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Inphyy Corner
10 years 10 months ago #18627
by inphyy
An Investment Mistake to be Avoided
By Stanley Lim, CFA - January 13, 2014
Have you ever made an investment in a share that looks attractive based on its fundamentals, yet its price just seems to get cheaper with each passing year? If so, you might have bought into a value trap.
A value trap is a share that seems statistically-cheap on first glance based on valuation methods like the Price to Book ratio or Price to Earnings ratio. But on closer inspection, its business has stagnated or, in the worst case scenario, is doomed to fail in the future. In such an instance, you might never see an improvement in the price of the share.
“Net-Net” Companies
A “Net-Net” investment is a type of investment that was popularized in Benjamin Graham’s classic investment tome, Security Analysis. A company with shares trading at a price lower than the difference between its current assets and total liabilities would classify it as a “Net-Net” investment.
The theory is that for such a company, even if you liquidate just its current assets (consisting of cash, inventory, and the likes), which should be relatively easy to convert into cash, and pay off all its liabilities, you will still end up with a profit in your investment.
Although there are no “Net-Net” investment opportunities within the 30 blue-chips that make up the Straits Times Index (SGX: ^STI), there are a number of S-Chips – Chinese companies listed in Singapore – currently in this category.
But, there are good reasons why a company within the “Net-Net” category can turn out to be a value trap:
1. It is a fraudulent company
The company might be running a fraudulent operation with unreliable accounts. Calling it ‘difficult’ in trying to place a value upon such companies would be an understatement.
2. The fundamentals of the company are deteriorating
A company might turn out to have declining business value if its fundamental worsen. In fact, an entire industry might even be facing tremendous head winds; think of horse-buggy manufacturers when the automobile first came onto the market.
Companies that require low technology input find themselves more at risk of facing deteriorating fundamentals. As a country grows and wages increase, it will be hard for the company to compete against other companies from poorer countries that can provide cheaper cost of production through low cost labour.
3. A company’s assets might prove too difficult to be converted into cash in a timely manner
An easy understanding of a current asset is any asset that can reasonably be converted into cash within a year of the reporting period. But even so, not all current assets are equal and some of them are not easily convertible to cash.
For example, a property developer might classify its “properties under development” as a current asset. However, if the company goes bankrupt before the project can be completed, the half-completed project that’s left hanging at the construction site might not be worth much at all.
4. The company has huge hidden contingent-liabilities
Lastly, a company might be in the middle of a court case that entails the possibility of disastrous consequences if it loses.
As the court case isn’t finalized, a company might not have booked any potential court-related-costs as liabilities in its balance sheet. If the company eventually loses the case and has to cough up huge amount of fees and damages, it might face bankruptcy and wipeout its shareholders.
There is thus no value at all for investors in such companies.
Foolish Summary
In investing, a bargain is hard to come by. A value trap might appear to be a bargain for investors, but as Curtis Macnguyen, founder of investment management firm Ivory Capital once said, “A bargain that stays a bargain is not a bargain”.
Courtesy of The Motley Fool
Replied by inphyy on topic Inphyy Corner
An Investment Mistake to be Avoided
By Stanley Lim, CFA - January 13, 2014
Have you ever made an investment in a share that looks attractive based on its fundamentals, yet its price just seems to get cheaper with each passing year? If so, you might have bought into a value trap.
A value trap is a share that seems statistically-cheap on first glance based on valuation methods like the Price to Book ratio or Price to Earnings ratio. But on closer inspection, its business has stagnated or, in the worst case scenario, is doomed to fail in the future. In such an instance, you might never see an improvement in the price of the share.
“Net-Net” Companies
A “Net-Net” investment is a type of investment that was popularized in Benjamin Graham’s classic investment tome, Security Analysis. A company with shares trading at a price lower than the difference between its current assets and total liabilities would classify it as a “Net-Net” investment.
The theory is that for such a company, even if you liquidate just its current assets (consisting of cash, inventory, and the likes), which should be relatively easy to convert into cash, and pay off all its liabilities, you will still end up with a profit in your investment.
Although there are no “Net-Net” investment opportunities within the 30 blue-chips that make up the Straits Times Index (SGX: ^STI), there are a number of S-Chips – Chinese companies listed in Singapore – currently in this category.
But, there are good reasons why a company within the “Net-Net” category can turn out to be a value trap:
1. It is a fraudulent company
The company might be running a fraudulent operation with unreliable accounts. Calling it ‘difficult’ in trying to place a value upon such companies would be an understatement.
2. The fundamentals of the company are deteriorating
A company might turn out to have declining business value if its fundamental worsen. In fact, an entire industry might even be facing tremendous head winds; think of horse-buggy manufacturers when the automobile first came onto the market.
Companies that require low technology input find themselves more at risk of facing deteriorating fundamentals. As a country grows and wages increase, it will be hard for the company to compete against other companies from poorer countries that can provide cheaper cost of production through low cost labour.
