Here is an original member article from March 8 2014, today July 25 freely released to all registered users.
Back on track. The SET as well as me -after a bout of medical.
Valuations on stocks as well as other investment assets (not to mention art and collectibles) is a very relative thing and hardly science. While there are some rules of thumb its not black and white. Here I reminisce in memory lane from the view of the pool.
First just a basic review.
Valuation of an assets can be as straight forward as pure academics where you compare the reasonably expected stream of expected future income, discounted back at the current prevalent interest rate. As I explained often here of late, the present level of interest rates is the key determinant and these remain ultra low; hence the reality of double digit p/e ratio’s here as on many stock markets around the world.
Another alternative, or to compliment this, one can compare the asset to other similar one which has bought/sold of recent in bona fida arms’ length transactions, like a not too illiquid similar stock. A third view is a valuation on the basis of replacement cost, where an appraiser estimates what it would cost to replace this asset, at current costs. Hence, 1) discounting future earnings stream, 2) compared to similar bought/sold transactions, 3) plain vanilla replacement cost.
Regardless of the method the level of interest rates in an economy is always a if not the most important factor. This is so because an investor assets has primarily any value because it is expected to produce future income and the so lower the interest rates are now, the higher the value of its future income stream. It’s the classic inverse relationship, same as bonds. This is why long term bonds have interest rate risk associated to them. Should interest rates rise the market value of the bond will drop.
My view are that bonds are now late in the cycle and more risky since if interest rates inevitably rise, then the value of the bond will drop. The bonds’ value decrease will almost entirely depend on how long the maturity of the bond. Of course should interest rated drop another tick here as is now talked about bonds could still rise before the cycle invariably turns.
Property stocks are very interest rate sensitive as buyers of property often take out long term loans to finance these, and the lower the coast of such loans (called mortgages), the easier it is for consumers to buy property.
Stocks too are by definition interest rates sensitive. But remember if interest rates rise its most likely because the economy is heating up which is good for a company’s earnings; vs. bonds which are not affected by that due to their static interest payment.
Ever since the N.Atlantic induced financial crisis economic guru’s and policy makers (not to mention the doom and gloom and gold guys), have predicted higher inflation to come. They been very wrong on this for very long. Deflation, not inflation, has in fact been the key risk which is why interest rates have persistently been lowered -and kept low. This long low % rate and inflation cycle will inevitably turn again but the timing remains very uncertain.
That is the world as viewed with rationalism -which always should influence the rational investor.
The real world is, like so many other things in life, influenced by vogue, style, sentiment, optimism/pessimism/fear and more. Sometimes an asset is so in vogue/style that is commands a premium and so trades at a higher then would make rational sense. Think years ago Microsoft or Apple Computer had such a premium as it was “all the rage”, evenwhile these companies did not pay any dividends. It was all based on future great expectations, which of course can and did change. When a stock trades at such high p/e premium with no dividends it is far more risky because the style/vogue perceived attraction can and will change without much notice….i.e. by the time you see it, its already adjusted downwards.
I happen to think green/clean energy companies’ should trade at a slight p/e premium as these command such an important place in the future and they are becoming increasingly financially viable even with little or no government incentives…time will tell and of course as always I can be wrong. Some investors believe that if its not economically viable now and on its own, then it has less merit. Others like me think that is wrong because the alternatives pollute the world, vs. green energy does not and is perpetually renewable.
Also like one seasoned member shared with us lately in our lounge, a most interesting AU Bloomberg article explaining in some detail how many green energy companies are rapidly becoming viable all on their own.
So far the p/e re-rating has not happened yet primarily because this sector is still small here and so mega institutions don’t talk about this, nor want to. Yet in recent weeks we have seen many core choices in that sector leading this SET recovery.
Last Friday DEMCO hit a new yearly high price (intra day at 9.05), same with EA. DEMCO is up some 25% since the start of this year vs. the SET index barely 5%.
In fact institutions and most all brokers indirectly still shy away from this sector as unproven or miniscule, solely because these do not (yet) command bib cap. market capitalization (and so trading) value.
