trading position penny stocks for 30-50 % gain.
You can listen to purbull follow the tide on what is hot now or you can wait for downjone to drop on May and collect cheap in month June or Sept because q1 and q2 earning will be ugly.
2020-05-04 13:23
long long time ago, rich refugees carry gold in their bags.......nowadays u can carry bitcoins in your phone.........
2020-05-04 15:18
truth be told..............I think value investing, value investors is likely to suffer the most damage in this environment........
so called value investing will point you to value traps and the share keep dropping and dropping.
to have at least a good chance at success, follow Philips methodology and Philips mentality, its a very matured approach.
...and trading? Trading ok one if you are PROACTIVE, CONSISTENT, CONFIDENT....but don't trade too often.......don't trade everyday......
The problem with trading is also the re-investment problem.....
2020-05-04 16:42
look at that probability....re gloves, calculate here, calculate there, so much calculations ...got use meh? point u in the right direction meh?
look at KYY....I say he is brilliant because he very simple one......Glove is the only game in town.......at least for now.......
2020-05-04 16:50
tl;dr version:
Buy companies which has positive cashflow, even better if it has free cash flow.
Avoid cash burning, debt-laden companies.
2020-05-04 22:24
Posted by enigmatic ¯\_(ツ)_/¯ > May 4, 2020 10:24 PM | Report Abuse
tl;dr version:
Buy companies which has positive cashflow, even better if it has free cash flow.
Avoid cash burning, debt-laden companies.
I always find that you are the very few who catch what I like to convey in my articles in very precise manner. Besides you have many attributes of a fine gentlemen;
Honesty
Respectfulness
humility
compassion
encouraging
kindness
2020-05-04 23:49
What stocks to buy in this turbulent market? kcchongnz
wrong question....To have an answer assume whole year 365 days also got some thing to buy.
that is simply not true......better is tell us what to buy.....when u have some thing to buy.....
but anyone also can tell u ...gloves are hottest game in town............
2020-05-05 14:27
but anyone also can tell u ...gloves are hottest game in town............
the next question is...how come some can make money out of gloves and some don't?
2020-05-05 14:33
stock market is gambling and gambling is emotion......
don't buy only game in town , buy what?
2020-05-05 16:35
Briefly, according to Peter Lynch, a critical factor in share investment is to understand the story of the company. For example, Mr. Chong mentioned about FAVCO last time, and I said must understand despite FAVCO is a good company, FAVCO is facing intense competition from the Chinese SOE.
On the other hand, Warren Buffett talks about economics of an industry. For example, trend (is it a sunset industry or growing one) , structures (no. of players in the industry), etc.
Lastly, TA can give you a sense of timing.
2020-05-05 23:32
Posted by supersaiyan3 > May 5, 2020 11:32 PM | Report Abuse
Briefly, according to Peter Lynch, a critical factor in share investment is to understand the story of the company. For example, Mr. Chong mentioned about FAVCO last time, and I said must understand despite FAVCO is a good company, FAVCO is facing intense competition from the Chinese SOE.
On the other hand, Warren Buffett talks about economics of an industry. For example, trend (is it a sunset industry or growing one) , structures (no. of players in the industry), etc.
Lastly, TA can give you a sense of timing.
========
the truth is ....opinions are always colored.........
experience and knowledge not enough to make good decision....decisions are based on character and attitude.....and u need to be PROACTIVE, CONSISTENT, CONFIDENT.
2020-05-05 23:54
MCO shutdown makes all uncle here talking as if his are the real true. Hello, throw money to support bursa stocks la.
No talk, act with your money. Energy needs to be released rather than study.
2020-05-06 00:37
TRUTHS.......Truths got many colors....how often is stock market 1+1 = 2?
2020-05-06 01:13
student of marketing / propaganda should understand stock market better than maths students.........
2020-05-06 01:18
1. KSL will fly
2. JHM target Rm 1.10
3. Minho target 0.29 cents
4. Naim will up
5. Emico 0.20 cents
2020-05-06 01:52
Philip ( buy what you understand)
I got buy ah, you got buy meh?
>>>>>>>>
Posted by cheoky > May 6, 2020 12:37 AM | Report Abuse
MCO shutdown makes all uncle here talking as if his are the real true. Hello, throw money to support bursa stocks la.
No talk, act with your money. Energy needs to be released rather than study.
2020-05-07 10:27
This sslee talk like a sohai mumbo jumbo tukang tilik loh...!!
U think can predict market like that meh ??
Posted by Sslee > May 4, 2020 1:23 PM | Report Abuse
Haha,
I already sold almost all my trading position penny stocks for 30-50 % gain.
You can listen to purbull follow the tide on what is hot now or you can wait for downjone to drop on May and collect cheap in month June or Sept because q1 and q2 earning will be ugly.
2020-05-07 11:16
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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....
Philip ( buy what you understand)
Don't listen to stock tips where the writer doesnt hold a single share in it.
As for LCTITAN, never buy stocks without understanding it's long term prospects. Never just look at cash and asset position, always buy based on competitive advantage, long term growth prospects, management execution and competition levels.
When you don't own the land around you, and are unable to expand your plant, a have to import all your feedstocks, and the guy next to you opens up a factory that is 5 times bigger than yours, and is also building the biggest refinery and crude oil storage in the region next to you, using a simple metric of balance sheet and cash flow to justify investment is silly. When you don't actually pay attention and scuttlebutt, you will quickly daily to realize that your competitor can produce 5x your output, with a costs structure that allows them to sell at your production cost and still make a profit.
Rear view mirror is definitely not a recipe for success.
And don't listen to stock tips where you don't have a clear understanding of the promoters buying price and portfolio position.
Without knowing the investing execution capability and long term performance, it is no different than getting a monkey to throw a dart to buy stock.
>>>>>>>>>
https://klse.i3investor.com/blogs/kcchongnz/2020-04-13-story-h1505955007-Don_t_listen_to_stock_tips_kcchongnz.jsp
2020-05-04 10:40