SMRT: Over Priced!

SMRT has gone up roughly 10% for the past month due to the transport fare hike revision. This is exceptional performance considering the STI has retreated about 10% for the same period. If we were in the midst of a bull market, SMRT will likely to rise at least 20%.

However, is SMRT’s share price rise sustainable and justified?

I do not think so. Hence I will be plucking some exaggerated numbers to show that its share price command an unhealthy premium over other stocks.

Today’s papers showed that SMRT and SBS will likely to gain an additional $10.1M in fares from the hike.

How does it affect shareholders and how much net profit will SMRT be able to extract from the increase in fares?

SMRT’s turnover last year was $802M, with a net profit of $150M or a profit margin of 18.9%.

EPS was $0.099 and at Friday’s closing price of $2, PE is at 20.2

If SMRT and SBS were to share the $10.1M on a 70-30 basis (biased towards SMRT), SMRT will be able to gain $7M in fares.

I am assuming that the $7M is additional free money and that SMRT does not need to incur cost to earn it (which is unlikely and exaggerated).

SMRT reported a rise in ridership and retail income. This is likely to translate higher profit levels. I am assuming a (exaggerated) 20% increase in net profit with reference from FY 07.

SMRT net profits for FY 08: $150M+ 20%($150M)+$7M= $187M

The actual amount will be lesser as SMRT has already reported 1 quarter of earnings and the fare revisions will only kick in on 1 Oct.

EPS will be $0.124, PE will be 16 even with the above biased favouring towards SMRT.

Though SMRT is a recession proof business, at current bear market, its forward PE ratio of 16 is far too high and demanding. The paltry dividend yield of 4% does not make this stock attractive in anyone’s portfolio too. This is despite the fact that the dividend payout ratio is 80%.

In actual fact, I think SMRT has a forward PE of at least 18.

I believe the current price of SMRT is too high. I would prefer to invest in SMRT if it falls to $1.40 and below, rising its dividend yield to 6% and above.

It is afterall a good business to own. Your colleagues will be contributing to your semi-annual dividends everyday when they pay to be squeezed like sardines on their way to work daily.

Stop Worrying, and Learn to Love the Bear By Jason Zweig

WallStreet Journal

When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market.

Meanwhile, this newspaper, and most of Wall Street, has declared that stocks have officially entered a bear market now that the Dow Jones Industrial Average is 20% below its record high of last October. I think that's poppycock. We've been in a bear market for years; the Dow was almost 600 points higher in early 2000 than it is today. What about that 10% yearly return that U.S. stocks supposedly provide with near-certainty? To earn a 10% long-term return, according to Morningstar, you need to have bought at least 19 years ago and held on ever since.

Could things possibly get worse? I don't know, but I am an optimist -- so I certainly hope things do get worse. Nothing else should satisfy an intelligent investor.

This May, at the annual meeting, boiled down what it means to be an intelligent investor into two startling sentences: "If a stock [I own] goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before the bounce back.

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods -- and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.

This new column takes its name from the classic book by Benjamin Graham, who wrote that "the investor's chief problem -- and even his worst enemy -- is likely to be himself." I hope to help you understand the chaotic markets around you, and the even more treacherous enemy within. For, as Mr. Buffett has also pointed out, investing is much like dieting: It is simple, but not easy. Everyone knows what it takes to lose weight. (Eat less, exercise more.) Nothing could be simpler, but few things are harder in a world full of chocolate cake and Cheetos.

Likewise, investing is simple: Diversify, buy and hold, keep costs low. But simple isn't easy in a market seething with "free" online trades, funds that promise to transform losses into gains, and TV pundits who shriek out trading advice as if their underpants were on fire. The real secret to being, or becoming, an intelligent investor is bolstering your self-control.

So, in these columns, I will seek to combine the wisdom we can glean from Graham with the latest insights from psychology, neuroscience and behavioral economics. The result, I hope, will be practical advice that can increase your odds of reaching your financial goals.

For now, bear this in mind: That which does not kill investors makes them stronger. Physiologists have shown that minuscule doses of poison may actually make organisms (including humans) healthier, a phenomenon called hormesis. I do not recommend seasoning your food with cyanide.

But the findings on hormesis do remind us that painstaking investors -- literally, those who can take the pain of a bear market that seems to drop another 1% every day -- will ultimately triumph, by patiently amassing greater and greater equity positions at better and better prices. The ancient King Mithridates of Pontus is said to have made himself immune to poison in constant gradual doses, a tale retold by the poet A.E. Housman:

They put arsenic in his meat And stared aghast to watch him eat; They poured strychnine in his cup And shook to see him drink it up.... I tell the tale that I heard told. Mithridates, he died old.

Write to Jason Zweig at jason.zweig@wsj.com

Article from here: http://biz.yahoo.com/wallstreet/080712/sb121582067258747665_id.html?.v=1

Sgbluechip says: I think the worst thing to do now is to sell away your holdings. The lower it goes, the nearer we are to the bottom.

Cycle

My observation on people around me is that people are no longer talking about stocks. In fact, I seldom see my colleagues checking the stock market anymore!

