All posts by Brennen

Value investing – is it wise to stay in cash or remain invested?

I read in a recent article that a value investor has now holding mostly cash. Over the past few years, he probably had made some money. He mentioned that he has already divested out of stocks and stay mainly in cash for the past two years.  In all likelihood, he is timing that there will be a market crash or at least a major correction not too far ahead perhaps in a matter of 1-2 years.  In fact, he did mention that he will pick up some good stocks when the market crashes. Now the question is – should one cash-in or should one to continue to remain invested sitting on unrealized profit even after a good run. The chart below showed that many stock markets had a good run in the last 5 years.

 

A few possible scenarios could happen in the next 1-2 years.

(a)     If the market did really crash or undergoes a huge correction

In this case, he will be very glad that he had timed the market correctly and was able to pick up some good stocks and earned a difference between his higher sale position and his lower purchase position.

(b)   If the market continue to advance

In this case, he is likely to regret his action for selling ‘too early’. He is unlikely to buy at higher price any time soon and will be stuck with cash for a total period of 3-4 years since he had already cashed out. Given that he is a ‘value investor’ probably meant that he no longer saw value in stocks and decided to get out of them. Certainly, he would not buy the stocks when the prices of those stocks went up even higher unless he has ascertained that the fundamentals of the stocks that he had sold have changed for the better.   

 

(c)    If the market moved sideways or even in a gradual decline

Initially, he is likely to continue to wait in hope to get a ‘better price’ for his stocks. There probably would come to a time when he lose his patience and start to dabble in stocks again. As one of the readers rightly pointed out, it is actually quite ‘expensive’ to stay in cash in hope time the market. The opportunity cost lost in collecting dividends for the last few years could have more than off-set the gain even though he may manage to sell at a higher price and buy them back at a lower price. In timing a market, we need to be two time right – both in the buy and sell, in order to gain from it. 

 

Of course, if one is possible to see what is ahead of us, in every boom and bust of the stock market, then market timing is the best strategy. But when things are generally uncertain, the time in the market appeared to be a better strategy than timing the market. The simple logical reason to that is that stock markets generally go up higher in the long run. Just simply by being a passive arm-chair investor could have helped us make a huge profit as the market tends to go up in the long run. That was actually endorsed by Warren Buffet who mentioned that one should buy an S&P low cost index fund consistently to gain from it in the long run.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

CPF – Crossing 55

I bumped into a friend a few weeks ago. He had just passed an important life milestone – the double digit 55. For most of us, especially those who have been working most of the time, hitting this milestone is akin to getting the coveted key to a treasure chest – the CPF. After all, most of us have been working hard all these years and, certainly, would look forward to unlock this ‘can-see-cannot-touch’ national forced saving scheme.

Apart from setting aside a full Retirement sum of $166k, he still has more than $83k to enable him to go for the Enhanced Retirement Scheme (ERS) for which he would enjoy a monthly payout of about $1,920 for the rest of his life after he crosses the age of 65. He decided to go for that. But here is in interesting irony. Instead of drawing down from Ordinary Account (OA) and Special Account (SA), he decided to join the ERS by topping his retirement account with cold hard cash, drawn down from a commercial bank. Meanwhile, the balance amount after deducting the full retirement sum was still left in the CPF under the ordinary and special account attracting 2.5% and 4% respectively.

The above episode invites two camps of thoughts. The first, being spender camp, would believe this is one of the stupid course of action to take. The general belief is that they have worked hard and have accumulated a huge forced saving all these years. Reaching 55 is a god-send and, surely, they cannot wait to unlock the piggy bank that has been stowed away for many, many years. The common excuse is that they are almost at the tail-end of the life-stage and if they do not use it, then when? The general motto is ‘enjoy it while you can’. The second camp is the saver camp. This is the group that believes in delayed gratification. They believe in holding their savings as long as possible so that they can enjoy the tastier fruit in the later part of their life once they crossed 65.

