Attention Book Value Investor!!

Book value gets a lot of attention these days - perhaps because it's such an easy number to find. You see it reported everywhere. With current technology, u can google and it can generate a number of stocks that traded below its book value. In theory, u just buy a stock that has a higher book value versus its price. Example, book value per share RM8.00 versus stock price RM4.00. Before I start going into book value, let's us understand what is book value. The formula is pretty simple:

How it is used among investors? It compare share price against book value per share. The ratio measures how far share price against its book value. Assuming A stock priced at RM15.00 versus its book value RM3.00 per share. It is said that the stock is traded at market 5 times against its book value. It may be considered at Overvalued stock, not a buy criteria. or the other way around, stock that is sell 0.5 time than its book value, can be considered as undervalued stock. Similarly, the NTA (net tangible asset) which has similar behavior.

The drawback of this method is that, the stated book value often bears little relationship to the actual worth of the company. It sometimes doesn't reflect the true value (be it understates or overstates). For example, Penn Central had a book value of more than USD60.00 per share when it went bankrupt. In 1976, Alan Wood Steel had a stated book value of USD32 million (USD40 per share). However, the company filed for Chapter 11 Bankruptcy 6 months later (similar like Pn17). The problem was that its steel-making facility, worth perhaps USD30 million on paper, was ineptly planned and certain operational flaws rendered it practically useless. TO pay off some of the debt, the steel-plate mill was sold to Lukens Corp. at around USD5 million and the rest of the plant was presumably sold for scrap.

A textile company may have a warehouse full of fabric that nobody wants with book value USD4 a yard. In reality, they couldn't give the stuff away for 10 cents. There's another unwritten rule here, the closer you get to the a finished product, the less predictable the resale value. You know how much cotton is worth but who can be sure about,an orange cotton shirt? You know what you can get for a bar of metal but what is it worth as a floor lamp.

A few decades ago, Warren Buffett decided to shut down the New Bedford textile plant that was one of his earliest acquisitions. Management hoped to get something out of selling the loom machinery which has a book value of USD866,000. But at a public auction, looms that were purchased for USD5,000 each years back, now were sold at USD26. What was reported as book value of USD866,00 only brought in USD163,000 in actual cash.

Overvalued assets on the left side of the balance sheet are especially looked very suspicious when there's a lot of debt on the right side. A company may reported RM400 million in assets and RM300 million in debts, resulting in a positive book value of RM100 million. The debt part is a real number. but assets of RM400 million may be worth at RM200 million in a bankruptcy sale or auction, then the actual book value is a negative RM100 million. now, it has become a worthless company.

A piece of advice, when you buy a stock just because its book value, drill down the detail of what those values really are.

For more clarity, you may want to evaluate Warren Buffett recent acquisition: (1)Exxon Mobil (2) Heinz (3)IBM or even its current shareholding like Coca Cola (in Berkshire Hathaway).

Is he buying stock that value higher than its book value (5 times than price to book ratio) or lower than its book value (1 time than price to book ratio). Or, why isn't he selling Coca Cola if it is traded higher than its book value?

In summary, just be careful using a book value, or it can be a value trap!

7 Habits of Highly Effective Investors

1. They read. And read, and read, and read ...

If you follow Warren Buffett and Berkshire Hathaway (NYSE: BRK-A, BRK-B), you've probably stumbled across his witty and equally brilliant first mate, Charlie Munger. He's a legend for his insights into successful investing, thought processes, and habits. He nailed a crucial one here: “In my whole life, I have known no wise people who didn't read all the time - none, zero. You'd be amazed at how much Warren reads - at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.”

2. They seek and demonstrate humility

Koch Industries may not command the recognition of its phonetic relative Coke, but it should. Koch is the second-largest private company in the United States and rakes in more than twice the revenue of the more familiar beverage-maker.