Usually these are the first signs of market bottoming.

Many people are anticipating the market to come down even further. When it does, people will think that they are lucky to have avoided the market.

When there is a mini rally, people will think that it is a bear rally.

“It will fall further.”

And usually, it really does fall further.

Again, it makes people feel that they are right not to buy.

It will go up and down until a point where even the most bullish person turns bearish.

“Bear rally again.”

Finally, it will start a real rally.

Some corrections will occur to consolidate the market once in a while.

Many people will feel it is still the bear rally and avoid the market.

Then, when the market approaches to higher levels, new investors start to come in, pushing the market to an even higher level.

Before we know it, the market reaches a new high.

“It will go up further.”

And it really went up further.

Then, people started to sell and lock in profits.

The market corrects a little and goes up higher, reaching new highs.

The same people who sold start to buy again, fuelling the bubble.

Finally, the bubble bursts and we are back to the bear market, like now.

Some thoughts on Oil prices

Since the beginning of the decline of oil prices, commodity prices have been on the downtrend as well. Even the “commodity currencies” NZ dollars and Aussie wasn’t spared. It now seems apparent now that there was no real demand for oil afterall. Those “experts” who have predicted that oil prices will reach US$200 by year end are probably the same people who have speculated on oil futures, at the expense of world economy.

The worst hits were probably airline stocks, many even incurring real losses, compliments from the oil speculators.

I remember discussing with some investors (colleagues) that the oil bubble will not last, last year. I was saying that there are plenty of alternative energy available as substitutes. For instance, solar energy, hydro energy, palm oil, coal, nuclear fusion and fission, wind energy, natural gas etc, just to name a few. If oil prices were to really run up to an unsustainable point, all countries will cut back on energy consumption and rely on alternative energies instead.

I also pointed out that if US (world largest consumption of oil) were to enter a recession (quite likely last year), it will cut back on energy consumption and thus reducing real oil demand. In fact, Warren Buffet has remarked that US was already in recession at that point of time but it was not reflected in GDP because of an increased in US population. Americans are actually worse off by the day.

Also, it does not seem logical that with global economy slowing down, oil prices are doubling at the same time. It is making a mockery out of the basic supply and demand theory.

Even MM Lee came forward and attempted to prick the oil bubble by “predicting” that oil will never exceed US$120. Before we know it, oil went past the US$120 mark and peaked at $148 before its descent. He also did not gain much market support when he wrote on the Asia decoupling theory in Business Times few months back.

Of course I was proved wrong again and again for months, until it seems that oil prices will never come down. Demand seems real. Even I begin questioning my contrasting perspective of steep and speculative uptrend of oil prices.

The oil experts argued that there have been no major oil fields discovered for the past 50 years and the cost of extracting alternative energy will take more time to curb the current energy demand. Besides, India and China accelerated growth will only increase oil demand and prices.

Suddenly, many papers were written by experts to “explain” why oil can only go up.

“Experts” wrote with great zeal on investment strategies to ride the oil boom. SPC went up to $9 (last traded at $5.30); Wilmar went up to $5.70 (last traded $3.68); Golden Agriculture went up to $1.15 (last traded $0.595), while SIA plunged from $20 to $13.80. Not many (myself included) ever dared to buy for its hefty $0.80 dividends when it was trading at $14.

Now, the “experts” are predicting that oil will drop below $80. Have they sold put options this time to ride the oil decline?

I believe oil will resume its uptrend for sure. There is no doubt about it if we look at the 50 year chart. With limited supply and unlimited demand, we should be prepared for high oil prices. However, for oil to double its price within 1 year can only be due to speculation. A more reasonable uptrend of oil price will be 10% per annum, in my opinion.

I do hope the experts are right this time as the stock markets will probably soar if oil prices fall below US$100.

It may be a good time to pick up some gold if it really falls below US$80 as well.

My 50% loss

Readers will noticed that I have updated a silly investment (SAIZEN REIT) made 1 year ago in my current holdings. I balloted for it through ATM for 10 lots and was given 2 lots, fortunately! I invested the REIT for dividends and since then, it has tanked about 50%. This is probably my worst investment paper loss till date. It doesn’t help as it reported a net loss of $50m for FY 08. The old saying of not investing into unfamiliar territory holds true for all investments.

The reasons I invested in this REIT was because Japanese Yen has been undervalued for many years. I was hoping that its appreciation will bring about interest in Saizen Reit. The fact is, Japanese Yen can continue to be undervalued for another 20 years.

Secondly, the housing ownership cost in Japan is too high (land scarcity) and risky (frequent earthquakes), hence renting accommodation in Japan is a more viable option in my opinion. This is a valid point as the annual report shows growing revenue and higher occupancy rates.

Thirdly, I was also inexperience and gullible to believe the prospectus of the 6.5% annualized yield! In actual fact, the yield will only be 4.67%.

Fourth point, based on historical records on Singapore listed REITS (at Sept 07), many did not incur losses upon IPO launches. I thought it was a “safe” investment. Again, Japanese property was an unfamiliar property play compared to Suntec, Capitalmalls and F&N commercial properties. It was a poor historical comparison on hindsight. The greed of selling it for a quick gain also did me no good.

