Posted by kcchongnz > 2013-03-20 10:53 | Report Abuse

gark: [Look at this way, what if the company that we have been discussing at low PE, gives high dividend and have some reasonable growth. Won't that be a much better prospect? These stocks do exist but less recognized by the market until a catalyst comes along.

I don't advocate chasing growth stocks, but a fisher/graham method in which margin of safety + growth will produce tremendous results.]

gark, don't misunderstand me. I agree with your above statement 100%. If you do read my analysis and valuation of companies so far, you will notice that I used a growth assumption (I always use conservative assumption) to find the intrinsic value of the company, and growth is a major assumption which drives the value of a company. I also agree with you that these kind of stocks do exist. I always try to find these type of stocks and they are normally not covered by analysis, low liquidity, few people talk about. But it is really hard to find.

The example of the hypothetical stock, S, we are discussing about we both assume that "The stock earns 10 sen every year and sells at 50 sen, a PE ratio of 5. It still earns 10 sen a share 10 years later, no growth, not even grow with inflation." is straight forward. It assumes the cash flow is fixed, no uncertainty, for example a consumer product everybody uses and not expected future competition. It is also like a bond giving you the future cash flow. Looking at my posting of "The power of arbitrage", don't you also want to put as much money as possible and earn the risk-free high return? We assume the cash flow is fixed, no uncertainty etc, remember. If the cash flow is uncertain, then it is another story.

Leverage is a double-edge sword, no doubt about it. Do you notice that most public listed companies borrow money,or leverage, to do business? Why don't they use all equity then? In the low interest rate environment now, debt is cheap (5-6%) where as the required return of equity holders are higher. I would want a minimum return of 10%-12% to invest in stock. Leverage amplifies return to equity holders if the business has a record of producing good earnings and cash flow. Have you ever wonder those companies with good cash flow like BAT, Maxis, BerjayaToto, YTL Power etc borrow so much money? But of course there is a limit to leverage, too high leverage makes the company risky, especially for those companies with not much cash flow, free cash flow in particular.

Posted by kcchongnz > 2013-03-20 11:00 | Report Abuse

gark, we are the very few who are looking at fundamentals of companies. That makes us of the same "gang". Yes, we have different opinion. I don't know how many times I have said I like constructive criticisms and I am always looking forward for them. Yours are some of the few. I appreciate them. That would curb my cognitive bias of over-confidence which is not good for me in investing in the stock market. Hope we can exchange knowledge more often.

Posted by oldman > 2013-03-20 11:10 | Report Abuse

Results speak for itself. Thank you guys.

Posted by oldman > 2013-03-20 11:11 | Report Abuse

I will buy Kfima and keep for 5 years. Time will tell. Of course. At own risk.

Posted by gark > 2013-03-20 11:13 | Report Abuse

Moderate leverage in a company is beneficial and is required to expand the business. I would tend to ovoid over leveraged companies with extremely high debt. Little or no debt companies have very good potential as they are able to raise funds quickly if a opportunity presents itself.

The leverage I was talking about is personal leverage, especially used to buy stocks, in which the stocks will be used as collateral. If due to an unfortunate market downturn, your stocks will be facing margin calls. This is why I would avoid leveraged purchase of stocks as it does not allow you to buy and hold for long term and ride out the downs of the market.

Posted by kcchongnz > 2013-03-20 11:13 | Report Abuse

gark, your comments on my posting on APM is appropriate and I also agree. Anyway my original posting on this is based on what Cold Eye talked about its 5 yardsticks. You are right to let other know about its other considerations and performance.

Posted by kcchongnz > 2013-03-20 11:16 | Report Abuse

gark, if you read careful about my posting on "The power of arbitrage" on stock S, I was talking about risk-less arbitrage. Whether it is personal or corporate, risk-less arbitrage like what I was talking about has three outcomes; win, win and win.

Posted by gark > 2013-03-20 11:19 | Report Abuse

Look at the great example of LTCM, which kept on buying Russian Bond because their Phd calculations shows that the bonds are severely undervalued.

Even though they are right in the end, but market forces prevailed and sold down those bonds, facing margin calls LTCM kept selling and the price went down further and then even more margin calls.