3. A company’s assets might prove too difficult to be converted into cash in a timely manner
An easy understanding of a current asset is any asset that can reasonably be converted into cash within a year of the reporting period. But even so, not all current assets are equal and some of them are not easily convertible to cash.
For example, a property developer might classify its “properties under development” as a current asset. However, if the company goes bankrupt before the project can be completed, the half-completed project that’s left hanging at the construction site might not be worth much at all.
4. The company has huge hidden contingent-liabilities
Lastly, a company might be in the middle of a court case that entails the possibility of disastrous consequences if it loses.
As the court case isn’t finalized, a company might not have booked any potential court-related-costs as liabilities in its balance sheet. If the company eventually loses the case and has to cough up huge amount of fees and damages, it might face bankruptcy and wipeout its shareholders.
There is thus no value at all for investors in such companies.
Foolish Summary
In investing, a bargain is hard to come by. A value trap might appear to be a bargain for investors, but as Curtis Macnguyen, founder of investment management firm Ivory Capital once said, “A bargain that stays a bargain is not a bargain”.
Courtesy of The Motley Fool
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10 years 10 months ago #18628
by inphyy
Replied by inphyy on topic Inphyy Corner
How to Identify Small Cap Performers
By James Yeo - January 13, 2014
Many retail investors have the misconception that small caps are risky shares. Thus, they might prefer to stick with shares with big market capitalisations in exchange for a peace of mind.
In fact, it reminds me of the words of my father: “Even though they [the big caps] might not appreciate in value as quickly compared to small cap companies, they would not disappear [get suspended from trading] within a day!“.
While his statement comes with a tinge of bias against small caps, suspended stocks like China Hongxing Sports (SGX: BR9) does lend weight to this words. Nevertheless, mid cap and large cap companies do not appear from nowhere and those companies were probably small cap shares themselves many years ago. Thus, the trick actually lies in spotting the common characteristics that top performers share.
Some examples I have cherry picked due to their astonishing share price appreciation over the past 2 years include Riverstone Holdings (SGX: AP4), Silverlake axis (SGX: 5CP), Oxley Holdings (SGX: 5UX), and Sino Grandness (SGX: JS5). Out of these shares, I found 2 yardsticks that are common.
Source: S&P Capital IQ
Strong Sales and Earnings growth
It is not uncommon for small cap companies to prefer retaining cash for growth opportunities rather than returning it to the shareholders as dividends. As a result, they often grow much faster as compared to larger, more mature peers.
A great example would be American consumer electronics giant Apple. After people got used to its exciting line of Macbooks and iPhones, it has since hit a peak where growth would likely be considerably slower. Tim Cook, chief executive of Apple, has also been honest about it and hence, the company has been returning more cash to shareholders in the form of dividends and share buybacks since 2012.
So, to separate the wheat from the chaff, investors usually look for higher than average earnings growth in small companies. Take for example, Silverlake Axis, a leading provider of end-to-end universal integrated banking solutions to major financial institutions. Its earnings per share has soared from a record low of 3.04 RM sen just after the financial crisis to 9.25 sen in year 2013 – an annualised growth rate of 51.07%!
As for rubber glove maker Riverstone Holdings, its revenue and net profit had grown at impressive compounded annualised growth rates of 21.7% and 12.9% respectively from 2008 to 2012. On top of that, it is debt-free and has also managed to provide increasing dividends over the years.
Substantial Positive Impact in the future
Apart from increasing profits, a stream of beneficial news is also a common theme among top performers. Such news can help renew investor sentiment in the company, highlight its improving fundamentals, and help push its share price to greater heights over the long run. For instance, over the past year, Oxley Holdings has been active in the limelight by announcing real estate acquisitions in the prime areas of London, England and Kuala Lumpur, Malaysia, among others.
It’s the same with food producer Sino Grandness. On top of consistent improvements in its earnings, the company has had several upbeat developments which have generated a fair bit of interest among investors. It has continuously secured new distributors and distribution channels and won more orders from trade fairs. The recent shareholder purchases coupled with the upcoming Garden Fresh initial public offering has also helped bolster confidence in the company.
Foolish Bottomline
Even though the share price of small cap companies can often rise very quickly tandem with increasing earnings and good prospects, it may turn ugly all of a sudden too. One such example is Ausgroup (SGX: 5GJ). Once a market darling in 2012 when it skyrocketed from $0.35 to $0.65 in a matter of 6 months, it has since plummeted all the way down to $0.178 in recent times due to poor market conditions.
So, as useful as the two yardsticks are, one cannot just depend solely on them to find winning shares. More importantly, an investor should be comfortable with what he/she is investing in and perform the due diligence needed. That’s especially so when our own hard-earned money is at stake.
Courtesy of The Motley Fool
By James Yeo - January 13, 2014
Many retail investors have the misconception that small caps are risky shares. Thus, they might prefer to stick with shares with big market capitalisations in exchange for a peace of mind.
