Don’t Chase After A Stock – Koyo International (SGX: 5OC)

Koyo Mistake

One of our Value Investors Club members asked me about Koyo.

He told me SGX issued a warning on the stock.

I went to investigate and found the stock was heavily speculated. You could see from the chart with rising prices and large transacted volumes over a span of almost two years. There were no fundamental reasons for this movement, and I could only attribute it to the behaviour of a few rich speculators ganging up together. But evidence is hard to find.

That aside, should he have got in the trade?

The answer is NO!

First, it didn’t pass the CNAV criteria, as the operating cashflow was negative for two out of three years.

Second, he should have bought when there is CNAV discount, which is indicated by the red line on the chart. But he bought it way above CNAV and even NAV (the blue line).

Chasing after a running stock is detrimental, especially a small cap stock, because price can collapse very quickly. Apparent in this case, the price plunged after SGX’s warning was made public. The speculators seem to pull out of the market and the price crashed back to $0.07.

I hope this is a lesson he and the rest of us can learn.

It is okay to make mistake, but we should minimise the probability of making it again. Then the lesson is worth paying for.

Saizen REIT (SGX: T8JU)

Saizen REIT Sale of Assets

Saizen REIT owns numerous residential properties in Japan.

It was not one of the favourites when it comes to REITs.

Some of the reasons or concerns I have heard from the others were:

  1. Japan is devaluing their currencies so I would have Forex loss
  2. Japan has not recovered from the loss decade

It is possible that the stock price for Saizen REIT has been priced in, and presented more than 20% discount to its property valuations.

In fact, I would want to debunk the devaluation of Yen. With quantitative easing, cash would flood the market and likely result in the rise in asset prices. This would counter the devaluation in Yen.

Investment is not about seeing the obvious, it is to ask ourselves if the discount is big enough to cushion the uncertainties going forward. Has the price been factored the obvious issues about the stock and it is worth taking the risk to own it? It is tough to practise contrarian thinking.

The general stock market sentiment was bad in 2015 with oil and commodities prices crashing and economic slowdowns in many countries. Saizen REIT would appear as a silver lining in investors’ portfolios.

The event to unlock the value of Saizen REIT was a bulk sale of their portfolio of properties in Japan.

In gloomy days like this, it was rare that the offer price was 3.8% higher than Saizen REIT’s NAV. (Offer at $1.17 while NAV at $1.1276)

The stock price jumped from $0.925 to $1.09 when the trading resumed on 2 Nov 2015.

The news caught investors by surprise. But it is no surprise that the stock market always pull surprises.

Beaten down stocks tend to react favorably to good news, while hot stocks tend to collapse quickly to bad news.

To me, I prefer to stick with the former when it comes to investing.

Lee Kim Tah (SGX: L25)

Lee Kim Tah

This is a CNAV stock with less upside due to the small difference between CNAV and NAV.

Nonetheless, there was a CNAV1 discount of 5-8% in Apr/May 2013 based on the stock price ranging from $0.75 to $0.79.

The profit target was hit when price reached NAV of $0.96 in Jul 2013.

This worked out to a small gain of 22%, excluding dividends.

The management eventually offered $1.08 in Sep 2014 to delist Lee Kim Tah, which was above the NAV of $1.04.

The company owns part of Jurong Point Shopping Centre.

PNE Industries (SGX: P07)

PNE Industries

This was a CNAV stock with the following figures at the point of our investment:

  • Entry Date: 28 Jan 2014
  • CNAV2: $0.11
  • Entry Price: $0.088
  • CNAV Discount: 25%
  • POF Score: 3
  • Exit Date: 14 Aug 2014
  • Exit Price: $0.225
  • Dividend Yield Received: 33%
  • Total Percentage Return: 188%

We bought PNE Ind at $0.88 on 28 Jan 14 when there was a CNAV discount of 25% and POF score was 3.

Most people will not like this stock. This is not the Warren Buffett kind of stocks that people talk about. I have heard comments like

  • This company is in the sunset industry of electronics manufacturing
  • Yes, it is undervalued but you have to wait very long for the assets to be unlocked
  • The family owns majority of the shares and they can take it private at the expense of the other shareholders
  • The stocks is so illiquid, it is not going to move

We often decide first then find reasons to support our decision. Most people would dismiss the stock as crap because they have never heard of it and find it so dis-familiar. If it is so good, why have they not heard of this stock before? To prevent cognitive dissonance, they had to find reasons to support why they should dismiss the stock. We can form our biases with just the stock name.

For us, we do not have the preference for or against the stock. We are objective and we will take action as long as the numbers are attractive enough.

Our dividend yield for PNE Ind was 10.2%. If we include the special dividend, our dividend yield will increase to 33%!

  • 21 Feb 14: $0.004
  • 30 May 14: $0.005
  • 31 Jul 14: $0.02 (Special dividend due to sale of PNE PCB Bhd)

But we don’t invest for yields. Yields are bonuses to us as we focus on buying assets at wonderful prices and sell them at valuation to reap capital gains in the process. The chart  shows the entry at $0.088, below the CNAV of $0.11, as well as the exit at $0.225, above the NAV of $0.21. This stock was sold on 14 Aug 14 and we no longer have any position in it.

LCD Global Investments (SGX: L38)

LCD Global Inv

I was not invested in this CNAV stock but some of our members did.

On 18 Apr 14, the stock trading was halted.

On 21 Apr 14, the management announced a voluntary cash offer of $0.17 and the stock price jumped immediately to $0.17.

The management must have believed the stock is undervalued and hence willing to buy more.

The stock price continued to rise through out the offer period and hit NAV on 16 Jun 14.

LCD Global Inv has a CNAV1 discount of 20% and POF score 2 before the voluntary cash offer was announced.

Buying at $0.15 and selling at NAV of $0.28 will yield an 87% gain.