Remember the email by the Tisco analyst (cc. in our lounge a few weeks ago) which completely downplayed this sector, evenwhile we here know its on an explosive growth cycle and less cyclical on top.
This brings the other dimension, a company which has yo/yo earnings or higher risks even if these grow fast is valued less then a more stable growing alternative. This is why you can find much lower p/e ratio stocks in so called frontier markets. These may have high growth just now but much more hazard besides far less information available, a cocktail to considerably more risks.
To say it again, cyclical is another key word/concept to never underestimate. A company which has cyclical fluctuating earnings will command a lower valuation as compared to another, because its earnings are viewed to be les yo-yo. I.e. the more volatile earnings the lower the p/e, as its less predictable and has more risks to disappoint. You sense my thinking: green energy is lower risk because its less cyclical to the current Thai economic slowdown and the market is starting to catch on!
When I was a broker in the 1980’s in the US the average p/e was around 8-to 11. With any stock trading at a p/e of 15-18 would be considered expensive with high risk that it was overvalued. Today the average p/e there is around 15-16 and are yet not viewed overly expensive by many. One key reason so, is because of the already for long holding lower interest rates prevalent there (as well as here). This is one reason the inflation proclamist should be knocked: because had inflation moved up as these relentlessly but wrongly argued, so would have interest rates and thereby the US market would never see such high p/e ratio’s.
Had these investor voted with their conviction they would have missed one of the longest US stock market rallies in history there. They would have also missed the long bond market rally as bonds moved up, just as interest rates and inflation moved down. Bonds and stocks are the biggest financial assets of any, the inflation hogs missed out big time on both…not to mention gold which lost 30% over the past 2 years, even while my favored stock here more then doubled. And all this during dire and head line grabbing Thai political uprising.
One significant reason why the SET index moved so high a year ago, is because of the ultra low levels of inflation and interest rates along with good sentiment and economic buoyancy back then. Hence it was not all that wrong or overvalued as some suggested. Back then it was perceived the Thai GDP growth rate would continue well above 5% -and that nobody in their right mind would dare to think they would screw-up the politics as they did since.
All this is changing. The Thai economy is growing at half that rate, the politics remain very messy and so the investor sentiment changed dramatically. Who would/could have predicted this?
Well some did but most of those bears got out much too early and missed the entire move up in early year 2013 and since I bet (I know) most missed the turn for the better. Remember, early last year was in fact the time when a stock like DEMCO doubled, so they would have missed that and so much more. Yes, a company featured in my model port., like QTC, further disappointed since without much warning in that they reported poor 3Q earnings and downscaled their future growth rate. For sure they did not warn me on that, which came on top of the political, economic and poor sentiment. Still it’s the combination of selections which matters most, not the inevitable laggard.
Here is where engineers and others often get it wrong, investor wise. Say you build 10 bridges, yes each and everyone has to be perfect so not to collapse. But, if you build a portfolio of stocks you know you will have some laggards/dogs but it’s the truly and only the combination of the whole which matters. If you aim to never had a laggard well, you would never be exposed to real winners as the two go together.
How we deal with laggards is another matter. A longer term investor (our objective here) may decide to ride it through, vs. a shorter term oriented member here may decide to cut loss. Cutting loss on QTC would have been smart, as I view today, but cutting loss on say SITHAI or DEMCO just to mention 2, would have been wrong, as viewed today. I dare to add here that DEMCO’s price has allot further to go by 2015 so don’t even think about taking some money off the table. I still rate it with a buy view.
Poor sentiment was further scaled down to emerging markets last May '13, when Mr. Bernanke got it wrong by prematurely declaring the US is back on the higher growth path. Huge capital flowed out of developing markets and into developed ones, and considering what has happened since, from Egypt to Thailand, that was not all wrong for sure. Yet, the US economy remains stale no least because of a bout of very bad weather there of late, just like our bout of bad politics here. Hence in general interest rates remain low and so stock prices relatively firm, even during scaled down economic growth. That is the power on valuation of low interest rates!