Before the bonds can realize their true value, LTCM declared bankruptcy. If LTCM can hang on for a couple more months they would have reap billions of dollars in profits. That is leverage working against you.

Posted by kcchongnz > 2013-03-20 11:25 | Report Abuse

What LTCM did was not risk-free arbitrage, it is a risky arbitrage which due to the decision of one man, Yeltsin who said they were not going to honor the bonds issued. Hence those Russian bond prices plummeted further and became worthless. In fact most low grade bonds went into tailspin when Russia made that decision. Our assumption above is cash flow with no uncertainty. That is the difference. Unless you assume those cash flows are not certain, then it becomes risky arbitrage.

Posted by gark > 2013-03-20 11:28 | Report Abuse

Well it was risk free leveraged arbitage (bond gives constant interest)until Russia decided not to pay back the bonds...

Same with our company S, a couple years down the road, the nature of business may change or the management decided to do something stupid.

We cannot predict the future, so there is no actual risk free arbitrage. We can only minimize our risk. :)

Posted by kcchongnz > 2013-03-20 11:36 | Report Abuse

gark, bond is a risky asset, it is not a risk-less asset. Even US treasury bond defaulted once during Regan's time. So now you are saying that the cash flow of the hypothetical stock S ise uncertain, then it is a different story then. We now have two different opinions. We can't say who is right or wrong, it all depends on each one's risk appetite. For me, because of S's low price in relation to its intrinsic value, there is high margin of safety. I will buy it. But I won't leverage myself to do it.

Posted by HarryChin > 2013-03-20 11:38 | Report Abuse

i just depend buyer and seller... (trader)

Posted by gark > 2013-03-20 11:56 | Report Abuse

Ok lah, kcchongnz, shall we agree to disagree? We reserve this space for FA analysis. I might contribute some later. ;)

Posted by Jonathan Keung > 2013-03-20 12:27 | Report Abuse

every investment carries risk. the higher the risk - higher the returns. even FD also carries risk. look at Cyprus. out of the blue. they came out with a rule to tax the depositors. if they carries thru. every fiscal tight country will follows and implement the deposit tax rule.

Posted by kcchongnz > 2013-03-22 19:32 | Report Abuse

Guan Chong Berhad
Let us evaluate a stock, GCB as recommended by Cold Eye with his own 5 yardsticks.

Yardstick 1: ROE
GCB reported an earnings of 118.8m, or EPS 23.7 sen for the year ended 31/12/2012 (note that I don’t use the term “ordinary business” here). With its net asset backing per share of 73 sen, ROE is about 34%, fantastic.

Yardstick 2: Cash flow and free cash flow
The cash flow from operations (CFFO) is only 9.2m for year ended 2012, or just 8% of its net profit. This demonstrates its extremely poor quality of its earnings. Is there financial shenanigans involved? Highly probable in my opinion. Its trade receivables and inventories jumped by 43% and 14% to 214m and 513m respectively while turnover increased only by 4%. GCB spent 100m in capital expenses, distribute 51m in dividend, acquired another subsidiary for 14m. Where did GCB got this money to do all these? You got it right. Borrow more from bank in the amount of 191m last year. Its total debts now is 625m, or a debt-to-equity ratio of 1.8 times. It didn’t pay interest for its short term loan in a whopping amount 512m but just rolled over it. Some money was obtained from the conversion of its warrants and hence the dilution of its earnings per share. GCB failed miserably in this important yardstick.

Yardstick 3: PER
Yeah a lousy company can still be a good investment if the price is dirt cheap. Does GCB meet this criterion? EPS last year was 24.8 sen Vs its price now 1.80. A PE of 7.2, damn cheap right? Is that E in that equation “real” as discussed in yardstick 2 above? If it is not, what is its PE now?

Yardstick 4: Dividend yield
GCB paid 12.5 sen per share to its shareholders last year. This translate to a dividend yield of 7%. Very good right? That depends on where the money for dividend comes from.

Yardstick 5: NTA
GCB’s NAB per share is 73 sen. With a price of 1.80, the price-to-book value is 2.5 times. Moreover, its total debt of 625m is equivalent to a debt of 1.31 sen. Its total receivables and inventories of 746m is equivalent to 1.56 per share. How much is the true value of them?

