Saturday, October 18, 2008

How low can the market go?

Sometimes, stock values become so low they defy belief. Then you can just throw away your charts and buy for the long term, based on fundamentals. Are we there yet?

A look back....

First, lets wind back the clock 7 years to look at previous bear markets. I first came to Singapore in early 2001 with $5000 in my pocket. I arrived from Australia, which had escaped unscathed from the Asian crisis and had been in a bull market for several years. After buying a shares booklet from 7/11, I was astounded. Many mid cap companies with excellent fundamentals were trading at ridiculous valuations. From memory:
  • Comfort was trading at a PE of 7 or 8, with a yield of 7%. With excellent cashflow, low debt, almost a monopoly with queues of poor uncles lining up to drive taxis, it had been able to increase its profits by 10+% for several years. I sold remember selling 2 weeks before the takeover by Delgro was announced :( fund my stupid HDB rennovations.
  • Robinsons was then a premier department store (as my wife said, it was the only one to segregate its offerings by price level (John little, Robinsons and 'Marks and Spencer') giving a more pleasant shopping experience. More importantly, it was profitable every year, and two thirds of its share price was cash. I didn't buy, no money. It eventually doubled.
  • Unisteel, with a 50% market share, trading at a PE of 12. It was to grow 20+ %for several years. I bought at 78c and tripled my money in 3 years. Before I bought it, it had traded around 30+c.
  • Want-Want, selling branded rice crackers, trading at a PE of 5 or 6, showing 20% growth. It traded at 60c, then moved up to 80c - I thought I missed my chance and didnt buy. It eventually reached $1.90.
I remember thinking that I thought I had come to Russia or Phillippines some other dirt poor, corrupt, disintegrating country! Where else would I find profitable companies with low debt, free cashflows, long operating history and potential 20+ percent growth, selling for single digit PEs?

Are we there now?

I cant find the same degree of undervaluation in the market right now. Key differences are:
  • In 2001/2002, we were in a recession and earnings were coming off a low base, hence the potential growth. After going several years through the recession , things were so bad that they could only get better.
  • The stocks mentioned above usually were blue chip (Robinsons) or had a sustainable competitive advantage (Comfort and Unisteel). Want Want was the exception. Looking at the blue chips today, for example, Comfort-Delgro, SMRT, Ascendas REIT, they do not yet have projected single digit PEs or yields of 7-8%. Trailing PEs are cheap, projected ones are probably not. The companies that have the ridiculously low valuations are the second liner companies which are a little weaker (eg: Cambridge REIT) or have a small market share (eg: TPV) in their industry, are are operating in China where it is hard to even determine their market share and count their competitors (let alone list their competitors).
  • Also, I don't mean to say that once stocks reach that level they will not fall anymore. My past experience does not even cover the Asian Crisis (STI went to 800+) where stocks were even cheaper. what I mean to say is that at these levels, I would use about 50% of my cash, which I did not need for 5 years, to buy and monitor them for the long term, with the expectations that some of them will double or triple in years to come. (The other 50% cash I will use for speculation).
Buffet once said in dealing with the 1970s crash, "I feel like an oversexed guy in a whorehouse". I felt like that in 2001. I don't feel that yet. Close, but not yet.... we are getting there. I will detail my search for undervalued stocks in future posts.

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