Koch Industries chief financial officer Steve Feilmeier is in charge of deploying the company's massive capital at a reasonable rate of return. When discussing what he looks for in a valuable acquisition for Koch, he said: "There is one in particular that I pay attention to when we're looking at another company, and that is humility."

Humility can be a rare virtue in an industry controlled by animal spirits, but it pays off.

3. They fail

Peter Lynch, the legendary manager of Fidelity's Magellan Fund, absolutely stomped the market over his career, averaging annual returns of 29 per cent. Here's what he had to say on picking winners: "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

That's right. If you're king of the investing mountain, you may narrowly beat a coin toss in the long run.

4. They steal

Maybe "steal" isn't the best word for it. In investing it's called "cloning", or basically borrowing already great investment ideas and making them your own.

When it comes to cloning, no one is a bigger advocate than fund manager Mohnish Pabrai - and few are so successful at it. After managing his fund for more than 18 years and weathering two recessions, his average annual return is 25.7 per cent.

Pabrai breaks his approach down to three strategies, and one of them is, indeed, cloning. It's no coincidence that he has had this idea affirmed by someone else too: Charlie Munger.

5. They evaluate internally

A lot of investors are aware of the need to go against the grain to find success, but the judgment and evaluation of others can be a big psychological weight. It can cause doubt and insecurity in your approach.

Buffett knows this best. He was chastised for trailing the moonshot returns of the tech bubble while he stuck with boring insurance and paint manufacturers.His advice for weathering the storm? An "inner scorecard". As he said in The Snowball, a book about his life: “The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard ... If all the emphasis is on what the world's going to think about you, forgetting about how you really behave, you'll wind up with an Outer Scorecard.”

6. They practise patience

We got a wonderful reminder of the power of patience here at Fool HQ when co-founder David Gardner's 1997 recommendation of Amazon.com (Nasdaq: AMZN) became a 100-bagger. That return – a gain of 100 times the original investment – is absolutely stunning, but even more impressive is that David was an owner the whole way through.

In his original Amazon recommendation, David wrote: "We're patient investors who buy with the idea of holding on to our latest pick for at least a year or two - if not indefinitely."

He's still holding.

7. They're decisive

Don't confuse patience with indecision. The best investors are poised to act when the right opportunity comes across their radars.

John Paulson and Michael Burry didn't participate in The Greatest Trade Ever by sitting on their hands. When they saw a clear opportunity, they backed up the truck. For Burry, that often meant battling his own investors' anxiety. His fund Scion Capital returned nearly 500 per cent in less than eight years.

Foolish takeaway

Taking the time to cultivate good habits will yield incredible results. As one popular saying goes:

Your actions become your habits,

Your habits become your values,

Your values become your destiny.

Read more: http://www.smh.com.au/business/the-seven-simple-habits-of-the-best-investors-20131112-2xe2o.html#ixzz2kQj29J7f

How to detect A company's bankruptcy?

It is very common for an investor to fall into trap which is, investing in the wrong company that may face bankruptcy. This is one of the red flag that an investor must at all cost to avoid buying this kind of company in stock market. Bankrupt by definition means, a person or company is unable to pay or settle outstanding debt. In the stock market case, when a company has the characteristics that the debt is beyond control, it will face bankrupt. We have seen company like Enron and World.com (biggest financial fraud in wall street history).

There's a way to detect it even before it happens. Edward Altman has developed a formula on how to predict bankruptcy. This formula will provide 80-90% accuracy that a company will bankrupt within 2 years. this formula is called as Altman Z-Score Analysis. NYU Stern Finance Professor, Edward Altman, developed the Altman Z-score formula in 1967. In 2012, he released an updated version called the Altman Z-score Plus, that can be used to evaluate both public and private companies, both manufacturing and non-manufacturing companies and both U.S. and non-U.S. companies. Investors can use Altman Z-scores to help determine whether they should buy or sell a particular stock if they're concerned about the underlying company's financial strength. The Altman Z-score Plus can be used to evaluate corporate credit risk.