GCB seems to satisfy 3 out of the 5 yardsticks used by Cold Eye to evaluate if it is justified to buy the stock, namely ROE, PER and dividend yield. However with the extremely poor quality of its earnings as shown in its cash flow, I suspect it doesn’t even meet a single one of the yardsticks. Well I have nothing against GCB at all. I am not trying to press down its share price so that holders of GCB sell to me cheaply. For I will never buy GCB share, whatever price it is as I follow WB’s rules. I can’t short sell it too as it is not allowed in Bursa. I still got utmost respect for ColdEye, just I don’t understand him for recommending GCB.

Posted by bangbang123 > 2013-03-22 19:51 | Report Abuse

nampak bagus

Posted by Hustle > 2013-03-22 19:59 | Report Abuse

Nice interpretation kcchongnz :)

Be simple I have 4 rules that don't buy:
1.Over whelming Price
2.Low dividend
3.Low volume
4.Suddenly from high price drop to very low price stock or contrary

Posted by kcchongnz > 2013-03-23 10:55 | Report Abuse

Hustle, I only agree to one of your rules only, namely "overwhelming price", or in my context, overvalued stock; meaning the share price is way too high in relation to its intrinsic value. Let me explain why I don't agree with your other three.

When we invest, we look at total return on our investment, ie dividend plus share price appreciation. Companies with good business with high return of equity should retain as much cash flow from operations as possible to reinvest into the business, if the reinvested capital can yield similar high ROE. Don't you think if the company can earn the incremental ROE of say 20%, isn't that better than you take the high dividend and just consume it away, or just put into the bank as saving with an interest of 4%? Isn't 20% return better than 4%? It has been shown again and again in academic studies that there is no statistical evidence to show that high dividend stock yield a high total return to investors.

Regarding low volume. or as been harping by somebody about no liquidity, read what some of the gurus of investment said about this.

"A perfect stock: The institutions don’t own it, and the analysts don’t follow it." Peter Lynch

Also see what Peter Lynch advised to avoid:
8. Being obsessed with liquidity
9. Avoid the hottest stock
10. Beware the next something
12. Beware the whisper stock

This is what Cold Eye said about high volume stocks, or hot stocks:
散户从来没有去想过，被炒家相中的，都是劣股。
蓝筹股的股价已经完全反映应有的价值，有些已经被高估。

AS for your point no.4, if a stock price drops from very high to very low price, maybe because of some unfounded rumours which you can fathom that it is not true, it may present an excellent opportunity for you to invest. On the contrary, if a stock has been trading at say 50 sen but suddenly goes up to 1.00, because there is a takeover offer at 1.50, isn't there still an opportunity to make money?

Posted by Hustle > 2013-03-23 11:31 | Report Abuse

Good point kcchongnz and appreciate it,I will study back the 3 of my weakness rules you pointed out.Further more,accepting others people valuable opinion have nothing to lose :)

Posted by kcchongnz > 2013-03-23 11:53 | Report Abuse

Hustle, please note that I am not saying your points are wrong. there is no right or wrong in investment. Just different opinions. Sometimes you opinion may end up right in the market and sometimes mine may be right.

Hustle, you have very good attitude. You can go far in your investment experience. Cheers

Posted by tptan45 > 2013-03-23 12:19 | Report Abuse

I have other don'ts.
1. Don't invest in stocks whose majority controlling owner has a bad reputation.
2. Don't invest in GLCs and china companies.
3. Don't invest in companies with less than 5 yrs of listing history. Somehow companies tend to lose money once they are listed.
4. Don't invest in companies with no growth or erratic growth or income.
5. Don't invest in techs.
6. Don't invest in companies whose business you cannot visualise or feel comfortable with.

Posted by kcchongnz > 2013-03-23 12:42 | Report Abuse

tptan45, good points. And I agree with most of your points and also have some difference in opinion as below:

1) This is indisputable. Ivory comes to my mind again. See how they present their financial statements you will know why. KNM is one of the worst reputations. the management/major shareholders keep on talking cock and frying share price and made from the patsy. Keep on talking cock, building empires, even buying back shares with company funds when they know there is no prospect of the company (but they sold at the back, just guessing only here but the signs are there), cooking books (with KPMG as the auditor?) etc etc.