Saizen Reit issued units as management fees which means that there will be large horde of selling the units for cash. This is a bad move by the management. This is one of the reasons I can think of for its share price volatility, other than the current bear market.

The good thing is that I will be receiving dividends. I will not be selling it as I want to remind myself of this mistake and also to hold it for its miserable semi-annual dividends. To be fair, the loss is less than $1000 dollars, representing only about 0.3% of my overall portfolio. The loss is unnecessary but I believe I will learn, grow and move on. Also, as long as the return on this investment is higher than 0.5%, it is better to keep it than realise the loss. Afterall the $2,000 I had invested last year will probably be idling in UOB current account anyway. Some consolation for me!

NO IPOs for me for the next 2 years!

Stock transactions and portfolio summary August 08

BUY (CASH)

DBS: 1,000 shares @ $18.48

SPH: 5,000 shares @ $4.02

Capitaland: 2,000 shares @ $4.85

SPC: 2,000 shares @ $5.42

HL Finance: 3,000 shares @ $ 3.28 (CD)

DBS: 1,000 shares @ $18.44 (CD)

SELL (CASH)

DBS: Contra 1,000 shares @ $18.80

SPH: Contra 5,000 shares @ $4.06

Capitaland: Contra 2,000 shares @ $4.95

SPC: Contra 2,000 shares @ $ 5. 53

Realised trading gains of $ 528

BUY (CPF)

SPH: 3,000 shares @ $4

HL Finance: 3,000 shares @ $3.40 (CD)

SELL (CPF)

SPH: 3,000 shares @ $4.05

Realised gains of $66

Dividends

Singpost: $625 (FY 08, first quarter dividends of 0.0125 cents/share)

Summary

In August 08, I received $625 dividends from Singpost and made $528 of trading gains. I also bought HL Finance and DBS mainly for their dividends. Together, I have a net cashflow of $1,153 in July 08.

It was actually quite exciting and fun to trade shares even for modest gains. I actually have the target to gain $400 so as to achieve a net cashflow of $1,000 for month of August.

The market is really bad for August 08. STI went down about 6.5% this month. Nobody knows if the bottom has been reached. For me, I will just stick to income investing and hopefully reach my target of minimum $1,000 a month cashflow.

I have about $20,000 of cash standing waiting for more opportunities to enter the market. I do hope that I can sell off DBS at about $18.80 and above in Sept to prop up my cash holdings for better opportunities.

I am expecting $450 dividends from DBS, HL Finance and Saizen Reits to be credited into my account in Sept. It will be a “poor” month for me!

Difficult to earn my money

Recently, 5 salesgirls and 2 salesmen came into my office during lunch time to promote their health products.

They started by giving my colleagues free body checkups and telling them their health are in bad shape after punching in some calculations through complex formulas.

Initially, they gave a lot of freebie samples like oatmeal vitamins, detox drinks, aloe vera wash etc.

Then, they started their sales pitch.

Their products are not cheap, typically $80 for some omega 3 fish oil capsules, $50 for vitamins. They broke up into teams and started promoting to different cliques. By the time I reached there, many of my staff had bought their products, as they felt embarrass to reject them after trying out so much samples from them.

One of the salesmen started to pitch his sales talk to me. After just taking my body weight, he was able to calculate my body fats level, ideal weight, stress levels and gave the conclusion that my health was in dire straits!

He started saying things like:

You need my products to cure yourself!

Everything in life can wait, but not your health!

It is really up to you, whether you want to eat these or eat medicine in hospital.

This pollen is good for you!

Take this package, you will not regret! It is a “man package”.

You need to detoxify! You need to clear at least 2 bowels a day! You eat 3 meals right?? Where did the other 2 meals go to?

To be honest, I almost bought the products, until the man told me the last salesline.

This is a typical MLM product salesman punch line!

True enough, I went to the internet to research about the company’s US products and I was spot on!

We all know one of the characteristics of MLM products are obscene profits. A $6 product can be selling for $60 or more.

The reason for such huge mark up pricing is because there are many “uplines” waiting a cut of the profits.

I will not want to buy a product when I know the profits margins is a hefty 1000%. Basic economics tell me that such products do not give value to the consumer, wiping any consumer surplus available.

Consider Singpost and SPH. Their profits margins are only 40-50% and they have done so after eliminating 90% of market competition, operating in an almost monopolistic environment.

A profit margin of 1000% is definitely ridiculous from business ethics perspective, unless you are selling out of the world products. Don't tell me I can become God after eating your products!

Come to think of it, the sales talk was rather exaggerated, similar to what we had seen in Money No Enough 2.

I am proud that I said NO, despite some colleagues giving me the disgusted look that I was a typical Singaporean who only went for the freebies. I prefer to stay healthy the healthy way. Not through capsules and sales talk.

I guess it is just hard to earn my money!

PS: Due to potential legal liability, I will not be naming the brand of the products the salesman are selling.