 

After evaluating two options, perhaps the topping up with cash may not be a bad idea if we can afford it. It may not look like a wise decision at the first thought, but coming from a difficult life when even $1 was a treasure during my childhood days, I thought it was not a bad idea too. While a big chunk is being stowed away in the ERS to secure our livelihood until death, the remainder in the CPF would attract a higher interest of 2.5% in the OA and 4% in the SA. It is an excellent place for putting our money for emergency, and yet able to secure a high interest yield while our funds lay idle. It is certainly better than putting the emergency cash in a commercial bank attracting less than 1% interest. This is after all, emergency money and is not supposed to be touched unless really necessary. By so doing, it would help free up the savings in commercial banks for other investments. Furthermore, even if the fund is earmarked for investments some time down the road, it is still a good place to park our funds in view that most of the stock markets have already touched their all-time highs. Not a bad idea at all!

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Is a $20 stock expensive and a $2 stock cheap?

We still see and hear people talk about a stock being expensive because the share price is high. It may be true but only to a certain extent. It depends on the situation. For example, when DBS share price hit $20, there were people mentioning that the share price of DBS was too expensive. Instead, they chose to buy other company stocks instead. This can be a naïve action to take because it may mean that highly-priced stocks (or generally the blue-chips) never get into their portfolio. A lot of opportunities could have been missed! That may also implicitly means that these people are holding a lot of low price penny stocks or, at best, held some high yield stocks like REITs, which are not so ‘highly-priced’. But if we look back into the price history for the past several years, one would have found that, generally, it is the blue-chip stocks that had made significant price gains. They gained from strength to strength. On the other hand, those stocks that were left behind were the low-price penny stocks and low-performing ones. In fact, some of them have been under long-term suspension and cannot be traded at all. To summarize it all, despite the bull market in the recent years, one may not able to enjoy a significant upside if he holds on the belief that high-price stocks are expensive stocks. Moreover, the share-consolidation exercise 2-3 years ago to meet the minimum trading price (MTP) criterion could have even made the situation worse. The share price of many penny stocks gets even lower after the consolidation, ending up in extremely low price and illiquid situation. This really is value-destruction. On the other hand, we now know that DBS share price has reached more than $22 or 10% even if we had bought it at $20 per share. Of course, I do not mean to say that buying high-price blue-chip is a sure bet to being a winner in the stock market. What I meant is that by viewing high-price share as expensive purchases would unconsciously prevent us from buying into them and probably lost out some investing opportunities.

Actually a high-price stock is not necessary an expensive stock. By the same argument, a very low-price stock is not necessary cheap either. This has been explained in my book “Building wealth together through stocks” from page 110 to page 114. In fact a high price stock of say $20 per share can be a lot cheaper than another very affordable stock trading at $2 per share. Instead of looking at the share price alone, we should look at a company’s market capitalization (or MktCap in short). It is the product of the shares outstanding and the share price. In a very practical sense, it is the dollar value of the company of how the market, as a whole, evaluates it. In other words, it is the ‘market price-tag’ of the company. DBS, for example, has 2,562,052,009 shares outstanding on July 2017. Given the share trading price closing today, 7 Aug, at $21.15, the MktCap is S$54.19 billion. This is the market value of the bank. This means if you have $54.19billion, you can theoretically buy up all the outstanding shares. However, this only exists in theory because once you start to buy the shares in the open market, the float gets smaller and the price will shoot up due to its market liquidity. Of course, this is also barring the need to carry out a general takeover exercise once we held beyond a certain threshold.

Let’s say for some reasons DBS wanted to make the share price affordable to around $2 instead of the current price of around $21.15. (Note: making the share price affordable does not mean making it cheap) The management simply cannot depress the share price by a stroke of the magic wand without doing something else. To bring it down to a share price of $2 from about $20, the bank has to introduce a lot of shares into the market. This, essentially, involves a share split of breaking down one share into 10 shares in order to bring the share price to that level. This means that shares outstanding would be magnified by 10 times to 25,620,520,090. The market-value of the DBS simply cannot evaporate overnight. The market, as a whole, still recognizes that DBS has a market value of a $54.19 billion unless the bank performed so badly that shareholders started to sell out the shares over time. Apart from the arduous administrative work involving existing shareholders, there is absolutely not much incentive for the directors to do share splits just to make shares affordable. If affordability is really an issue, then investors should instead buy smaller lot size instead of 1000 shares. By doing so, that should reduce the outlay from paying $21,190 to buy 1000 shares to $2,119 to buy 100 shares or the multiples of it. That essentially, was the purpose of smaller trading board lots of 100 shares instead of 1000 shares introduced by SGX about 2 years ago. In fact, in more sophisticated stock exchange like the NYSE, we can even trade just one share instead of a board lot of 100 shares.

