Monday, August 13, 2007

My Investing Journey: Boustead Part 2 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I have been tempted to sell off my Boustead line several times over the past 2-3 years, on the basis of certain events (director leaving, force majeure in Yogyakarta, Indonesia where Salcon had a project, selling during corrections to go to cash) but whenever I did so, I always have had to buy back at a higher price. So much for market timing; I came to the conclusion that illiquid long-term stocks simply could not be traded in this manner without the risk of high opportunity costs.

What are the characteristics of long-term buy-and-hold stocks? I can point out two from the example of Boustead. Firstly, it should be held by strong hands. By that, I mean that it is not speculative in nature to the extent of attracting the wrong type of crowd who gets alternately euphoric and panicky, thus imparting the same characteristic to the stock price. Warren Buffett, interestingly, also tries to cultivate investors of his Berkshire Hathaway stock along his well-known philosophy of long-term buy-and-hold, refusing to split the stock to enhance trading liquidity (eventually he created a new class of cheaper shares, recognising that some people want to liquidate for their own needs). I have observed that Boustead tends to hold well during market corrections, and this is a sympton of strong holders, many of them institutional. Institutional funds hate price volatility (which they interpret as risk), and hence are drawn to stocks with strong hands. Thus it is that a critical mass of institutional holders is often a drawing point for new funds to come in --- an example of a benign cycle.

But this must be anchored by a long-term vision and competitive strategy --- the second characteristic. Most blue-chips exhibit strategic vision and the means to execute upon it --- which is why they are valued at a premium. Boustead's positioning in the oil & gas, water engineering and niche industrial construction fields turned out to be spot on, as each sector came into market prominence over the last 2-3 years --- first water in 2004-05, then oil and gas in 2005-06, then industrial construction in 2007. Each arm of Boustead successively took over as the main pipeline of engineering contracts, smoothing out and growing the topline and bottomline at a steady pace. At the same time, there was a process of asset value unlocking going on, as the company divested its ownership of industrial facilities at substantial premiums every year.

One of these assets was Easycall, now known as China Education, in which Boustead held a substantial stake. In 2005 the company distributed the majority of this stake to its shareholders as a share dividend. Easycall was worth 10-15 cents then. Today it is trading at >40 cents, and reached as high as 90 cents earlier this year, after Raffles Education came into the picture. Without this share distribution, I would not have taken note of Easycall and accumulated further. This is the serendipity I mentioned in my earlier article, and makes me somewhat superstitious that sometimes, there are stocks that can make you money in one way or another (while conversely, others lose you money no matter how hard you try). And when you find them, it pays to hold tight.




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