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Turnaround Stocks

OK guys, I confess.  I have been procrastinating on my next entry.  I have loads of ideas to share but I’m just putting it off.  Well here it is…

Today I want to talk a little about turnaround stocks.  Remember that I talked about identifying the a turnaround by looking at the moving averages.  To me this is the markets confirming the turnaround.  Many times, we see false turnarounds and it is not easy to distinguish between real ones and fake ones.  I’m sure those who have been in the markets for a long time can attest to that.  Let me show you some real life examples below:

Mitra Adiperkasa

The company is a premium retailer of many prestigious and exclusive brands in Indonesia such as Zara. Topman etc.  Before 2013 the company overexpanded and started facing severe inventory and cashflow problems.  This was compounded by the taper tandrum which caused emerging market currencies to depreciate, much like the situation now.  The stock dropped 72% from the peak in 2013.

The question of course was what the right entry point was.  Was it when the stock had declined 30%, 40%, 50%?  When the stock dropped 70% I’m sure many people were expecting the stock price to drop further.  After all, who is to say that the stock will not drop 90% or go to zero?

Anyway, I had made the mistake of going in too early into stocks.  I can assure you it’s not fun to be anticipate a turnaround before it actually happens.  Why not let the share price itself tell you when they are ready to turn around?  Yes, you will typically miss the first 20-30% of the rebound from the bottom.  But hey, that is better than going in at -70% only to find that the company may actually never recover from that!

My current rule of thumb is to go into the the stock when the 100 day moving average cuts the 200 day moving average from below – which is roughly about Rp420 (doesnt have to be exact) around Sep 2016.  Current price: Rp795 even after the recent decline after hitting a recent high of >Rp900.  Close to doubling your money in 2 years. Not a bad return?

MAPI 09092018

 

Brilliance China

Around the same time in 2015, Brilliance China stock price declined on worries of China’s anti-corruption drive.  The new Leader Xi Jinping had made it his personal crusade to root out corruption amongst Chinese officials and this has caused many retailer of luxury goods to see sharp declines in share prices as officials try to stay low.  Brilliance China is the exclusive distributor of BMW cars in China as you may know.

The share price declined close to 65% from its 2015 peak.  Our indicator gave a buy signal around Sep 2016 at around HK$10.  Went to a recent peak just shy of HK$24 around Aug 2017.

Interestingly enough, the stock declined again recent back to a recent low of below HK$10.  Here’s our chance to make a second round!

 

brilliance 09092018

 

Galaxy Entertainment

Same story as Brilliance.  The anti-corruption drive caused the share price of Macau casino operator Galaxy Entertainment to fall from a peak of HK$80 to HK$20.  It went back up to the recent peak of above HK$70 and looks like it’s coming back down for a second dive, much like Brilliance China’s case.  Buy signal was issued around Sep 2016 at around HK$30.

 

galaxy entertainment 09092018

Nestle India

For those of us following India, here’s another example.  Nestle India’s stock fell due to a recent scandal in 2016 when regulators found that the company’s Maggi instant noodles may contain more than seven times the permissible level of lead and was considering banning Maggi in India.  Fortune magazine had estimated the episode to cost the company close to half a billion dollars in damages.

Nestle Maggi Noodle Crisis

The stock declined 33% from its recent peak but somehow recovered very soon after.  You can see from the share price chart below that the buy signal was not generated until June 2017 when the share price was INR6,600, more than a year after the share price bottomed at around INR5,000 in Feb-Mar 2016 (it hit INR5,000 several times, threatening to break support at that time but ultimately didn’t).  Could it have gone below INR5,000 subsequently after Feb-Mar 2016?  Honestly, who knew?  It could have!  The share price recovered above INR7,000 (almost it’s pre-crisis high level) and came back down again to INR6,300.  Could it have tested INR5,000 again?  Yeah sure … why not?  But on hindsight it didn’t happen.  LIke I said, it didn’t confirm that the crisis was over until much later in June 2017.  After which the stock went on to create another new high.  The last closing price was INR10,470!  Not a bad return should we say?

Nestle 09092018

 

Teva Pharmaceutical Industries

Finally, a look at Teva, a generic pharmaceutical company listed in the US.  The whole generics industry in the US has been hit by price cuts and health care system reforms.  I shall not go into the details here.  What is more important is that after declining close to 85% from its recent high, the stock has given a buy signal at around $20 in April 2018 after bottoming around Oct 2018.  And guess what Warren Buffett bought into the stock in 4Q18 and added more to his position in 1Q18 according to exchange filings!

teva 09092018

Conclusions

So the point I wanted to make is that this rule works not just in a single market but in many Asian markets (and even the US markets)?  If you have the time, you can look back at the turnaround stocks you have experienced personally and see if this rule works for you!