Essentially, the above also helps explain why OCBC is trading at around $11 per share and is almost 50% of that of DBS on per share basis. Otherwise, in no time OCBC share price would play catch up and go higher to reach to $21 or it could be DBS share price sinks to $11.21 to match with OCBC trading price. Certainly, that is unthinkable. For that, we shall leave to the next post.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Execution strategy: Sell & buy back

In the talk organized by InvestingNote a few weeks ago, we shared several guiding principles when we buy or sell our stocks. Ideally, when we buy into a stock we hope that the moment when we buy into it, the share price immediately rises and stays for a long time, better still, forever. This means that our stock has appreciated and provides us a good margin of safety. The other part of the return is the recurring income that comes in the form of dividends year after year. So basically, we enjoy both the capital appreciation and dividends. This is an ideal situation. It is akin to buying a bungalow that cost $50,000 in the 60s or 70s and the valuation is now at $25million. The recurring income comes in the form of rentals. This is known as the buy-and-hold-strategy, and was famously used by long-term investors like Warren Buffet and John Templeton.

There are, however, situations that are not viable to hold a stock any longer because the underlying fundamentals have eroded with no immediate solution in sight. A good example is the SPH. In the 90s and the start of the new millennium, SPH had been a good stock. It was a near-monopoly in the print business. Hence, it made sense to buy the stock at a reasonably good price and held it long term to take advantage of the dividends that were distributed year after year. But the inauguration of the internet changed the rules of the whole game. Customers now have a choice – either to continue to read the hard printed copy that comes one to two days late or to browse through the internet in search of immediate news. It is so powerful that many newspaper and magazine printers were pushed to the brink of bankruptcies. While we continue to like the stock, we probably have no choice but to change our tact to a sell-and-buy-back-later execution strategy.

By selling into strength and buying back later, it helps us lower of the average cost for the shares. Even if we decide not to buy back the stock any more, we are effectively enjoying a saving that would have otherwise eroded with time. Let me use an actual scenario of a person whom I know very, very, very well. He had 6,000 SPH shares mid-2016.

The share price was dropping very quickly by mid-2016. He was left with 6,000 shares at that time. Feeling that it no longer made sense to hold the shares any longer, he decided to let go of his holding over a period of three months. The proceeds after taking into account of the brokerage and other fees come to about $23,589.61. Hypothetically, if he were to buy back the same quantity of stock yesterday, the amount that he had to pay would be $17,949.73. Deducting further of the loss of dividends of $1,080 which he did not collect as he had sold the shares, he still can make a gain of $4,559.88. This is equivalent to a gain of at least 4 years of dividends without losing out the shareholding instead of losing out one year of dividends originally. In summary, we need to adapt the right buy/sell strategies for our stocks. Buy-and-hold strategy may not always work.

 

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Comfort Delgro

Of late, Comfort-Delgro (CDG), together with some stocks like SPH and Noble, were in the limelight. Obviously, a sea of pessimism has been haunting the stock in the last few weeks. Today, its share price is $2.28. It had broken through the ‘very strong’ support level that many traders described as between $2.37 and $2.40. The strong support had lived to its name for several months, but still it was finally broken. Frankly, there has been a swing in the sentiment.

For the past two years in 2015 and 2016, the market appeared to be extremely optimistic over this stock. It started off with the falling fuel price in end 2014. Then came a revision of transport fares and, finally, the news on LTA taking over of operating assets from the transport operators in mid-2016. Good news had obviously fueled the market to become overly excited and the share price of CDG was pushed above $3.00 in 2015. At the price of $3.00 the PE ranged between 20 and 23 from 2014 to 2016 and was trading between 2 and 2.5 above book value. It is not exactly expensive (of course without the luxury of comparing against similar companies). Perhaps, its growth potential has prompted many analysts to be more optimistic with buy calls above $3. Even in the year 2016, when the market price was gradually sinking, many analysts were still recommending buy calls on the stock with target prices above $3.00.