In fact, it reminds me of the words of my father: “Even though they [the big caps] might not appreciate in value as quickly compared to small cap companies, they would not disappear [get suspended from trading] within a day!“.
While his statement comes with a tinge of bias against small caps, suspended stocks like China Hongxing Sports (SGX: BR9) does lend weight to this words. Nevertheless, mid cap and large cap companies do not appear from nowhere and those companies were probably small cap shares themselves many years ago. Thus, the trick actually lies in spotting the common characteristics that top performers share.
Some examples I have cherry picked due to their astonishing share price appreciation over the past 2 years include Riverstone Holdings (SGX: AP4), Silverlake axis (SGX: 5CP), Oxley Holdings (SGX: 5UX), and Sino Grandness (SGX: JS5). Out of these shares, I found 2 yardsticks that are common.
Source: S&P Capital IQ
Strong Sales and Earnings growth
It is not uncommon for small cap companies to prefer retaining cash for growth opportunities rather than returning it to the shareholders as dividends. As a result, they often grow much faster as compared to larger, more mature peers.
A great example would be American consumer electronics giant Apple. After people got used to its exciting line of Macbooks and iPhones, it has since hit a peak where growth would likely be considerably slower. Tim Cook, chief executive of Apple, has also been honest about it and hence, the company has been returning more cash to shareholders in the form of dividends and share buybacks since 2012.
So, to separate the wheat from the chaff, investors usually look for higher than average earnings growth in small companies. Take for example, Silverlake Axis, a leading provider of end-to-end universal integrated banking solutions to major financial institutions. Its earnings per share has soared from a record low of 3.04 RM sen just after the financial crisis to 9.25 sen in year 2013 – an annualised growth rate of 51.07%!
As for rubber glove maker Riverstone Holdings, its revenue and net profit had grown at impressive compounded annualised growth rates of 21.7% and 12.9% respectively from 2008 to 2012. On top of that, it is debt-free and has also managed to provide increasing dividends over the years.
Substantial Positive Impact in the future
Apart from increasing profits, a stream of beneficial news is also a common theme among top performers. Such news can help renew investor sentiment in the company, highlight its improving fundamentals, and help push its share price to greater heights over the long run. For instance, over the past year, Oxley Holdings has been active in the limelight by announcing real estate acquisitions in the prime areas of London, England and Kuala Lumpur, Malaysia, among others.
It’s the same with food producer Sino Grandness. On top of consistent improvements in its earnings, the company has had several upbeat developments which have generated a fair bit of interest among investors. It has continuously secured new distributors and distribution channels and won more orders from trade fairs. The recent shareholder purchases coupled with the upcoming Garden Fresh initial public offering has also helped bolster confidence in the company.
Foolish Bottomline
Even though the share price of small cap companies can often rise very quickly tandem with increasing earnings and good prospects, it may turn ugly all of a sudden too. One such example is Ausgroup (SGX: 5GJ). Once a market darling in 2012 when it skyrocketed from $0.35 to $0.65 in a matter of 6 months, it has since plummeted all the way down to $0.178 in recent times due to poor market conditions.
So, as useful as the two yardsticks are, one cannot just depend solely on them to find winning shares. More importantly, an investor should be comfortable with what he/she is investing in and perform the due diligence needed. That’s especially so when our own hard-earned money is at stake.
Courtesy of The Motley Fool
Please Log in or Create an account to join the conversation.
10 years 10 months ago #18632
by inphyy
LionGold: Ghana Subsidiary Formalizes Tailings Purchase Agreement And Expects Gold Production In March 2014
13 Jan 2014 19:22
LionGold Corp Ltd is pleased to announce that its Ghana gold mining subsidiary, Owere Mines Limited, has finalized its tailings purchase agreement with B&C Gold Pty Ltd, formalizing the Heads of Agreement previously announced on 21 November 2013. LionGold owns a 77% interest in ASX-listed Signature Metals Limited, which in turn has a 70% stake in Owere Mines. B&C, an Australian registered company, and its related entities have had over 8 years of experience within Ghana in operating and exploring gold mining and related business opportunities...
liongoldcorp.listedcompany.com/newsroom/...257C5F00151997.1.pdf
Replied by inphyy on topic Inphyy Corner
LionGold: Ghana Subsidiary Formalizes Tailings Purchase Agreement And Expects Gold Production In March 2014
13 Jan 2014 19:22
LionGold Corp Ltd is pleased to announce that its Ghana gold mining subsidiary, Owere Mines Limited, has finalized its tailings purchase agreement with B&C Gold Pty Ltd, formalizing the Heads of Agreement previously announced on 21 November 2013. LionGold owns a 77% interest in ASX-listed Signature Metals Limited, which in turn has a 70% stake in Owere Mines. B&C, an Australian registered company, and its related entities have had over 8 years of experience within Ghana in operating and exploring gold mining and related business opportunities...
liongoldcorp.listedcompany.com/newsroom/...257C5F00151997.1.pdf
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