In Malaysia, particularly, you should have avoided companies like Transmile, Kenmark, Repco etc even though the price went outrage without reason. You do not want to invest your hard earn or retirement money into these kind of companies.

Ok, below are the screenshots of Altman Z-score formula. The input of Z-score are derived from Balance Sheet and Profit & Loss Statement. Before you use this tool, make sure the source of inputs are available. If it is kept secret, you know the drill. they want to hide from you, there must be something fishy. There's a reason why all companies in all stock exchange around the world must release the quarterly/yearly reports. 

Altman Z-score Analysis

Z-score

If you are interested in the above excel formula, do email me.

Another Valuation: Discounted Cash Flow - AEON

In the previous posting, I have covered on intrinsic value calculation using earning projection and discount it for future projection. As mentioned before, there are many types of valuation. Today, I will write on Discounted Cash Flow. This calculation will be based on Cash Flow. What is cash flow? It tells investors that how strong a company in term of generating cash from their daily operation.

For this exercise, I will choose AEON due to its strong cash flow generation. AEON is one of the oldest retail chain store in Malaysia (formerly known as Jusco). Remember, some metric or KPI may not be fit for certain sector. AEON do not need to spend its cash except for expanding new branches as well refurbish existing branch. As for daily operation, as long as customers are coming to the store and buy things, it will still continue to generate cash on daily basis.

Also worth to highlight the ability of AEON to sustain free cash flow. Meaning, on top of generating cash flow from operation, after deducting capital expenditure, AEON still manage to spare some cash.

What are other business characteristics that AEON possess besides Strong Cash Flow? This is what you should be looking for:

1. Sustainable and consistent ROE
2. Strong, consistent and sustainable Cash 
3. Strong brand and customer loyalty
4. Good and recognize management

If you missed out AEON, you might want to look another similar strong cash companies like AEON. May be I will discuss later for Pos Malaysia.

AEON Free Cash Flow

AEON Dividend History

Based on the historical dividend payout, AEON has the sustainability of cash to pay dividend to shareholders at least 10 consecutive years.

AEON 10 Years Operating Cash Flow

AEON Cash Flow Statement 31 Dec 2012

AEON Intrinsic Value Using Discounted Cash Flow

Based on the above valuation, it is still undervalued by 21%. Based on margin of safety principle, this may not be a good entry. You may want to enter at 50% MOS. It depends on your appetite for safety net. But it is just a guidelines, not the exact science. If you decided to make a position, be prepared to average down your position. 

AEON annual report can be found the following link: http://www.jusco.com.my/annual.html

Disclaimer: The above simulation is intended for discussion. Not intended for buy or sell call. Please consult certified financial adviser for your investment decision.

How To Calculate A Stock Intrinsic Value

In the previous articles, we have covered on buying a stock that is below its market value. There are 1001 ways on how to define an intrinsic value of a stock. As you know, stock market price is fluctuated every now and then. You will never know at what price that market reflects a stock true value.

I will share on how to come out with intrinsic value. I may not be possible to cover all methods of the stock valuation in one article but will try to cover it as many as I can in the next series of articles.

Intrinsic Value Illustration

Just remember, calculating an intrinsic value is not an exact science. It is a projection or estimation on the future value of a stock price based on business historical performance. What determine a future value is subject to a lot of factors, variables and parameters:

• Business performance - can a company sustain its current performance in the next 10 years?
• Business trend - Will the trend change? (best classic example, Nokia used to be a leader in Cellular phone  but it has been knocked down once Apple Inc.  introduce Iphone. Now Apple Inc. faced the same cycle where Samsung has slowly become No.1 in Smart Phone Industry)
• Economic condition (country, regional and global)
• Company's financial condition (debt, cash flow, Earning, future expansion and capital expenditure etc)
• Talented CEO or Board of directors

For the above criteria, you need to be really conservative in your stock valuation. One of the stock investor legend (Benjamin Graham and Seth Klarman), they factor in the so-called Margin of Safety (MOS). On the other hand, coming out with Stock Intrinsic Value, it is an estimation. Famous saying by Warren Buffett, "It is better to be approximately right than precisely wrong." An intrinsic value of a stock will give a hint or gut feeling whether a stock value can be undervalued or overvalued.