Obviously, there was too much good news feeding into the stock price. Frankly, I felt alone when everyone was optimistic, but that gave me pockets of opportunities to scale down my CDG holdings in the Q3 and Q4 2015. It had a good run since mid-2012 from around $1.50 per share. In fact, I had pointed out to past students be aware of the threat from Uber and Grab almost 2 years ago amidst the widespread optimism over this stock. It was difficult to know the extent of the damage it can cause on the taxi services. My initial assessment was also that there could be some kind of government intervention, but it appeared to be almost none as we know now.

In fact, even in 2016 when the share price was slowly sinking, most analysts were still recommending buys with target prices above $3.00. The discomfort prompted me again to write the blog in May last year :

 http://blog.bpwlc.com.sg/feeling-uncomfortable-about-comfort-delgro.

In hindsight, I am happy that I was able to reduce my shareholdings at a good price. With most of the shares bought before 2012, and I had sold about one-third of my shareholding above $3.00, I have a relatively comfortable margin of safety even at this on-going price (today close at $2.28). However, I still regretted that I did not follow through my conviction to sell 50% of my holdings. My expectation of the government intervention and a special dividend for the sale of assets to LTA did not materialize. Also, perhaps, I have emotional attachment to this stock. Its predecessor, SBS Bus, was my first stock that I ever purchased and sold at more than 100% profit in matter of 2 years more than 20 years ago. This experience had actually set me off in this adventurous stock investing journey.      

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Technology destroyed some traditional businesses (3): Keppel Corp & Sembcorp Marine

The share price of Keppel Corp ended today at $6.42. It has lost about 35%-40% its steady state value of about $10 per share 3-4 years ago.  Everyone knows that the reason for this was due to the collapse of the oil price from more than $100 at around mid-2014 to less than $30 per barrel by January 2016. In fact, traditionally, Keppel share price is closely tied to the price of crude oil. Its arch rival, Sembcorp Marine, another public-listed company on the Singapore Stock Exchange (SGX) also exhibited the same behaviour. When the oil price hit close to $150 per barrel just before the global financial crisis, Keppel share price and Sembcorp Marine went above $14 and $6 respectively. When the oil price crashed during the global financial crisis, the share price of Keppel Corp and Sembcorp Maine went south hitting below $4 and $1.50 respectively. When the oil price went up again to US$90-$100 per barrel between mid-2012 to mid-2014, their share price again swung up. This time, Keppel Corp share price held steadier at around $10, while Sembcorp Marine share price exhibited more volatility as it has other marine related segments that were also going through a very trying period. But when the oil price crashed once again from more than $100 in mid-2014 to less than $30 in January 2016, we again witnessed the crash in the share price of Keppel Corp from above $10 to less than $5 and that of Sembcorp Marine from more than $4 to less than $1.50 per share. At the moment, the oil price is about $45 per barrel and share price of Keppel Corp and Sembcorp Marine have since advanced respectively to above $6 and $1.60 per share. To sum up it up, the stock prices of these two companies bear very close co-relation with the crude oil price even to this very day.

Unfortunately, for Keppel Corp, Sembcorp Marine together with about 20 or so offshore marine related companies, they have no control over the oil price. In other words, these companies are price takers. Their businesses are tied to the price of oil, but they have no influence over it. Then, of course, this begs the next question – when can we expect the oil price to go back to its glory days of more than $100 per barrel? Frankly, I do not know as I do not have a crystal ball to tell the future. It also means that many others out there do not know the answer as well. As I had mentioned in my recent talk organized by InvestingNote recently, in order to be a big winner in stocks we need to be ahead of the others on the winning side of the curve.  This means that we have to look beyond the present situation and make a calculated guess of the future using the present data.  We may be right, we may be wrong but a calculated guess substantiated with some critical metrics and data would help us reduce the risk of being at the wrong side of the curve than not to do any homework at all.

 

