ACCUMULATING WEALTH – Opportunities in the Bubbles

Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment

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Opportunities in the Bubbles

This year is moving very fast, and we are now heading to the earnings season for the second quarter of 2020. On 14th August 2020, Bank Negara Malaysia (BNM) has announced that Malaysia’s economy had a contraction of 17.1% in the second quarter – June end. This is the worst performance since 1998 during the Asian Financial Crisis. In addition, BNM has lowered its forecast for the economy this year and it’s expecting a negative growth between 3.5%-5.5%.

This is partly why the market sentiment has turned bearish the past few days. The other reason could be the super bullish sectors like glove and healthcare has started a sharp correction. As of mid-August, many glove counters have corrected 20% from the peak. Technically, it means that it has gone into a bear territory. For chart pattern wise (as of the second week of August), you may see that most of them have already formed a bearish engulfing pattern which is a trend reversal signal. With this correction, many gloves companies are still having a Price to Earnings (PE) ratio of 50-100, indicating high valuation (still). Some investors would think the sharp decline of these leaders would lead to a market crash. However, given a rather stabilised and strong US stock market, I believe it is unlikely. So how is the US stock market doing now?

Source: https://www.Investing.com

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 we can see the Dow Jones Industrial Average (DJIA) chart on 14th August 2020, the candles have filled both two big gaps that formed in June 2020. The index has become more bullish than a month ago as it has overcome the 27000 level and stood above it. This is in harmony with the US non-farm payroll in July, which increased by 1.763 million and its unemployment rate fell to 10.2%. Both numbers are better than Wall Street’s forecast.  Moving forward, the index is challenging the immediate resistance of 28000 followed by 29000. It is likely to break new highs before the US Presidential Election. One caution though, gold has surpassed the 2000 level, which means the market is prepared for more uncertainties ahead. Since higher index and gold price means higher risks, what should we do? Are we seeing opportunities with lower risks?

Opportunities in the Bubbles

The answer is ‘yes’, because not all sectors and stock prices have gone up. There are companies which are worth looking into.

Net Cash Company with prospects

It means a company with bright future, and has net cash left after paying off all its debts.  For instance, Focus Lumber (5197), where its principal activities are manufacturing and sale of plywood, veneer and laminated veneer lumber (LVL). Based on its Q1 2020 report, it has cash and cash equivalent of over RM90 million and zero debt. That is 90 cents of cash per share! Its share price on 14th August 2020 was RM1.02, with net tangible asset (NTA) at RM1.68.

According to Bursa’s announcement, the company has been buying back its shares in the past few months. Furthermore, international lumber price has been rising significantly since April 2020. Therefore, the chances for the company to have better earnings ahead are higher.

Another example is Willowglen (0008) which provides technological solutions for infrastructure, businesses, residential, commercial and industrial needs. Willowglen is a laggard in the technology sector, as its peers have advanced to new highs while it is yet to be appreciated. According to its Q1 2020 report, the company has 87 million cash and zero debt. This translates into cash per share of 17 cents. Its share price was RM0.465 on 14th August 2020.

Does Willowglen have prospects? Its annual report 2019 has given us some hints:

  • Willowglen has secured and is implementing a project involving unmanned aerial vehicle for the oil palm industry. It can help to monitor the water, fertilizer, insecticides and herbicides’ needs of a plantation.
  • It has secured the opportunity to deploy RFID labels and is developing other Industrial Control System opportunities in the Philippines.
  • The company’s emphasis on R&D has enabled the group to release new products and solutions every year. There are much more information which you can read from in its website.

Conclusion

As you can see, while some sectors have gone up tremendously, there are sound fundamental companies with bright prospects that are yet to appreciate. The question is only when.