Why do we bother to find an intrinsic value? Here's the reason why. Assuming a company's earning growth 15% on yearly basis. Current Earning is RM100 million. Next 10 years, if a company accumulated RM100 million every year, by year 2023 company has accumulated RM1 billion. Next step is, in the next 10 years [2023], will the value of RM1.00 in 2023 be equivalent to RM1.00 in 2013. You never know what is the inflation rate like, interest rate, BLR rate etc. What do you need to do? You need to factor in Discounted rate.

Let's use a real company information and come out with intrinsic value. I choose Tomypak Holding Berhad.

Tomypak Counter

In the previous article, I have shared where to find all the relevant information (http://zayedzulkifli.blogspot.com/2013/04/where-to-find-wtf-investment-tools.html). This will help you to estimate intrinsic value of a stock.

Tomypak Balance Sheet 2012

Tomypak Profit & Loss Statement

Tomypak Cash Flow Statement

Tomypak Cashflow Statement

Don't worry on how-to formula. I have developed excel sheet formula, you just need to plug-in:

1. Current year net profit (from Profit & Loss statement)
2. Total outstanding share in the market
3. Cash and Equivalent (from Balance sheet statement)
4. Total debt (From balance sheet statement)
5. EPS growth rate is standardized though some investment analysts give 26% CAGR-3 years-EPS growth rate. (remember: be conservative)

Tomypak Intrinsic Value

Tomypak current market price as of last week was RM1.41. Comparing its intrinsic value RM3.04, our entry price should be at RM1.52 or below (the lower the better it is). So, does that mean when we buy RM1.41 we will immediately get RM3.04? It will take time for the market to realize tomypak market value. if lucky enough, we may see the realization in 2-3 years. To be successful in investing, you need to have 3P Persistent, Perseverance and Patience.

3P: Persistence, Perseverance and Patience

Some additional information on Tomypak. On top of margin of safety price, a dividend will be a safety net for your investment while waiting for market to realize a stock value. At least, you have passive income plus capital appreciation.

Tomypak EPS Historical

Tomypak Dividend History

Another factor to decide:

• A company has been consistently and continuously paying dividends to stock holder
• A company has recorded uninterrupted net profit for many years
• A company's operating cash flow
• Proven record on ROE (Return on Equity) that company has efficiently used capital and provide reward to shareholders.
• Conservative debt management - net cash is preferred

Disclaimer: the above is just for education purpose. Not intended for buy or sell call.

Where To Find (WTF) Investment Tools

You must be wondering now: What stocks to buy? Do I just simply buy? What if I bought the right stocks? 

What stocks to buy?

To buy or sell stocks, it is a decision making. For you to make a decision, you must equip yourself with intelligent tools to back up your decision. Where to find (WTF) Investment tools that will assist your decision making in buying or selling stocks? You cannot rely on others on your decision. Your money is your responsible. You have to make due diligent analysis on your decision. Otherwise, you tend to blame others if you are making wrong decision.

Here, I will share intelligent data that may help you making intelligent decision

1. Information of companies listed in Bursa Malaysia: there are over 1000 companies listed in Bursa Malaysia. The first source to go is to go to Bursa Malaysia website itself:

http://www.bursamalaysia.com/market/listed-companies/

For Muslims, if there are interested whether a company operates according to syariah, Securities Commission Malaysia provides such list which is updated twice a year:

http://www.sc.com.my/paper.asp?pageid=877&year=2011

2. Financial Data on Annual Report (Balance Sheet, Profit and Loss Statement, Cash flow): This information is very crucial in stock market decision making. You don't call yourself as an investor if you didn't look at any part of financial information of a company.