As we know, oil prices, just like prices of any other commodities, depends on its demand and supply.  On the demand side, it takes a huge global demand to push up the price of oil. It can be a long-drawn war or a huge industrialization leap. All these did not take place in the last ten years. Huge oil hoarding can complicate the demand scenario as well, but ultimately there is still a need for real demand in order to push up oil prices over a longer period. Even with the Chinese economy normalizing after the global financial crisis, the oil price did not seem to show any significant change. Right now, we have gone past the industrial age in the last century and entered into the information age. So, it also means that advancement in economies is not driven so much by oil demand.  That said, it does not mean that the total global demand for oil has dropped compared to that of 20-30 years ago. On the contrary, I think global demand could have increased during all these years as more economies with huge population size opened up. What created a ceiling in the oil price lies more likely on the supply side. Over the past 30 years or so, a lot of progress has been made in harnessing alternative energies. That takes a chunk off the demand for fossil fuel.  And unlike 20-30 years ago, when crude oil is extracted either via oil wells onshore or via oil rigs offshore, a new extraction technique has begun to muscle its way into the oil extraction scene. Shale oil extraction, which we have not heard about 20 years ago, is slowly elbowing out the more expensive offshore extraction using oil rigs. In fact, the technological advancement in shale oil extraction has made it gradually cheaper. Just 10 years ago, the break even cost was between $65 and $70 per barrel, and, by now, if the oil price reaches $60 per barrel or even lower, it would have made shale oil a flourishing trade. Franking speaking, oil shale technology is not really a modern technique. The exploration was as early as in the 1980s, but the environmental issues and the low oil price during the 1990s made it temporarily shelved. It was then re-harnessed when the oil price started to climb more than 10 years ago. In fact, this oil extraction technique has made US, the world largest crude oil user, to reverse from a net oil importer to a net oil exporter. This could also be the explanation for the glut situation recently. As such, super oil tankers have to be used to store the crude oil and park offshore in hope of better oil price in the future.

 

Perhaps, the share prices of Keppel Corp and Sembcorp Marine as well as the peripheral companies may have met their lows recently, it cannot be said that their share price would drastically go up anytime soon. Unless the demand or supply situation changes so drastically beyond our imagination in the foreseeable future, it is difficult to envisage a huge demand for oil rigs. Their share prices may continue oscillate according to the oil price, but big leaps in their share price still depend on the how convincing is the demand is for oil rigs. As a matter of opinion, it may not happen in the next few months or even the next 1-2 years down the road. Hopefully, I am wrong coming from an investor’s point or view, but right from a consumer’s point of view.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

 

Technology destroyed some traditional businesses (2): Comfort Delgro

Until a few years ago, Comfort Delgro has been in a very comfortable position. The business model that has been used in Singapore was able to be duplicated and adapted locally in other important cities in Australia, the United Kingdom (UK), China, Vietnam and Malaysia. The whole business centred round the traditional land transport operations and provided the company with various sources of income. The share price doubled year from mid-2012 of around $1.50 to more than $3 per share in mid-2015. Some might say that that was not exactly a star performer, but I would say that the stock performance was great in view of its ‘old-economy’, almost recession proof, traditional land transport business. It is not easy to find a traditional business whose share price that could double in a matter of three years. With the euro crisis brewing at that time, most blue chips stocks were not really performing following the run up after the global financial crisis. So given the backdrop of the unexciting STI at that time, Comfort Delgro stood up among blue-chips stocks. It was the top performing stock in year 2015.

Now the situation has turned. Rental cars Uber and Grab have been making headlines of late. They took many traditional taxi businesses in many cities by storm with their aggressive pricing policies even though the companies are still incurring losses. They seemed determined to break out the traditional taxi business at all cost. The situation in Singapore is no exception. Comfort Delgro, being the biggest taxi operator in Singapore is obviously the victim of this onslaught. By today, Comfort Delgro share price has just sunk passed the $2.37 level, which has been a very strong support threshold for several months. The situation is not all pleasant for the Comfort Delgro at the moment.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Technology destroyed some traditional businesses (1): SPH

By now, many would have noted that SPH share price has been on a decline from $4, slightly more than a year ago.  It has not been this low since the global financial crisis when it touched $2.32 on 12 March 2009, which coincided with the low of the Straits Times lndex (STI). Following the crisis, it had been oscillating at around $4 for a long, long time before the recent decline to its current price at around $3.25. In fact, since the share split of 1:5 in 2004, the share price has not really enjoyed any strong upside although investors had been lavished with generally good dividends in the past.

In fact, SPH is not the only victim of the technology onslaught. Newsweek, Washington Post, Financial Times, Reader’s Digest and many national newspapers suffered declining sales volume as well.  Technology, in particular the internet, had swept across the globe at such a huge pace that it wiped out many traditional news and printed media businesses. Readers are no longer happy to receive news 1-2 days after it happened, not even hours. We are now talking about minutes or even seconds. Financial market for one is very unforgiving as far as the speed of news is concerned. The news that appeared in print today was already a history that had already moved the market. Certainly, the financial market players are too impatient to wait for the print to reach them before they reacted. Look at US presidency election, the BREXIT, British election, the market had already reacted even before the news were casted in print. By the time the news appeared on the dailies, many snippets would have already splashed all over the internet. Just a simple search through a search engine, one would be able to pick up at least 10 pieces of news stories on the first page of the engine search.

