Thursday, January 12, 2006

My Investing Journey-Sembcorp and NOL 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
As a matter of fact, I ended up knowing the earlier mentioned two stocks, Sembcorp Industries and NOL, rather well over the next few years. In NOL, I also had my first taste of the widely fluctuating fortunes of cyclical stocks, and one of those wild swings of emotions that one simply cannot experience through virtual trading.

In May 2000 most of the blue chips were still selling at ~20X PE, stocks like DBS, OCBC, Singtel, SPH, SIA. Sembcorp was also trading at >20X trailing PE at the price of 1.77 when I bought it and today when I look at it it is trading at 12X PE. I was quite lucky to escape with a profit barely 3 months later at 2.05. As it turned out it was around the peak when I got out; Sembcorp would not go above 2.00 for the next few years until 2004. That was some market timing, except that I had no intention to do that; I just decided to run after making ~20% on my capital. That is actually a credible strategy in the sense that it helps to control excessive greed and capture paper profits, a strategy I will outline in later posts. And because my first experience with Sembcorp was so rewarding, I bought into the stock various times later in 2002 and 2003, but I would never have such strong rewards from this stock again. On retrospect, the company had remained remarkably stable over the recession years 2001-03, with pre-tax profits staying above S$300M and share price ranging within a narrow band of 1.30 to 1.70, while offering good dividends in the meantime. My initial view of GLCs being the lowest risk category wasn't wrong (though later in the late 2003 boom they would lag other stocks in performance).

NOL was the classic cyclical. Of course, at that time I had no idea what was a cyclical. I knew that business moves in cycles, of course, but was too obtuse to deduce that there were stocks whose fortunes were tied so heavily to these business cycles that they made record profits in a bullish environment, but their business declined so heavily in downturns that they could easily swing into heavy losses. In short, they were highly volatile. Those who were caught with NOL in 2002-03 when it bled red ink totalling >US$300M were in the same ship as me, pardon the pun. The share price collapsed to $0.70, to my horror. Who would have thought a company previously helmed by our then-PM Gok Chok Tong, and our de facto national shipping company, could have faltered so badly. But ultimately, its fate was ruled by macro trends, a fact I always remember nowadays when analysing commodity and cyclical stocks.

I had chances to exit at a profit to my 1.40 purchase price but ultimately didn't, having learnt about PEs and thinking that it was amazing that I could have a GLC for 10-12 times PE. Surely there was tremendous upside? .... Well it had, it shot up to $4 last year, remember? But I had sold much earlier, in mid-2003, when the stock recovered to 1.20 from its bottom price of 0.70: I had held the stock for 3 years, with only a 15% loss to show for it, albeit a smaller one compared to its bottom valuation. It just shows firstly, how bad timing for buying a cyclical can incur oneself high opportunity costs; secondly, what a dunce I was for doing just that; and thirdly, the importance of holding power as it allows the strong holder to restrict this to paper losses and, provided the company is strong financially and operationally, the "spring" effect will enable business operations and stock price to bounce back eventually. In this respect, GLCs are an excellent choice for such cyclical trading because of their strong backers. Of course, don't try this now in the year 2006; we're somewhere near the peak of the cycle now.




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