Disclaimer: This article is written for the purpose of discussing my thought on a buy or sell process basing on a fundamental approach. It is not a recommendation to buy or sell any particular stock. Like other posts I wrote recently, I have put this up in my private learning blogs first prior to publishing here.

“Heads I win; Tail I don’t lose much” The Dhandho Principle of Mohnish Pabrai.

The market performance in 2014

The year 2014 started with KLCI at 1853 retreating to about 1780 before continuing its uptrend to its peak at just below 1900 at midyear, and from then on it began with its downtrend. The drop was particularly furious at the end of November when the KLCI gave up 70 points in two weeks to 1674 on 16^th December 2014 due to the sharp drop in crude oil price and the Ringgit against USD. About 230 points was shaved off within half a year. The small and medium capitalization stocks, especially the oil related stocks, were particularly adversely affected. KLCI ended the year lower by about 100 points or 5.2% for the year.

A check with the performance of the 117 unit trust funds invested in Malaysian equity as at 9^th January 2015 from FundSuperMart shows a median loss of 2.7% for the past one year, with 74% of them in negative territory, compared to the previous year of an average gain of the funds at 15.2% with not a single fund posing a negative return. Appended below was my analysis of the unit trust funds a year ago.

http://klse.i3investor.com/blogs/kcchongnz/45121.jsp

The previous top performer, Philip Capital Master Growth fund which gained 28.5% in the previous year, made a loss of 13.2% last year, one of the worst performer. The previous third top performer MAAKL HDBS Flexi fund was not spared too with its last year return at a negative of 6.1%, below the broad market. If we examine the return of the last 6 months, the situation is much worse than this. My previous statement that the top performers were pretty consistent in their performance in the above article, which was against what the research has shown, was not really true after all. The other point is chasing the growth stocks, disregard of price, was also not a very wise move after all as in investment, the mean reverting is a powerful phenomenon, whether you believe it or not.

Return of MyThirdPortfolio

As discussed in my previous post, MyThirdPortfolio was not spared. This portfolio made an average loss of 1.1% compared to the -1.5% of the broad KLCI index. The winners in the portfolio outperformed the losers by 8 to 7 with a median return of +5.0% as shown in the post below.

http://klse.i3investor.com/blogs/kcchongnz/67547.jsp

A Review of stocks in MyThirdPortfolio: Which to retain and which to sell?

As usual, I will carry out a review to see which stocks still meet the criteria of good companies and still trading at cheap prices, or if their Graham net current asset values or option pricing values are still way above their current prices to decide which stocks to keep or sell for profit.  

Table 1 in the Appendix shows the metrics for the Magic Formula for the stocks in the portfolio. For this portfolio, I have decided to keep all the stocks intact in this portfolio going forward to 2015 with the rationale below.

Although the price for Latitude has run up substantially by 61% since I last wrote about it, its Magic Formula metrics are still very high with ROIC and EY at 25.5 and 22.2 respectively due to its continued improving fundamentals. With the opportunity of high USD where its major export market is, and its modus operandi, it has high reinvestment opportunity yielding return of capital way above its costs. Hopefully this buoyant furniture export market can sustain for some time to come. Below is some of my write-up on furniture companies recently:

http://klse.i3investor.com/blogs/kcchongnz/66908.jsp

http://klse.i3investor.com/blogs/kcchongnz/67260.jsp

Tong Herr’ marginally qualifies the Magic Formula with ROIC and EY at 9.2% and 12.9% respectively. Its business appears to be turning around with the end of the investigation of the anti-dumping measures by the European Commission and the commencement of productions of its Thailand and Vietnam plants. The European as well as the world economy at large is still improving. There is  promising hope that its revenue and margin will expand and hence improvement of its ROIC with all these silver linings. It may be adversely affected with the depreciation of Ringgit against USD as a big portion of its debts are denominated in USD. Thanks for the information from one of the participants from this course. Appended is my assessment of Tong Herr:

