A Scenario of Low Risk High Return

The stock market has been lacklustre recently, even though the uncertainties have reduced.

On 12th June 2018, North Korea and the US had celebrated the Trump-Kim summit as a victory, signifying a new peaceful relation for both countries. A day after, the US Federal Reserve raised a key US interest rate, underscoring the central banks confidence in a steadily growing economy. Domestically, the stock market has been under selling pressure, especially after the market has learned that Malaysia’s national debt has hit RM1 trillion. Moreover, the companies’ quarter one results announced end of May was less than satisfactory. At the time of writing, the foreign selling streak hit 25th day, which is the longest since February 2014.

As negative as it sounds, it’s little wonder why most investors, including foreign funds, prefer to stay away from the Malaysia market. But why foreign funds are selling? First, I believe international investors would tend to be more skeptical if a country has changed its ruling government. Second, if you are a fund manager and were told that the country you invested in has 1 trillion debt, you just won’t sit there and do nothing. The natural reaction is ‘sell and get out’ first. But here is another question: will the selling end eventually? Once the selling is done, what would happen? Furthermore, what if the new government starts performing? Will foreign funds re-enter? You bet!

Of course, it takes time for all good things to happen. But, do you only invest when the positive signs start to surface? Maybe not. Regardless, let’s have a look at our portfolio when our market is in the confusion stage.

Disclaimer: The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

As you can see, while the table has showed a gain of 180% since November 2015, the three counters bought earlier have gone into red because of their poor quarter results. Is the poor result due to a fundamental change or temporary factors? So, let’s observe one more quarter.

Added 40000 shares HEVEA at 0.77

The quarter 1 result for Hevea was a disappointing one, only making RM2.3 million net profits compared to RM15.5 million in the last quarter, which is a decrease of YoY and QoQ. According to the management, the poor result was due to the rising material cost, labour shortage and weaker USD. As a result, the share price plunged tremendously. However, we took the opportunity to buy on dip based on the following:

The management indicated the labour shortage issue has been resolved.
There are continuous demands for both particleboards and RTA.
Its share price did not fall below the recent low of RM0.685, even though the result was far below 2017 Q3.

It was understood the new business venture – the king oyster cultivation may start to bear fruit from second quarter onwards.
The above indicates that the fundamentals have not changed and the business is still growing. It means the setback that the company is facing now is temporary.

Added 50000 shares D&O at 0.68
D&O is the world leading SMT LED manufacturer which provides services of OEM, OBM and ODM in opto semiconductor products. It has planted the seeds for automotive lighting business many years ago and now it has started to bear fruits.

This is reflected from its earnings in 2017, which doubled from 11 million to 22 million. The growth has showed by 26% CAGR of the automotive segment since 2013. In addition, its balance sheet has strengthened from a net debt position of 5.6 million in 2016 to a net cash position of 5.6 million in 2017.

Furthermore, as the world’s top five automotive LED manufacturers with end customer cover almost all brands of cars; it’s obvious that D&O is in the high entry barrier business.

The investment sum of Hevea and D&O is RM64800. Updated with the cash brought forward plus the RM1200 dividend (0.5 sen/share) received from JHM, our new cash level is now at RM19,125.

In conclusion, the market is lacklustre now. But with lower valuation and fewer uncertainties, it’s a scenario of low risk high return, which means higher chance of winning.