Some examples:
Look at CRANE(5) , as of now and it appears so boring, but is it? A model portfolio selection with ample reviews done here for some time. It reported at first view poor earnings but the stock is up +20% year to date. In January a seasoned member mentioned to me that 3 to 4 stocks in my model portfolio have high p/e ratio’s, and when I answered him that "a stock with double the expected growth rate should have triple the valuation", he yawned. If you were a strict value investor based only on p/e’s you would have dismissed CRANE outright. Yet CRANE and CHO have been decent performers, yes even while both have double of more the p/e of the rest.
CHO (1.80), a growth stock selection also moved up more then many from around 1.50 to just now 1.80. I am not going to “open an office on this”, but I think its evident that the higher p/e’s did reasonably well since the start of the year at a time just as politics flared up more and the whole market was very nervous. Yet DEMCO did just best while it was most touted. :)
Then there is and remains the ever highly valued CPALL bigger cap stock. It has a current p/e of over 21. Actually this stock held up pretty well since my own warning....Go figure. It is and remains one Dr. Nivet's (a long Thai value investor here) top choice he touts at every occasion. Surely based on some seasoned value investor members view here along with mine, this stock remains overvalued, along with lots of debt….but it has very low perceived cyclicality and great investor marketing.
PPM (7.30), another company which one could have easily claimed to be fully valued 6-8 months ago, as it reported so, so earnings since -with little news. Yet as of today it has held its value. Hence and I want to repeat: its never the whole story to just take one stock, look at it later at some point in time and declare this or that, with hindsight as its just a snapshot in time.
A few members have departed here of late based on just that false interpretation/understanding. I might here also remind members that during all the ups and downs and my many investor mistakes, my 6 month model portfolio’s keep nicely outperforming the SET, for many years. And yes, we got another head start on the current running one.
Perhaps the best thing I did her of late is just view to stay the curse vs. the panic view many had and so bailed out, often near a bottom. Or, missed the bottom on DEMCO at 6.50 (and others) which I then called a psycho low price. Today at least I dare to pad my back on that, as it looks like it would have been a great mistake to walk away back then.
Not least, so many investor gnomes declaration early this year that all emerging markets are out for now, when in Thailand’s case it was a great value investor buying opportunity, so many missed. Today it looks that way, of course time will tell.
One can go on and on with this but this point is clear: To get too close, or too jumpy or too daring or trying to hard are the real individual investor/member risk factors. Now is the time to sit back collect the good dividends and let the hot season pass with a likely SET resurgance in the second half of the year.
So many good people get going in stocks after a long period of positive headlines and with many selections already up in price. “Things look good, so better start investing”, yet stock markets are forward looking and this is why its often late in the game to start investing only when all is well. Similar to that, lots of bears shun stocks when times are rough, like of late, thinking it will only get worse. Many missed the bottom of the market in early January ‘14, just as that Mr. Chalerm here started to raise hell.
In fact I predict we already saw the SET bottom back then and great values like back then (i.e. DEMCO at 6.50) are history. Surely some members will write me again or post on in our lounge, when DEMCO goes up past 10, asking if its still a buy and I will want to refrain reminding them that I pounded the table below 7…only to them remind me I also said buy in the mid teens; even while those where different times then. In the meantime the regular and consistent 6 month model portfolio’s performance show the reality.
Oh well, my point is not that I am right. No, as I am wrong all the time; my point is that even during all the ups and downs and sideways and wrong calls here, the longer term investor has fared pretty well and well above the SET index. As so many of you can attest. Yes, I should have turned bearish last May as on so many other things with hindsight, but glad I did not in late 2012 like so many, as these missed out on great profits to be taken and traded -and enjoyed in the peaking months of early last year.
Just like many of these will have missed the bottom in early January ’14. It’s always the combination of all decisions (here views) which matter, not a bad call taken out of context. With the key selection moving forward again very nicely.
Best Regards,
Paul A. Renaud.
PS. The free DEMCO warrants seemed to have lost their punch since a huge price and volume soaring a couple of weeks ago, but its showed how easy it was to unload all those, if only one was patient. As of today they are still some 100 % higher in value, as to when the market bottomed in early January.
