Sunday, September 10, 2006

My Investing Journey: Allied Technologies Part 1 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I shall give a flavour of the recovery boom in mid-2003, and talk about my experiences in a stock that to this day remains my greatest market success in annualised percentage gain and one of my biggest gainers in dollar terms even up to today, when I have a significantly bigger portfolio. It is a vivid illustration of the low probability-high return stock that might often lie dormant with little chance of being bid up by the market, but once it is, the lucky investor can expect oversized returns (because the valuation, such as PE, starts from a low base).

The stock was Allied Technologies, and it listed on the Mainboard in late June 2003. Led by a Taiwanese, it was reputedly one of the top metalworking firms in Singapore, probably behind Amtek but a peer of Seksun (albeit different customer bases). It was a top metal parts supplier for HP printers.

In early July 2003 I bought into the stock at 27 cents, and then when it rose to 30 cents in late July I felt encouraged enough to double up my stake. To understand my rationale for the purchase: at 8X PE it looked cheap, its niche was in printer parts manufacturing which I'd felt was stable enough not to give any bad surprises, and I was generally bullish on the precision engineering sector, which had showed steady growth even over the bear years of 2001-03. If one remembers the mood in mid-2003, it was one of relief and yet apprehension about whether it was a rebound rally in a bear market. I was generally cautious too, and placed a high premium on risk (hence concentrating on low-PE stocks).

On retrospect, the reason for the subsequent charge-up was partly due to the fact that I'd chosen the right sector to buy in. The precision engineering sector was sufficiently dependent on the electronics sector to be considered part of it, and electronics is the first to benefit from a recovery in the business cycle. For those who want to find out about what stocks to buy along different stages of a business cycle, I would strongly encourage you to read the chapter on "Stocks to Pedal During The Business Cycle" in the book If It's Raining in Brazil, Buy Starbucks by Peter Navarro. Again on retrospect, I may have second thoughts about buying into the stock if it is today, simply because I have learnt to be more cautious on IPO stocks after witnessing several post-IPO collapses in the past few years eg. New Lakeside, Daka, Azeus, Anwell where everything seemed similarly rosy at IPO time but earnings dissipated the year after. I've discussed this before in "Is Too Much Knowledge a Good Thing?".

Back to the stock. It continued to enjoy strong trading volumes post-IPO but until end-August it was still hovering in the mid-30s. However, over one month from September to late October the stock moved up from 35 to over 70 cents, accompanied by heavy volumes peaking at 140,000 lots per day! It was an exhilarating surge.

This sort of surge truly transforms one's psyche, because it is not a measured rise over a long period (with consolidation etc) but rather, a momentum-fuelled charge on wild volume. I remember myself watching a movie (it was "Seabiscuit") on an afternoon off in mid-October, which also happened to be the day when Allied was the top volume counter (not a mean feat in a booming market) and surged up 8 cents and then retreating 5 cents towards closing. I could hardly concentrate on the movie as I checked prices on my phone regularly, and wondered whether this suggested buyer exhaustion.

Of course, this kind of frantic trading attracts attention from the SGX market surveillance department, and the news emerged that the company was acquiring an LCD monitor assembly plant for several million dollars. In a newspaper report the next day, there was speculation that the revenue contribution from this new plant could reach US$100M (if I remember correctly), effectively doubling the company's current revenue then.

That explained the price surge. Of course, of course. The market was ready to intellectualise and rationalise in the bull market that had become full-blown by October 2003 (now that's one October that defied the calendar effect, which claims October is a terrible month for the market). To fully comprehend the mania, one must note that the precision engineering and electronics sector had become a hot sector in a hot market; Amtek had doubled to $1.60 from its April low at $0.80, Seksun had gone up to $1.30 from $0.80 six months earlier. Allied was in this sector.... and now it had a catalyst. By late October it was trading at 70+ cents, or 20X trailing PE.




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