Personally, I think that the management saw it coming at that time, and that was why they decided to sell several properties into SPH REIT in mid-2013. By so doing, it hoped that it can earn a ‘passive income’ as a sponsor and a major shareholder of this REIT. Unfortunately, the rental income is not sufficient to offset the decline in the print business. And this could continue to be so for a long time to come. To be straight to the point, the internet is not going to go away any time soon. In fact, it will definitely not go away unless it is displaced by another faster and more convenient transmission means. That said, it is a long-term threat unless SPH is able to side-step it by finding another growth business.

To be fair, I would think that the management has been doing their best to maintain shareholder’s value. The share price could have declined even more steeply had it not been for the high dividends that were distributed in the last few years. Unfortunately, this is an encroaching external threat that is difficult to defend against, unless they do not want to be in the business at all or to lessen the blow by finding another lucrative business. The final consequence, unfortunately, is an ever-declining share prices, a deep cut in future dividends or both.

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

 

 

 

SIA – Difficult times ahead

It has been known in the investing world that Singapore Airlines suffered a significant operating loss of $138m in the last quarter of its financial year 2016/2017. The overall profit fell to $360m, a drop of 55.2% compared to the last financial year. In fact, the current fate of SIA’s loss was already imminent some years ago.

 

Let us start by looking at the aviation scene 20 to 30 years ago in the 80s and 90s. During those days, there were no Chinese airlines or gulf airlines vying for almost the same international routes across continents. As a result, airlines like SIA, Cathay Pacific and Swiss Air were able to make their names in the aviation world. Now with airlines from the gulf such as Qatar Airways and Emirates Airlines, the routes that SIA used to fly to Europe or plying between Europe and Australia/New Zealand are immensely under threat. We all know that the fuel cost is the biggest cost driver for airlines. It takes up easily about 30%-40% of the total operating cost. With their cost of fuel almost the same as that of drinking water (maybe exaggerating!) in those oil producing countries, SIA is definitely in a disadvantaged position.  Every single drop of aircraft fuel used by SIA has to be either hedged or buy via the spot market.  Hedging, by itself, is a double edge sword. It can help make or break the bottom-line of the airline.

 

Next is the competition from the Chinese airlines. With a deep hinterland, an extremely huge population and a leaping economic progress, we can be very sure that the domestic airline industry will advance by leaps and bounds. After all, what will stop them from extending their tentacles into international routes? The experience gained from plying international routes would help improve their services for the domestic routes. In fact, even their compatriot, Cathay Pacific, has not been spared.  For last financial year, Cathay Pacific suffered a loss of HK3billion. And, only just a few days ago, Cathay Pacific divulged plans to let go about 600 staff.

 

The developments in these two parts of the world have indeed put SIA in a ‘sandwich’ position, eking out SIA’s previous dominance. The profitable stretch from Europe to Australia/New Zealand has to be shared by these competing airlines. In fact, they are not the only ones eyeing these routes. Several airlines in Asean region such as Thai Airways, Malaysian Airlines and the Australian Airlines such Qantas have their interest this profitable stretch as well. That sums up the competitive environment in the premium airline segment.

 

Then there is also a huge competition from the budget airlines. About 10 to 15 years ago, we did not hear much about budget airlines. But by now, we can almost find one budget airline for every one national carrier. The no-frill segment is indeed another dog-eat-dog sector. During times when there was no budget airline, premium airlines were able to profit significantly when oil prices were at their lows. However, it is no longer the case now. When the oil price is low, we see more budget airline in operation, thus eking out the profits once enjoyed by premium airlines.               

Frankly, if we follow Michael Porter’s theory on competitive advantage, we should realize that SIA’s competitive advantage may be slowly ebbing. Relying on intangible factors, such as services and branding, may not be exactly useful because, given time, good services can be trained and branding can be developed. In other words, the economic moat developed by SIA in the past 20-30 years is in effect weakening.  