Same case as the above, Bursa Malaysia also provides financial data particularly on the annual report as well as quarterly report. Example is Dutch Lady Milk Industries:

http://www.bursamalaysia.com/market/listed-companies/list-of-companies/plc-profile.html?stock_code=3026

Dutch Lady Milk Industries - Leader in Diary Product in Malaysia

Corporate Announcement on Dutch Lady Milk

Disadvantage of Bursa Malaysia Financial Data is that, it is just data. You have to interpret and do you financial ratio calculation (Like Return of Equity, Debt to Equity Ratio etc). It may be available in the annual reports still.

3. Financial Ratio Calculation:You can also find on other financial data and financial ratio on companies listed in Bursa Malaysia. You don't need to be mathematical genius or financial expert on how to do ratio calculation, what formula etc. This is given and free of charge:

- Reuters: http://www.reuters.com/finance/stocks/overview?symbol=DBMS.KL

- Bloomberg: http://www.bloomberg.com/quote/DLM:MK

 

- Financial Times: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=DLADY:KLS

All of the above is free. There are a few companies that provide services giving financial data and ratio analysis:

http://klsenew.klsetracker.com.my/ (if you open trading account with Jupiter Securities or Apex Securities, they provide data from EquitiesTracker as well but limited to 5 years data)

https://www.insage.com.my (if you subscribe with Malacca Securities, they provide financial data from Insage with limited to 8 years of Financial Historical Data)

4. Financial Analysis on Companies: I really recommend you to buy (in fact, it is a must have for every investors in Malaysia. This book is available at MPH Bookstore, Popular Bookstore, Kinokuniya etc. It provides quite reasonable analysis. But you shouldn't follow blindly. The price of this is RM70.00. It is updated and published twice a year (March and September).

Stock Performance Guide Malaysia

Sample Analysis in Stock Performance Guide

Looking forward your investment journey 

Investing School of Thoughts

There's a saying, "Tactic wins the battle, strategy wins the war"

To win the investment war, you need to strategize your investment approach. Else, you will have high chance of losing the money. There are 3 popular school of thoughts in investing strategy. There are many more but I just want to highlight 3 strategy that commonly used and successfully generate return as well. The three strategies are

1. Fundamental Analysis Strategy

Fundamentalist will look at the business fundamental, looking at quantitative value at  a report (Ratios, Financial reports like Balance sheet, Cash flow statement, Profit and loss etc) as well as qualitative characteristics of a business - moat, durability, management, business prospects etc.). The fundamentalist will try to buy and hold a stock as long as they can. the buy call will be triggered when a value of a stock is extremely undervalued using margin of safety valuation. The sell call will be executed if the business fundamental is deteriorated like increase of debt, consecutive losses, bankrupt, no durability. Best example in trendy and hot product like Polaroid Camera (now that it is being obsolete in the market), Nokia Handphone use to become market leader in 2000's, now being cannibalized when Apple and Samsung introduced smart phone.

Fundamental vs Technical

2. Technical Analysis Strategy

This strategy will only look at price and volume action. believe that the historical performance of stocks and markets are indications of future performance. This can be tracked using chart and graph. The technical analyst tend timing to buy entry and sell exit based on pattern of price and volume. They sometimes don't call themselves as investors but known as traders or chartists. Sample chart below is MYEG (Company listed in Bursa Malaysia who provides E-Government Services), the arrows are the trigger of buy and sell call. It is not holy grail as they said. Profitability of you being correct is 60-70%.

