A Bullish October with Foundation
Almost all the world stock market indexes were bullish for October especially with the Dow Jones, S&P and Nasdaq keep breaking new highs. You might be asking, what makes the Bull Run sustainable with a number of uncertainties, such as the geopolitical tension of North Korea, Spain and some natural disasters in the US.
Obviously, if the market can shrug off the above events and keep performing, some form of foundation must have supported it. For instance, the recent US factory data and the prospect of tax cuts have boosted the optimism of the economy. And not easily seen in the last five years, the world’s three strongest economy’s stock indexes – the US, China and Japan stood well above the MA50 line, showing strong signs of bullishness.
The interesting thing though is, the KLCI has fallen below the MA50 and became the index that ‘bucked the trend’. Besides, you’d have noticed that there were more losers than winners in the last few weeks. With the Malaysian stock market that behaved ‘independently’ to the macro, how has our portfolio performed?
Although we have gained 268% return since the inception in November 2015, the bullishness in October has subsided. Some companies that used to perform well have lost its steam in terms of earnings and trend. Therefore, we need to perform some switching to sustain the portfolio’s performance.
Sold Superlon (5098)
Superlon is engaged in the business of manufacturing of thermal insulation materials mainly for the HVAC&R industry and trading of HVAC&R parts and equipment. The 2018 Q1 results announced on 26th September 2017 was a disappointing one, with revenue falling to 19% from 32.5 million in 2017 Q4 to 26.3 million, whereas its net profit fell from 6.4 million to 3.6 million in the same period.
According to the management, the decrease for both revenue and profit was due to lower volume of sales and higher cost of materials. Even though the board expects the company to achieve a satisfactory result for FY2018, I felt that more explanation should be provided given such an unexpected poor performance. With the lack of clarity in the revenue drop, I decided to take profit and sold 50000 shares at 2.28.
Bought Masteel (7235)
Masteel is the manufacturer of steel billets and steel bars for the construction sector.
Based on the last two quarters’ results, their combined earnings per share (eps) were RM0.096, or RM24.7 million net profits. If you annualised it, the net profit for FY2017 can easily surpass RM50 million or eps of RM0.2, which would give a fair price of RM2 based on a PE ratio of 10.
However, the average steel selling price has been going up significantly in the last few months. According to The Star online, the steel bar surged to 7.8% in July followed by another 12% to RM2440 per tonne in the first two weeks in August, and peaked at RM2642 in September. With strong selling price, the quarter 3 results for steel companies are likely to go uptrend. For Masteel, its earnings per share (eps) for FY2017 can easily hit RM0.25, which translated to a PE ratio of 5.2 based on market price of RM1.31.
With this in mind, we bought 80000 shares of Masteel (7235) at RM1.31 per share using the sales’ proceeds from Superlon. Our new cash level is now increased to RM35,425.
As you can see, in good times or bad times, your companies could perform well or give you a surprise. Therefore, with a clear understanding on their performance, you can make appropriate decision to sustain your portfolio’s performance.
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