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Consumer staples has never been a particularly sexy sector. And none less so than for 2007 what with all the hype about asian infrastructure, telecoms, construction, and pump priming for the economy. Me? I’m sticking with mummy’s milk.
And that’s because all the goodness and calcium and vitamins has translated into healthy sales growth, ROA and profit growth, giving this particular baby a healthy “8”. The only things I don’t like are the growing balance sheet and receivables… but with the recent retracement of its PE to around 18 it seems like a fair bet, especially if you notice that it has just hit resistance.
It’s all here. You can see the companies referred to by checking out the categories I have used just below.
Unfortunately I haven’t had a chance to analyse these stories myself especially as I have been busy learning PHP and setting up my fancy new blogsite (I can’t wait to roll that out for my readers.)
This weekend Miss Dirty Dog and I were in Koh Samui looking for potential wedding venues. At the airport I bought a book called ‘Blink’ by Malcolm Gladwell and read it over my trip. This book (which was written by a journalist and hence given rave reviews newspapers) describes how split-second decisions are made. Apparently it is something to do with our body’s natural ability to assimilate a small amount of data subconsciously and extrapolate it to come up with an accurate conclusion which our conscious mind would take a lot more data to achieve. It is about how we develop ‘hunches’, or more scientifically, ‘thin-splice’ events. Think of the mother who always knows when his son or daughter is telling a fib, extremely skilled businessmen who always seem to do the right thing, detectives who can follow their noses correctly, art historians who can spot fakes despite being presented with near perfect replicas just because it ‘seemed’ like the right decision at the time. Now think of a good trader. A good trader always seems to make the right trades. Their brains and bodies have been tuned to such a degree that they somehow pick out the right signs when presented with only limited information. Now think of all the screwups that people make – police shooting the innocent, people who get convicted for crimes they didn’t commit, investments that go wrong etc. etc. This is ‘thin-splicing’ at its worst – when your body leads you the wrong way and you make the wrong decision.
As a trader, wouldn’t it be great to tune your body to such a degree that your subconscious body can nudge you in the right direction of a trade? Hell, you’d be like a Jedi Knight! Well guess what? There are a few things you can do to help get you on your way. The most obvious is just to practice. And I don’t mean doing paper trades, I mean trading with real money. Because there is no other substitute. The more you do it the more you will get a feel for what works and what doesn’t. Take me for example – I’m not a particularly great technical intra-day trader, but I believe that I am fairly good at making strategic long term decisions because I’m a stubborn fella and I like to track and nibble at stocks even if the trade goes against me. I’m also good at spreading my risk around and protecting my capital. So I trade according to that style and over time I will continue to refine it more and more.
So here’s my tip: ask yourself what kind of person you are, get together some money and just start trading. Then when a trade goes against you, ask yourself why you did that trade? Try to understand how your body ‘thin-spliced’ the information you had in order to get you to make the trade. The more you understand it the more you will be able to nurture it.
Another potential beneficiary of the tourism play in Malaysia is Air Asia, which I have also put through my spreadsheet and scored. As you can see it doesn’t do very well due to eroding profit margins. However as an airline company it has the advantage of being in a business where barriers to entry are extremely high. You can see also that it has been busy building up its operations and grown its fleet – which has caused havoc on the liability/asset ratio and profit margins but necessary to maintain growth (which it still enjoys). That is still why it has been rewarded with a PE of around 30. The big question is whether it can keep up its turnover, which it seems to be on target for despite a generally weaker travel sector before terrorism became a household word. This has been due to good management and great positioning in a new and growing market. However I would not expect any magic from this counter as its share price hasn’t moved much in the last 2 years and will prefer to wait for weakness before I go in.
Construction is not the only sector which is touted to be a beneficiary of the government’s policies in 2007. Another sector is leisure and gaming.
This counter predominantly owns or has shares in leisure facilities (Sungei Wang), Hotels (Andaman, Datai, Shangri-La), as well as a power station and is 25% owned by Genting. On 29 Dec it announced its sale of Sungei Wang plaza in exchange for a stake in Bintan Treasury Bay (a private vehicle which owns land in Bintan) to capitalise in the redevelopment of Bintan in Singapore. As a result of the announcement, the price broke through its range high of 1.85 and is set to hit 2.50 on excitement of this news.
Okay so much for all the hoo-ha. Let’s look at the numbers. Landmarks scores an 8 on my company valuation test, which puts it in the similar league to pretty well run companies like Astro, so I have no problems with this counter. But what are its growth prospects? If you’re been to Bintan, you’ll know why it is generating so much excitment. This is an unspoilt beach about 1 hour away from Singapore which is set to benefit big time from expanding tourism. Since it is also owned by Genting, there are natural synergies there. And you can expect Genting casinos to plug this baby big time… BUT, in exchange for a slice of this pie, Landmarks had to dispose of Sungei Wang – its most prized asset and biggest earnings contributor. Is the exchange worth it? I’ll leave it to you to decide. At these prices you could say that it is expensive and might even be ramped, which from its history you will see that it is no stranger to. But, because it’s a good company with good prospects and I wish to trade on the breakout, I have decided to take a light position on this today. Even if this turns out to be a headfake I would be happy to sit on this counter for a while.