On the cost structure, the operating leverage on airline industry is very high. It is tantamount to operating an oil refinery or in exploration/mining industries. Before the company can start to produce the first unit of the product, it has to invest significantly in the fixed cost. Similarly for an airline operation, before it can start to carry the first passenger, there is a need for heavy investments in the upfront. A decent passenger liner would easily cost US$200m. We are not even talking about the B777-300ERs or A380s class, which are north of US$300m. While the high operating leverage forms a barrier for new entries, it also means a huge challenge for an airline to be profitable. To operate a decent fleet, we are pretty sure that the airline cannot escape from not getting into debts even with a huge war-chest. Furthermore, passenger and cargo load factors have to be consistently maintained at  high levels and close to their full capacity to ensure sustainable profitability.

 

Then we have the changing lifestyles among travelers. Air travel is no longer considered as luxury lifestyles whereby travelers are willing to pay a premium for it. It may be seen as a means of getting from point A to point B on different parts of the world. In fact, there may be people willing to spend more for longer stays or paying more for a more luxurious experience on land than probably on air. When the global economy gets worse, business travel budget gets the cut straight away and travelers downgrade abruptly. When a region is hit by epidemics such as SARS or avian flu, or natural disasters such as earth-quakes or political turmoil, air travels to the affected regions are curtailed immediately.       

Certainly, there are just too many unknowns facing airline industries. It is not an area that we could understand fully as a simple investor. Frankly, as an individual, I like to travel on SIA. At least, I am confident that I will reach my destination safely and on time based on its past travelling records. After all, it is our national carrier. If we do not support it, then who will, right? However, to invest in the stock as an investor is another consideration.

Since the last sale of my final 1000 shares at $12.62 in June 2009, I have yet to make any purchase of SIA shares till now. In fact that sale was a loss for me even though I had profited from earlier trades such as selling at prices between $17.50 and $19.00 per share in 2007. In hindsight, it was a blessing in disguise to have sold the last board lot (previously one board lot was 1,000 shares) considering that the price has fallen below $10 per share today. That said, I am not ready to buy them back considering its dicey future.

Disclaimer – The author is no expert in market research for airlines. The above information is based on his opinion and information that he gather through literatures as an investor. It is also not buy or sell recommendation on the stock.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

Further Readings:

http://www.straitstimes.com/singapore/sia-has-lost-market-share-and-needs-new-strategy

http://www.straitstimes.com/business/companies-markets/sia-to-re-integrate-sia-cargo-within-group-some-staff-to-move-to-other

Averaging down

Abstract: A post by a pseudonym Luminac in the InvestingNote on 29 April 2017 mentioned that a close friend of him had invested in stocks like Cosco(F83), Noble(CGP), Hyflux(600) and had been accumulating them for over the past 10 years. She realized that the loss was too big and was on a crossroad of what to do next. I herewith share a similar life experience when I was in that situation some twenty years ago. No mention of the stock name shall be made in this post.

 

The share price was around $1.90 to $2.00 when the desire to re-own this stock became extremely burning. After all, I had owned the stock before and had sold them for a reasonably good profit. So, it cannot be very wrong to buy back this stock at around $2 when the highest price that it reached after a share split was $5. The company had made several mistakes and took extreme risks that on hindsight would have made me stayed far, far away from this stock. Unfortunately, my focus then was on the stock price. To me, the $2 price tag was a 60% discount against the $5 level that the stock had once reached.

Big mistake…the company was taking on so much risks and making so many bad business decisions that it had to make a rights issue at a huge discount. I cannot remember the exact ratio, but I think it was in the ball-park of ten rights for every one share owned. Certainly, it was forcing the minority shareholders to take on the rights to assume part of the huge risk. The share price tanked from about $1 just before the rights issue to around 10 cents. From then on, I started to follow more closely on the company developments and not on the stock price alone. A check on the past financial reports showed that the top man was still being paid in the region of either more than $750k or even more than $1m when the company was either earning insignificant profits or even suffering losses. Furthermore, the huge part (close to 90%) of the total remuneration was in the form of fixed salary and was even entitled to a few percent of ‘other benefits’. The percentage allocated to the bonus was far too little. So basically, the management is bleeding the company through their fixed salaries at the expense of the minority shareholders. In fact, the top man drew such a huge salary that he need not have to care much about the prospects of the company going forward. I believe all that was in his mind was he hoped to find a white knight who was stupid enough so that he could sell off the company lock, stock and barrel after bleeding it for so many years. A further check showed that at least one independent director was there for more than 10 years. As we know, independent directors are usually the ones that form part of the remuneration committee. Furthermore, during annual meetings, motions were almost always seconded by the same few persons as in the past meetings and so were comments quickly shot down by the management. The way I see it was that all these years, the company was simply wayang, wayang moving from one business type to another while waiting for a white knight to come along. After all, the people forming the management are getting old and they have no energy to turn the company around. Meanwhile, they continue to draw good salaries. I realized that I had bought a confirmed ticket to disaster. Are the minority shareholder interest protected at all? Surely not.