http://klse.i3investor.com/blogs/kcchongnz/59618.jsp

Scientex appears a little pricey after its run-up in price from RM5.74 to the close of the year 2014 at RM7.09. It EY is now at only 7.8%. However bear in mind that the Magic Formula doesn’t take into consideration of the prospective growth of the company. Although I don’t like to pay for growth as it is uncertain, its recent quarterly results do show the kind of high growth expectation. Its immediate future prospect also appears to be very good as it expects revenue from its consumer packaging business to quadruple to RM1b in three years following its strategic partnership with Futamura Chemical Co., Ltd of Japan which would see it expanding its operations. Going forward, the packaging business will slowly overtake its property development business. Hence I am willing to hold this stock in my portfolio and hope the profit runs with the improved fundamentals of the company. Appended below are the two articles I have posted in i3investor.

http://klse.i3investor.com/blogs/kcchongnz/56316.jsp

http://klse.i3investor.com/blogs/kcchongnz/60563.jsp

The share price of Uchitech was in doldrums for a number of years due to its subdued business performance. EY is still not high at 9.0 at the present share price of RM1.43. However, it ROIC has been always very high and still very high at 52.2 last year although it has deteriorated substantially.

I would like to add here that a friend of mine was so upset with my purchase of Uchitech for him that he took a very drastic action about it. However, I am not proven wrong by him yet as Uchitech share price has risen by 13.5% when the market went down drastically and many of his stocks lost 20%-30% the last three months.  Buying a business with high return of capital at reasonable or cheap price does provide a high margin of safety against market down turn.

Appended below is my analysis of Uchitech with my conclusions which follow:

http://klse.i3investor.com/blogs/kcchongnz/62058.jsp

“There also seems to be a good future growth story to tell with its attaining the investment pioneer status from MIDA, and its success in Research and Development meeting stringent client and regulatory requirements, placing it ahead of its competitors. Thanks to the good capital allocation of the management. The most recent quarterly report appears to prove the plausibility of the turnaround story. Most of all, it is selling at a beaten down price and hence good value.”

The metrics for the rest of the Magic Formula stocks in this portfolio remain high. They are Magni-Tech (ROIC 26.5%, EV 24.4%) , Padini (ROIC 45%, EV 15%) and TASCO (ROIC 10.4%, EV 15%).  Magni Tech share price stays low in relation to its earnings although its ROIC is high probably due to the old fashion type of industry it is in with not much future growth prospect. Padini may be facing steep competitions from other retailers and hence investors are doubtful of its continued high profitability. However, when the price is beaten down, it may be good time to accumulate as with its proactive management and its business has been proven to be resilient. TASCO may spring a surprise with its high growth expectation tying up with its Japanese counterpart. Appended below is my assessment on TASCO:

http://klse.i3investor.com/blogs/kcchongnz/57483.jsp

What about the rest of the stocks in the portfolio? What about the two companies with NA metric of ROIC and EY? What am I going to do with the two company warrants which have lost substantial value? Will I cut loss? We will deliberate the other investing strategy of Graham net current asset value and financial risk management the next time.

Conclusions

MyThirdPortfolio lost 1.3% last year, which is in line with the broad KLCI of -1.5%. The Median return of the portfolio shows better at +5.0%. It is not bad when compared to the median return of -2.7% of 117 unit trust funds investing in Bursa during the same period.  As generally the stocks discussed still meet the metrics of the Magic Formula, I have decided to keep them all in MyThirdPortfoliio.

The performance of MyThirdPortfolio seems to show that value investing, besides outperforming the market during the upturn, also has the ability of protecting against the downside when the market is not favourable.

Anyone who is interested to join my online investment course for a small fees, please contact me at ckc13invest@gmail.com

As there are some participants already confirmed and waiting, it will commence soon.

K C Chong (On the eleventh day of New Year 2015)

Appendix

Table 1: Return and the Magic Formula for MyThirdPortfolio

*The actual numbers may vary due to the period financial statement used