2) GLC management never has the interest of the shareholders in mind, only their own personal interest. Despite of whatever the moat the company has, no use for shareholders. The benefits won't be yours. Chinese companies? OMG. Enough said. Totally agree.

3)Generally agreed, but many exceptions. I have ECS, Prestariang. I think these are exceptions, hopefully.

4)No growth companies can be good investment if the price is right. See my arguments with gark in this thread. I hope you can comment on it. Same as companies with erratic growth. Look at the intrinsic value of a stock as the discounted free cash flows in the life of the company and compare with its market price.

5) That was what Warren Buffet not doing during the tech bubble in the early twenty first century when all tech companies were so way overvalued. Circumstances may vary. I think if one has invested in Apple, Microsoft, Dell etc long time ago, he may have made a lot of money. Just guessing.

6) Yeah, stay within your own circle of competency as Warren buffet said.

Posted by passerby > 2013-03-23 12:42 | Report Abuse

tptan45 missed out his no.7 don't - never touch Tan related companies...i can still remember that :)

Posted by kcchongnz > 2013-03-23 12:47 | Report Abuse

Come on passerby, straight away I can prove you wrong. If you invest in Public Bank started and owned by Tan Hong Piew, your compounded annual return is more than 20% since the beginning.

Posted by passerby > 2013-03-23 12:51 | Report Abuse

@kcchongnz - just joking with tptan45 la, he mentioned not to touch Tan's related companies before la

seriously, are you really from contracting background ? normally contractor catch words very fast one le...

Posted by kcchongnz > 2013-03-23 13:00 | Report Abuse

passerby, you think i read every post in i3 meh? Can't imagine tptan asked people don't touch Tan related companies.

Hey, you cast doubt about my contracting background? If you question my identity before lei. Again now? Want to engage in a discussion about foundation works, bored piling, diaphragm wall, soldier pile wall, secant pile wall, barrets, had dug caisson, top-down construction etc?

On second thought, better don't lah. I read your posts before, you know all the foundation contractors in Malaysia, in particular those bored-piling companies. May be you are still in the industry. Obviously, you would know more than me then. I already "sau san".

Posted by passerby > 2013-03-23 13:16 | Report Abuse

lol, i see you hanging around here 24/7, thought you see the post before :)

thinking back, you admitted " been there, done that" during the chat with tonylim , no solid valid reason to cast doubt about your contracting background , lol

I "chia dua pao" about bored-piling companies you really believe :)?

Posted by tptan45 > 2013-03-23 14:18 | Report Abuse

It is Teh Hong Piau, not Tan.
BTW I meant misai Tan

Posted by kcchongnz > 2013-03-23 14:32 | Report Abuse

I actually want to trick passerby one. He did not notice it is Teh, and not Tan. Hahahahahaha.









No lah, actually I nyayok already.

Posted by tptan45 > 2013-03-23 14:58 | Report Abuse

My don'ts have generally steered me away from trouble since I started investing seriously. They were conceived after reviewing the 'burns' both mine and others.
I have shallow financial knowledge (unlike kcchongnz and others) and those don'ts protected me well so far. I missed some opportunities but that's ok. But the also greatly restricted the number of investment targets. I am never a believer of diversification, so that's ok.

Never lose money...Buffet.

Posted by passerby > 2013-03-23 15:12 | Report Abuse

actually i didn't realize that also coz got no interest in Public Bank, lol


very fast putar-putar wor this time contractor :)

Posted by kcchongnz > 2013-03-23 15:14 | Report Abuse

yeah loh, bullshit too much.

Posted by kcchongnz > 2013-04-02 13:50 | Report Abuse

Cold Eye’s 5 yardsticks for Muar Ban Lee

Yardstick 1: ROE
MBL reported an earnings of 17.1m for the common shareholders, or EPS 18.6 sen for the year ended 31/12/2012. With its net asset backing per share of 89 sen, ROE is 20.8% which is much better than the benchmark of 15%. This is excellent as it was achieved with no debts.

Yardstick 2: Cash flow and free cash flow
The cash flow from operations (CFFO) is 22.6m. This is 132% of its earnings of 17.1m. This shows the quality of the earnings is good. After spending 2m in capital expenses, there is a free cash flow (FCF), or owner’s earnings of 20.6m. 12.1m dividend was paid out from the FCF . This FCF is at 26% (>>5%) of its revenue or 45% (>>12%) of its invested capital. I can only use one word to describe this; Fantastic.