Certainly, I need not have to say much about the stock price with a company like that. It was $5 during the good times, and was $2 was I re-purchased it, and then it tanked to around 10 cents after the huge rights issue. If only I had read into the fundamentals, I would have painfully cut loss or simply just not do anything. My loss would have been, at most, a few thousand dollars. My big mistake was that I keep on averaging down while praying that the stock price would turn around. Just like many gamblers did, I did not simply average down, I bought more than our original holdings in hope to quickly breakeven, but somehow the tide was always against me. The descent was steeper than what I could average down. I also found it got more and more difficult to average down because of the increasing stake when it was on its way down. I did manage to sell some when the stock price blipped up temporarily, but the realized gain was simply too insignificant to offset the unrealized loss. It went on a long time when I suddenly realized that the hole was just too big to patch. It had already lost 90% to 95% of the value that I initially bought. Selling off at this time would not lead me anywhere and averaging down is not the answer for such a stock. Furthermore, I was too focused on this loser that I missed out many winners out there. I had lost a lot in terms of opportunity cost.

So, for many years, I had been sailing on a pirate ship without realizing it. Summarizing the whole episode, the management took the company as an ATM to draw their huge salaries. The minority shareholders were bearing the business risks all because they made bad and lousy business decisions. And, yet as a minority shareholder, I have no say in the company affairs. Do you think one should continue to be vested in the company stock? After all, the company founders have recovered all their capital from the IPO and could have even profited greatly from it. What incentives do they have to bring the company to the next level? It all boiled down to the responsibility of the management.

To get out of such disaster, I need to change my mind-set. It is no point in buying and selling stocks that make us can’t eat or sleep at peace. After all, we invest for our retirement or for times that we become incapacitated. Stocks must withstand a passage of time. Why should we be in the situation that we invest our money in exchange for more problems? Don’t we already have been facing a lot of challenges in our daily lives? To date, all these going back to basic thoughts have been a big blessing in my investing journey. I managed to benefit from the GFC in 2008/2009, averted the penny stocks clash in 2013 and the high yield bonds that still plaque many investors even today and many nonsense investing scams that mushroomed over the past years. Several good stocks have become multi-baggers, and two of them have been bought out and privatized. Sure, good stocks can also tank during financial disasters, but history has shown that they come back stronger when the crisis got past us.

Now, let me add a last paragraph to the mentioned stock in this post. If the above episode on that single stock had not been painful enough, here comes the salt on the wound. Just 2 years ago, the SGX introduced the minimum trading price (MTO) rule of $0.20. All stocks below 20 cents have to be consolidated. I did not know the exact trading price then because it was no longer important to me. It was probably less than 1 cent at that time. Doing a 10 to 1 consolidation had no meaning as it would still be below 20 cents. So, it ended up with consolidating 100 shares into 1 share, which theoretically meant that the stock should be trading at $1 after the consolidation. With the consolidation, the stock became extremely illiquid. The trading volume was low and the buy-sell spread was far in between. Perhaps a lot of investors would have realized by now that for fundamentally lousy companies, consolidation equates to value destruction. The stock price fell to around 60 cents after the consolidation and, by today, it is around 30-40 cents. By this time, my loss is 10 times that of the original loss. However, all these no longer matter because the final value on paper is a very tiny black dot on my portfolio.

So, if you ask me should we average down, my answer is if it is fundamentally lousy stock is …never. Never catch a falling knife. But if it has good fundamentals that can possibly translate to a price upside in future, then perhaps, it may worth a second shot.

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.