The Next Bear Market

Jim Rogers

Jim Rogers: ‘The next bear market will be the worst in my lifetime’

It is always insightful to listen to old and experienced investors, especially when they share their view of the future.  This is vintage Jim Rogers.  If you have heard him speak in the past, you would have heard a lot of it before.  If you haven’t, this talk is as good as any he has given.

Take aways:

  1. US interest rates to rise rapidly in the future.  Be careful if you or the companies you have invested in are highly indebted.  Many of them might fail and be forced to sell their assets cheap like many have done before in history.
  2. Agriculture prices have done very badly in the last 10 years or more unlike almost every other investments in the world, some down as much as 70% from the peak.  He is advising people to be farmers instead of bankers.
  3. In the event of a bear market, people will look for safe havens, he thinks USD will still be a safe haven this time round.  It is about to get very over valued!
  4. Markets still down from their all time highs: China, Japan

Food for thought!

 

Relief rally?

Markets rebounded today.  I suspect this was due to the strengthening of the RMB.  One could say that this was caused by interventions by the Chinese government or because of market causes.  The rise in the RMB does seem too much too fast and technical selling has come in.  Whatever the reason you pick, the weakness of the RMB which had caused the earlier weakness and crisis of confidence in the markets has reversed today.

RMB Strengthening Against the USD – Too Much Too Fast?

CNH 27082018

HSCEI

hscei 27082018

So is the HK/China market finally turning the corner or is it just another dead cat bounce?  I think the honest answer is no one really knows.  But if you look at the HSCEI chart objectively, the downward trend has not reversed itself.  My yardstick to measure trend change, as I have mentioned before in my last post, is that the 100 day moving average line must cut the 200 day moving average line with both trend lines turning up.  As you can see in the chart above, if anything, the 100 day ma has just cut the 200 day ma downwards not too long ago in July!  I think there is no need to anticipate the markets.  Just let them prove themselves.  If the trend is strong, it is never too late to jump in.

 

Drawdowns in Markets

Investors are obviously worried about the outcome of the Trump Trade War. Asian markets have entered into a technical bear market but the US markets have hit an all time high. Just last week, the US markets officially recorded the longest bull market in its history.

Usually markets have cycles. Some say there is a 7 year Joseph cycle in Asia. 7 fat years followed by 7 lean years. An entire book has been written about it and I shall not repeat its observations here. So why hasn’t it applied to the US markets today? I believe one of the reasons might be this unusual period of market interventions called the QE since 2008. Excessive liquidity pumped into the markets has certainly made its way into equity markets and real estate in general, and even the bond markets. The markets have been pumped up when on its own natural rhythm should have have started gong down from 2015. (7 years from 2009). In fact, the decline has been observed in Asian markets, especially in HK/China which saw a low in many stocks. Consequently by that same theory, we should have seen 7 years of up markets from then up to 2022.

So the current correction is probably just a typical market correction in a bull market. The underlying fundamentals of the companies seem to confirm that view. In China for instance, unlike in 2015, many companies are reporting strong results and not declining profits as was the case in 2015. Just looking at the China auto sector where representative stocks such as Brilliance China and BAIC Auto (Mercedes Benz) JV, stock prices have halved from their recent peaks less than 6 months ago, when the companies are reporting profit growth of 30% or more. The outlook also remains bright as their foreign JV partners such as BMW are expected to introduce more models into China. The structural trends are still intact, as Chinese consumers are still enamored with these foreign luxury brands. The decline in share prices is caused by the recent news that the auto sector would be slowly liberalized and foreigners are allowed to own majority stakes in foreign JVs. Some worry that this means that foreign brands no longer need to work with Chinese companies and can sell cars on their own. However, the current JV agreements are still in place at least until 2023. There is still plenty of time to negotiate the new arrangements. But markets of course hate uncertainty. But to half the share price because of that?

Brilliance China

brilliance china 27082018

[Ed (27 Aug 18):  Brilliance China incidentally announced interim profit growth up 54% and the stock popped 14.7% today.]

BAIC 

baic 27082018

 

I have observed that share price decline fall into several categories. Declines of up to 20% should not be treated with concern. This is still within the normal deviation of stock prices in general. In more volatile markets or stocks, fluctuations in stock prices up to 30% can happen as a normal course of action without any news or change in fundamentals. I have learnt that this can be heart wrenching if we look at our P&Ls on a daily basis. However the best thing to do in this case would be to do nothing or we risk being shaken out by short term market fluctuations. The only exception to this rule is if the stock price were to break its 200 day ma. We should then sell the stock immediately as this usually isn’t a good sign. It shows that investor sentiments have changed and we do not know how much further it would go. The caveat to this rule of course is if you are a truly long term holder in the stock like Warren Buffett and you need to have unshakable conviction in your investment and analysis. Make sure you are also sufficiently diversified. In life many things can go wrong even when you have done all you can to consider all things in your analysis.