Yardstick 3: PER
MBL is trading at 98.5 sen at the close of this morning session. With EPS of 18.6 sen, the PE ratio is only 5.3 (<<10). This is a reasonably low PE and considering that it has a healthy balance sheet with excellent earnings and cash flows.

Yardstick 4: Dividend yield
MBL paid a dividend of 10 sen for last financial year, or a dividend yield of 10.2%, more than twice the FD rate. Very good indeed.

Yardstick 5: NTA
The net asset backing per share of MBL is 89 sen. Hence at a share price of 98.5, the price-to-book value is 1.1 (<1.5). It is inexpensive. 41% of its assets is hard cash.

Yardstick 6 (Non Cold Eye yardstick): Growth
The CAGR of MBL’s revenue and net profit for the last three years was 46% and 26% respectively. Last year’s growth was 43% and 40% respectively. This growth is a very high growth.

MBL meets all criteria of Cold Eye as an investment grade stock by a wide margin. For those who is going to harp on its ill-liquidity, the table below shows its long and short-term return from 2 weeks to 3 years since listing.

MBL 0.985 1/04/2013
Period 2-week 6-month 1 year 2-year 3 year
Price 0.975 1.02 0.81 0.65 0.65
Return of stock 1.0% -3.4% 21.6% 51.5% 51.5%
CAR 30% -6.7% 21.6% 23.1% 14.9%

MBL’s compounded rate of return can be summarised with two words: very good.

Oh I just bought this stock not long ago, I am not promoting this stock, but merely for knowledge sharing purpose. I am also not asking anyone to buy so that I can sell him high.

Posted by Andrew Law > 2013-04-02 14:31 | Report Abuse

if 1/2/3 and 5 all very good figure also not enough. if the major shareholder do not want to reward the minority shareholder, price will not move.

Posted by kcchongnz > 2013-04-02 14:36 | Report Abuse

Why do you say the major shareholder, actually it should be the management, does not want to reward the minority shareholders when the dividend distributed was 10 sen, or for a yield of 10.2%? How do you want the management to reward you? Please share.

Posted by gark > 2013-04-02 14:39 | Report Abuse

kcchongnz,

3 cent dividend for MBL is still pending AGM, will announce within a month or so.

Also dividend payment has been increasing for 3 years in a row.

Posted by kcchongnz > 2013-04-02 14:44 | Report Abuse

gark, thanks for the information. Excellent to have fellow forumers helping to disseminate information, whether good or bad. Yes, the growth in dividend year after year is very important.

Posted by Andrew Law > 2013-04-02 14:55 | Report Abuse

kcc,

i'm not talking about mbl specifically. MBL pay good dividend, then it's good.

most of public listed company, their management is also biggest shareholder. I always like company that reward its shareholder. not just looking at PE and ROE

Posted by Andrew Law > 2013-04-02 14:57 | Report Abuse

also for trading, i prefer that these stock has some foreign fund or local institution holding some percentage of shares.

This shows visibility of the stock in focus

Posted by kcchongnz > 2013-04-02 15:01 | Report Abuse

Andrew, agree with you if you are referring to trading, not investing.

Posted by tptan45 > 2013-04-02 16:47 | Report Abuse

By Kcchongnz :4)No growth companies can be good investment if the price is right. See my arguments with gark in this thread. I hope you can comment on it. Same as companies with erratic growth. Look at the intrinsic value of a stock as the discounted free cash flows in the life of the company and compare with its market price.

They can be good investment targets, but unfortunately when funds are limited, I think a sound, fundamentally strong growing company might be a better place to park the money.
I am very much influenced by gurus which advocate growth and not so much by pure value gurus. But I will not be able to quote any studies, values, etc. But by common sense share price will grow with the company.

Posted by kcchongnz > 2013-04-02 17:42 | Report Abuse

Tptan45, you must a great fan of Philip Fisher, father of Kenneth Fisher, one of the earliest proponent of growth. I am one of his fan too. A growing company is great, there is no doubt about it. But my point is don’t overpay for growth. Let me show you in an analysis below. You see numbers won’t lie, only assumptions may not be true. The analysis I show below is pure mathematics, no assumptions, or little assumptions.

