Bull vs Bear on 27th July 2007

Bull and Bear

Bulls and bears are common creatures in the stock market. While bull are most welcomed by many, bears are very much hated. But is the view on them justified? I am interested to find out.

STI 1988 to present (27th July 2007)


From 1988 to present, there are distinctive periods of bull and bears. Ignoring the smaller bears, the larger one lasted from 1996 to 1999; 2000 to 2003. However, taking a step back, from 1988 to present, a gigantic bull actually make the bear (no matter how big) miniscue.

In fact, boom and bust are common in the stock market. Though many are triggered by events, e.g. economic downturn, terrorist attacks, oil crisis etc. their unpredictability in occurrence actually give these ups and down a random pattern.

However, in an overall view, the general direction (as any healthy economy) over decades should be up. If a committed investor put in the same dollar amount into the stock market regularly over the years, there is no way he will make a loss. In fact, riding the gigantic bull amongst the random herd of mini bulls and bears will bring him the profits. (STI rose by more than 14% per annum on average from 1998 to present)

DOW 1930 to present (27th July 2007)


Another example can be taken from a more mature economy. In its relative infancy, stock market was volatile, but the general direction is up. In the mature state, the general direction is still up despite short term volatility.

Investors vs Speculators

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. Quoting from the Intelligent Investor, Benjamin Graham). Another common manifestation is the investor takes a long term position (riding the gigantic bull) while the speculator toys with the random herd of mini bulls and bears, common in the short term volatility. Money comes fast ... it disappears quickly too.

Conclusion

Thus my position is clear. So long as I am diligent and careful with my valuation, buying as many sufficiently undervalued companies over the years will have given me ample margin of safety and diversification to protect my portfolio. I choose to ride the gigantic bull and ignore the random herd.

Multi-Chem 2Q results on 25th July 2007

Bad results...
As expected from the current electronics slump, profit attributed to shareholders tumbled another 49%. This is the 3rd decline in 3 running quarters.

But...
Fortunately, the entire picture painted by Multi-chem is not all dark and gloomy. Its IT distribution segment continue to grow specularly, on track to be its saviour in years to come.

Reading between the lines...
Its IT distribution segment revenue (selling and supporting IT security products) grow from 12.2m in 4Q 2006 to 21.8m in current quarter, 2Q 2007:

• 4Q 2006: 12.2m
• 1Q 2007: 16.2m +32.7%
• 2Q 2007: 21.8m +34.5%

...

PCB segment contributed about 76.1% of the earnings for financial year 2006 which was a good year. Quarterly earnings was about 4m and thus PCB contributed about 3m. In order for the IT distribution to match this 3m, the revenue will have to grow to 42.9m per quarter (Traditionally, the IT distribution business operating margin is about 7 to 8% before tax)

Thus, assuming revenue growth of IT segment to maintain at 30% and margin to remain at 7%, it will take at least 3 quarters for the IT segment to match the PCB earnings in their best quarter, and hence maintain Multi-chem's overall earnings per quarter at 4m.

Expectation
Hence I expect to see earnings improve significantly by 1Q 2008 or latest 2Q 2008. Looking at it another way, I have 3 more quarters of bad results to load up more after each results announcement. Time to queue for more tomorrow.

The long waited formal annoucement by Armarda, 10th July 2007

Annoucement - Placement

After the nearly unexpected, illogical, unreasonably spectacular rise in share price from nearly 3 cents half a year ago to 33.5 cents today, Armarda finally released the long awaited announcement:

PROPOSED PLACEMENT OF 43,750,000 NEW ORDINARY SHARES OF HK$0.20 EACH IN THE CAPITAL OF ARMARDA GROUP LIMITED (THE "NEW SHARES"

Reason they gave
They explicitly mentioned that the proceeds will be used to :

finance strategic partnerships or alliances, acquisitions or joint ventures for expanding the range of services offered by the Group.

History

The last time they issue placements ( at a pathetic 5 cents when it had a NTA of nearly 10 cents) was to raised fund to finance a Joint Venture with FESCO group in PRC. Though it had cash then, it could not use them because most of the cash is either tied up as paid capital or generated in PRC. Armarda entered the JV with FESCO group as a "foreign" enitity, hence it could not use the fund generated in PRC and had to be injected from "abroad". Without sufficient cash abroad, it had no much choice but to raise cash via placements.

Reason I guessed (hopefully I'm right)

In the same light, I guess the management might be currently negotiating a Joint Venture of the same nature as FESCO group type, i.e. it had to "inject" cash from "abroad". If not, with its current cash hoard of 95M HKD, or appox 18M SGD (incl. 40M "untouchable" paid up capital), there is little reason why it need to issue shares to raise SGD 13M this time.

Reason I guessed (hopefully I'm wrong)

But there might be another reason, a little bizarre but not entirely impossible given under current market enthusiasm. Due to the current market exuberance, the management might be thinking that Armarda's shares (at 33.5 cents) are way overvalued. What other time than now to exploit the current situation and raise as much cash as possible?

Conclusion

Anyway, at a placement of 32 cents, current share price of Armarda will be well anchored, no matter how ridiculous it might be, given current fundamentals. Another excuse for me to hold on to my remaining shares of Armarda in my portfolio.

Finally, I let go of Surface Mount Technology on 29th June 2007

For reasons I do not know, Surface Mount Technology, SMT's share price have recovered to a level where I can let go and break even (including covering trading cost). I already identified SMT to be one fighting a somewhat losing battle in the ultra competitive EMS solution business. With escalating cost of business, pricing pressure and without a clear strategy or ability to compete, the profit erosion is inevitable.

Whether there is anticipated turn around in SMT or due to speculative forces at work resulted in the escalating share price. Despite this, I am not prepared to hold on to SMT. From what I could see, there is no change in business fundamentals to justify the market revaluation. I am already happy to get out without losing a cent on SMT (excluding time value of money holding SMT for 9 months). I exited at 46.5 cents and it closed that day at 49.5 cents.

Further trimming my holdings on Armarda on 26th June 2007

For the past week, Armarda is testing my emotional limits with each higher closing in share price each day. Without any news to justify such near ridiculous price, I really find it difficult to hold on to it. I am afraid my paper profit will vanish into thin air.

As I had identified in earlier postings on Armarda, I am aware that there is anticipated profit growth in coming quarters due to the Joint Venture with PRC's FESCO group. However, at 22 cents, it is trading way above the most optimistic valuation I can come up with.

Without many options of undervalue stocks and my stubborn reluctance to sit on spare cash, I decided to pare off some of my Armarda's profit and acquire more of Tsit Wing. To date, I have taken back my cost of buying Armarda and my required return in investing in Armarda in the first place. Now I'm down to halve the amount of Armarda I used to hold.