MYEG stock from the perspective of Technical Analyst

3. Hybrid of Both Strategies

The hybrid of both will only select strong fundamental companies to be traded when there's a buy or sell signal using price and volume action based on historical performance of chart pattern. Some said the hybrid can’t mix as both are opposed to each other like oil and water. The hybrid uses most important reports and ratios like Profit & Loss (earning report), P/E (Price Earning Ratio). Mostly, the hybrid will not try to keep a stock for a long term. Most popular strategy that people talk a lot is CANSLIM Method invented by William O' Neil (Will discuss separately on this in different topics).

Which one should be your choice?

Which one fits your investment objective, time frame, your psychological mind, your full time job etc. Both can be right or wrong. If you think you can consistently make money with either strategies; stick to it, be discipline, have perseverance, patience and may the success be always be with you.

My take (personal bias): is the one who stay in the market the longest and become successful of all time like Warren Buffett, John Neff, Benjamin Graham, Philip Fisher, Peter Lynch, John Templeton (just t0 name a few). Of course, some successful trader like Dan Zanger,  Richard Dennis, William Eckhardt etc. The question is who can sustain longer in the market and becoming more richer. If you look at the Forbes top billionaire, who are they?

Hunting The Value Bargain in Stock Market

Price vs Value

Would you buy a property or land that's worth RM10 million at price of RM100k? May be you think the person who is selling to you is a nutcase. But who would want to sell that if they knew the true value. That's what happening in stock market. Most of the time, the value of a stock sometimes is mispriced. Investor feels that a stock's market price doesn't match the value of the underlying business.

If you remember this famous saying by Warren Buffett: "Price is what you buy. Value is what you get"

I will bring you a real business case example that happened in Bursa Malaysia Stock Exchange recently. Sometimes, we don't really understand why it is being ignored, why investors tend to wait and only take action last minutes. And there are so many question that will make you think, market is really irrational and doesn't make sense.

Example 1: KRISASSETS HOLDINGS BERHAD

Kris Assets (KASSETS) used to own Midvalley Megamall (one of the biggest and crowded mall in Malaysia). They have sold Midvalley to new entity called IGB REIT. From the sale proceed (billion of ringgit) has been returned to Shareholder in the form of Cash dividends and Free unit of IGB REIT shares. Also, KASSETS still has some  amount of cash in bank. To avoid KASSETS from becoming PN17 company (which will give a lot of hassles later to a company), the company must be winding up (de-listed from stock exchange) at a reasonable value.

Kris Assets Value

They have hired liquidator to value delisted price and announced delisted price at RM0.08 on March 26th 2013 (as above). The market price of KASSETS was RM0.05. Huge discount of value 60%. How the market react on this announcement? Nothing! The price only moved on April 2nd to RM0.06. Why investors hesitate to buy at 60% discount of value? The only answer that I know, market is irrational. They only act when market react on the price. The winding exercise will only take 2 months with 60% gain. This is great deal, isn't it? 

Example 2: HUA YANG BERHAD

HUAYANG is one of small capital property developer. If you looked at the below report analysis by CIMB, the land bank owned by HUAYANG against its liabilities, the Revalued Net Asset Value (RNAV) per share  is RM3.96 versus the current market price RM2.03, huge value discount against its market price. This exclude dividend payment around 5-6%. Imagine huge discount.

Huayang Asset Value

What can you understand in the above 2 cases? The above is one of the example on how to value a stock using accounting (balance sheet) valuation. Of course, there are more methods to  value a stock. Sometimes, when you do valuation, a stock can be undervalued or overvalued. The equation is very simple, Undervalue = buy, Overvalue = Sell, Fairly Value = Hold/Wait. Please note that this shouldn't be the only criteria to buy a stock (in certain cases, it can be the only criteria i.e. de-listing of a stock from stock exchange). We will discuss more about the criteria in the future chapters. 

Rule of investing is to buy a stock value that is above its market price. You do not want to overpay the price of a stock that you buy.

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” —Benjamin Graham (Warren Buffett Sifoo)

Disclaimer: This is only for discussion purpose, not a buy nor sell call.