Say a company whose EPS is 10 sen and its stock is selling at $1. It pays no dividend. So the PE ratio is 10. It is growing at 10% per year. After 5 years, its EPS would be 16.1 sen (10*(1+10%)^5). Assuming the PE ratio remains the same when you sell it then, i.e. 10 and my required return is 10%. The present value of this future cash flow is also $1 (1.611/(1+10%)^5). So if you have bought the share at $1, you are paying a fair price. If you pay 1.50 for the stock, or a purchase price at a PE of 15, are you paying a fair price?

Look at another stock, B. Its EPS is also 10 sen now but its expected growth is 20% for the next 5 years. Its EPS will grow to 24.9 sen in 5 years time. Assuming you pay a higher price at $2 to buy B now, or a PE of 20 and after 5 years, it is still selling at a PE of 20, the price will be $4.98 (20*0.249). If you discount this price at 10% back to the present value, it is $3.09, more than 50% above the price you pay. You got a great deal even if you pay a higher price of PE of 20 for a stock growing at 20% for the next 5 years. But is it still a good deal if you buy it now at $4.00, or a PE of 40? Or instead of growing at the forecast growth rate of 20%, it is growing at only 10%? Is it a good buy also?

Posted by gark > 2013-04-02 18:02 | Report Abuse

My view more of a mix of all styles, must have deep intrinsic value margin of safety with reasonable growth attached. I would term reasonable growth is at least 8% CAGR which is not too difficult to achieve.

Posted by datuk > 2013-04-02 18:18 | Report Abuse

as a long term player......i only interested to accumulate/ average down/up when the industry is in recession....be a contrarian, be an expert in that industry!!!

Posted by kcchongnz > 2013-04-02 18:38 | Report Abuse

gark, good points. For me if I were to invest in a value stock, these are my criteria:

Margin of safety: Min 30%
PE ratio < 10

But
Debts/capital < 60%
Quality of earnings must be good, ie, CFFO/NI about 100%, or more
Historical growth and expected growth rate > 5%

Posted by houseofordos > 2013-04-02 19:32 | Report Abuse

wah kc, so fast u pick up MBL ar.. i still din manage to catch it :P

Posted by gark > 2013-04-02 21:55 | Report Abuse

Kc,

My pe is more flexible basically less than long term growth and dy.

Example, a stock growing at 8% cagr with 3% dy, max pe = 8+3=11

Posted by Ooi Teik Bee > 2013-04-02 22:33 |

Post removed.Why?

Posted by Aston > 2013-04-02 22:36 | Report Abuse

Some announcement tomorrow. Reporters are called to Putrajaya this afternoon

Posted by nhkch > 2013-04-02 23:42 | Report Abuse

hi guys..after reading from the first comment, i really benefit from how to do fundamental analysis. I did bought cold eyes book but due to less example, i still have difficulty in FA. There are few question i would like to ask kcchongnz..

1)
APM 4.96 20/03/2013
Period 2-week 6-month 1 year 2-year 3 year 4 year 5 year
Price 5.00 4.96 4.40 4.85 3.00 1.50 2.00
Return of stock -0.8% 0.0% 12.7% 2.3% 65.3% 230.7% 148.0%
CAR -19% 0.0% 12.7% 1.1% 18.2% 34.8% 19.9%
Dividend 0 2.5% 4.3% 3.1% 3.3% 8.0% 5.0%
Stock price appreciation -19% -2.5% 8.4% -2.0% 14.9% 26.8% 14.9%

i wonder how to get those data? and how to calculate CAR?


2)
The cash flow from operations (CFFO) is 142m. This is 114% of its earnings of 125.2m. This shows the quality of the earnings is good.

i) 114% is good then how much consider bad?
ii)what is the theory for this calculation? i mean what does it mean if the percentage is low?


3)
This FCF is at 8% (<5%) of its revenue which is good.
ROE is 12.8% (not bad)

What is the reference for this data? Why <5% is good?
For ROE should it compare to other company in same industry?

4)
Margin of safety: Min 30%

what is margin of safety and how to get this number?


5)
Debts/capital < 60%

Is this mean that (total liabilities)/(share capital)?


Hope this is not too much :)

Thanks.