The second type of correction is the 40% correction from the last peak. A stock that recently fits this criteria is HM Sampoerna in Indonesia, majority own by British American Tobacco. The stock has compounded total returns of more than 25% in USD since its listing. A very impressive achievement in Indonesian markets given its volatile history and unpredictable FX movements. (A feat achieved by the equally impressive Unilever Indonesia, it has it be mentioned.) Tobacco stocks, it has to be said, normally do very well over the long term. Once I did a study and dug out the share price performance of the longest listed tobacco stock I could find – BAT London and was amazed to find that the stock has also compounded close to 20% p.a. since the 1960s which was as far back as my data source went. If anyone out there has a longer listed history of a tobacco stock, I would be interested to know the compounded annual TR of the stock. This proves to me that certain consumer companies like tobacco companies are much suited to weather through all sorts of economic conditions. Well back to HMSP. It is indeed unusual to find these stable stocks correct so much in such a short period of time. To be sure, the decline from recent peak has been about 44% in USD terms and have rebounded recently. In local currency terms the correction had been less. Investors are worried that the company has been losing market share and have not taken recent excise duties very well. But if we understand the long term characteristics of the tobacco business, I would say this should at best be a temporary issue. Indeed BAT Malaysia has also more than halved from recent peaks but for a different set of reasons. It is my contention that these stocks therefore are probably pretty close to being ripe for long term investors. If only I could get it at a lower price… Haha… Patience…

HM Sampoerna

HMSP 27082018

HMSP 1991 to 2018 Returns

HM Sampoerna compounded at a compounded return of 25.44% since it was listed in 1991.  That is a total return of 43,528% over the last 27 years! And this is in USD terms (hence taking care of the weakness of the Rupiah over this period.)  Notice that the total return is a lot higher than the price return.  Which means that about 60% of the total returns are made in dividends!

BAT Malaysia

ROTH MK 27082018

The final and most severe correction are those that typically go down. 60%-90%. These normally signal a severe crisis of confidence such as the Asia Financial Crisis on 1997 or the Global Financial Crisis in 2007, or if there are some structural reasons in the stock or the industry that the stock is in. Stocks are sold because of fear and not because of the fundamentals. Indeed, fundamentals and valuations are no longer meaningful. The only question then is when the we buy the stock., This would have been more an art than science. This is where I believe that technical analysis would be useful. It would be advisable to wait until the long-term trend is confirmed to be changed. In other words, we wait for the markets to signal that the trend is changing. Currently, my preferred indicator would be to wait until the 100 day moving average line cuts across the 200-day moving average line. This will ensure that we will not be tricked by the many false starts that are typical of a downward moving bear market. The dumps out this approach of course is that we normally would not be able to pick the bottom of the market. In fact, from my own observations, we would typically miss about 20 to 30% of the price from the low. This would of course be a small price to pay in order to avoid catching a falling knife. And you would also help reduce too many sleepless nights while we all want to stop to find it only to go down further if we went in too early. Here, I’m of course speaking from my very own painful experience. This is just a guideline for myself and of course if you readers have any other alternative way of timing the bottom I will be interested to find out as well and to refine my own approach.

This has been a very long discourse but I thought this would be a good time to summarize my own views on what to do when markets are down. Of course, to minimize our risk and to maximize our outside, it would be advisable to enter a stock only when it has declined more than 40%, I find that this would be much safer in the long term. This would also mean that we might miss a lot of opportunities along the way. But I would very much prefer to keep my bullets for those few real opportunities for the stock has declined 50% or more and has a chance within the next two to three years to double in price. The compounded annual return for some of these stocks will then be more than 20% which I think is a very reasonable goal and a very lucrative one for many investors.

The First Step

It is often said that a Journey of a Thousand Miles starts with a single step. So this is a first for me. For me it is like stepping into the unknown the whole new world social media the internet and blogging. So sometimes and no doctors have to learn new tricks.

And so the Journey Begins. No one can say how this will end up. But I intend to go as far as I possibly can in this journey with you. In this blog, I intend to document the thoughts and musings that come to my mind each day when I look at the market.

And finally some housekeeping matters. The views expressed in this blog is purely personal and should not be attributable to any organization or any other person other than myself. Any comments on stocks should not be construed as a recommendation to buy or to sell that particular stock. As with all investments, there are ups and downs and there’s no guarantee that one will make any money at all in the short-term or long-term. You should exercise caution when you are investing and do your own due diligence before investing making any investment. Never ever overcommit your funds or over invest beyond what you can afford to lose. I am not responsible for any investment decisions you make as a result of reading this blog.