I will post up my own scoreboard on this company valuation later, but here’s the blurb.
UPDATE (12-01-07): Here’s the scoreboard. This baby gets a 10! And I got in (expensively at) 2.4025.
Wish me luck!
Here’s the latest OSK report on the construction sector:
which lists the potential beneficiaries of the 9MP election pump priming which is due to take place this year. The wisdom which is being touted right now on the street is that projects will kickstart earnings and balance sheets of these companies which have been languishing the past few years (with IJM being the best candidate).
Okay I wrote about this back in November so what’s new? Well, I decided to apply my ‘dirty’ test to some of these companies and was a little surprised to see how most of these companies scored with just an average 1 point being scored between the 3 companies.
So beware! Just because the environment becomes more friendly towards a company does not mean that they will be able to translate that into profits. All the stars must align for a stock price to go up and stay up. They are: Good environment, good management and investor interest. Construction companies in Malaysia are benefitting from 2 out of 3 of those factors. In my view, any price action will be driven by investor perception rather than improving fundamentals and hence subject to correction when these stocks fall out of favour.
Just take a look at the IT stocks in the global stage to see what I mean (INTEL, Microsoft, AMD etc. all getting whacked even though the new operating system VISTA has just been launched).
But I will still probably go in on some of these at some point if I see a trend being established (just like I did with IJM last year), but I will only take light positions.
I’m going to post a pdf of spreadsheet I have adapted* which I use to quickly evaluate companies. This baby looks at a company’s numbers and scores them according to a number of criteria to do with profitability, cash flow, operating efficiency etc. In total there are 13 tests and anything scoring 10 or above is a company worth following in my book. Now this doesn’t mean that I will automatically buy the company, it just means that I will put it on my watchlist and buy it when it becomes cheap enough. This is because investing does not involve only picking good companies, it also involves buying and selling them at the right time. Also please note that this test does not look at the external environment which is essential to determine growth prospects. However they provide a quick way of weeding out weak companies and identifying strong ones so that you can spend more of your time researching good companies.
I will post these up every now and then when I find a company which scores 10 or above and add it to my watchlist.
*from Harry Domash’s book “Fire your Stock Analyst” (he calls is a ‘fiscal fitness’ test)
I don’t know a single money manager who dares to short the market right now, but I’m going to stick my neck out and say that the KLCI is about to run into some serious headwinds. If you take a look at the below picture and study the volume you will see that when the previous high was broken back in October, the big money literally piled in and propelled the market to its current high. After new year a huge drop off in volumes ensued, producing a higher high on weaker volume which is red flag in my book (note also that RSIs have also demonstrated another negative divergence). The good news is that volume has returned in the last couple of days, but the question is will it be sufficient to drive the market up another leg? I am standing aside for now and waiting for it to come back to some vague support levels I have drawn in before adding on to more positions…
Don’t things always look so clear in your rear view mirror….
Welcome to 2007 readers! Thanks for the earthquake in Taiwan I had to spend it in the office talking to clients who were flipping out over their taiwanese investments, and readers have been complaining that my blog is unaccessible now, since a great chunk of Malaysia’s internet traffic does travel along the Taiwanese pipeline. As for Bangkok, well luckily Thailand already had its fair share of shocks so the bombing did not really make anything worse of than it already is (financially speaking of course!) other than to demonstrate that the perpetrators are no better than the current leaders who have no respect for human lives. Or maybe Thaksin’s supporters were just outraged that he didn’t get a chance to put his policies in place or make enough money whilst in office…
Anyway earthquakes and bombings aside … I do not believe that New Year should change anything as far as markets are concerned so any themes which were working in 2006 should I believe be followed into 2007. So the growth of emerging markets should continue as should the rise of equities generally. My advice is to follow the money. Now there are many including me who think that there are big problems on the horizon linked to the cooling of the Chinese economy and the weakening of the US consumer base which will affect global consumption, but the million dollar question is when that will happen. Well, like I always say, I am a trader not an economist, so I have no idea. It could be this year or it could be next. In the meantime I will just take any opportunity I can to buy into good companies when confidence is weak and sell when confidence is high. Over Xmas we did indeed see some weakness in the KLSE which I used as an opportunity to buy into Genting (I will update my portfolio details later).
But I am still less than 30% invested in stocks because the market is still strong and I generally prefer to sell rather than buy at times like this. So here I am, exercising patience and still waiting for the bears to come and ruin the bull party, which will happen as night follows day…..