I am Philip. As today everyone has had a few days to digest the results of the SUPERMAX and HARTA results, the biggest and most interesting question is..
WHAT HAPPENED TO THE GLOVE STOCKS AFTER QR REPORT?
So far, many speculators and investors have been caught off guard and totally surprised at the results that came out and the share performance after that.
HARTA - announces 219 million in NET Profits, 90% growth Quarter-to-Quarter, and 133% growth Year-to-Year. Share price drops from RM20 to RM16.
SUPERMAX - announces 399 million in NET Profits, 462% growth QoQ, 2553% growth YoY. Share price drops from RM22 to RM18.
What happened? Shouldn't a stock go up after a great all time high quarter?
Firstly, we have to understand the long term prospects of everything, not only short term results.
Firstly, Lets look at Comparative Valuation:
MAYBANK - 87 BILLION VALUATION - LAST QUARTER 2 BILLION NET PROFIT, LAST ANNUAL PROFIT 8.4 BILLION.
HAPSENG - 21 BILLION VALUATION - LAST QUARTER 160 MILLION NET PROFIT, LAST ANNUAL PROFIT 1.165 BILLION.
NESTLE - 33 BILLION VALUATION - LAST QUARTER 186 MILLION NP, LAST ANNUAL PROFIT 672 MILLION.
PCHEM - 47.6 BILLION VALUATION - LAST QUARTER 500 MILLION NP, LAST ANNUAL PROFIT 2.8 BILLION.
SUPERMAX - 24.8 BILLION VALUATION - LAST QUARTER 399 MILLION NP, LAST ANNUAL PROFIT 525 MILLION.
HARTALEGA - 55.5 BILLION VALUATION - LAST QUARTER 220 MILLION NP. LAST ANNUAL PROFIT 560 MILLION.
TOPGLOVE - 64.7 BILLION VALUATION - LAST QUARTER 347 MILLION NP. LAST ANNUAL PROFIT 655 MILLION.
* Please note that for this analysis I am taking a few liberties like ignoring debt and borrowings in terms of valuation, the ROE or quality of earnings, and the growth runway/competition for those earnings.
However, there are a few mental models we need to take into account.
1. Assuming we are just starting in the Covid19 cycle, When will it end? As we know that sooner or later it will end, how will affect the long term growth prospects of businesses.
2. what is the affect of foreign investment on stocks listed on multiple exchanges? (supermax in hong kong, topglove in Singapore) as these adds liquidity and matured investors. Note for example the glove rally in Malaysia went earlier, larger and longer than the glove rally in Singapore. In some cases Riverstone, a major glove maker only had their stockprice climbing in mid/late May in SGX. One thing to remember: Bursa Malaysia does not work on the same precepts at NYSE or NASDAQ, just like how doing business in China is different from doing business in Malaysia and USA. BURSA is NOT NYSE.
3. Trading is the study of human emotions. Investing is the study of business prospects. This is a very important distinct difference. In the short term, stocks can go anywhere. In the long term, earnings will decide if the share price goes up or down.
Using these 3 big ideas, we dive down and try to understand why things are happening the way it is working out right now. The first question is of course: When will it end? Unfortunately, trying to predict WHEN it will end is an exercise in futility. However, what we can do is predict IF and HOW it will end, this can be done with more accuracy. To the first part, the definite answer is YES. How will it end? This is more complicated but also not hard to predict. What happens? Firstly, there will be a period of time (expectation is 1-5 years until a vaccine is found) when fear is everywhere, economies shrink, markets are in chaos, and stocks with anything to do with healthcare, social distancing tech, gold speculation (hard assets in times of chaos) will go up and down. Then you will have a few companies who will announce vaccine is near (and the speculation will ensue). Some will work, many will not, but sooner or later a major company will declare and world will accept that a working Vaccine is Found!. Things will start to go back to normal, and business with competitive advantage will win market share, while those that never had a competitive edge, will slip back into the back pages of penny stock speculation.
Knowing this will happen is easy. Trying to TIME the market is Fatal in the long term. So using the first mental model, we can have a clear understanding that in relation to glove stocks the price will go from good results to increased expectations to better results to unrealistic expectations causing bad results (in relation to unrealistic expectations).
This is where everyone gets caught.
When one has unrealistic expectations that differs from the stock performance, no matter how good the performance of the company is, people will SELL. This is why TIMING the market is so fraught with danger.
The trick to successfull investing (and trading) is to have a realistic expectation of where the business is going, and paying a fair price for it.
What is realistic for me? As someone who has held Topglove for many years now, from RM10 share split last year to RM4, and sold all at RM10.30
TOPGLOVE - RM5, 16 billion valuation, 370million annual, PE43 valuation is fair for the business dominance in the market, the ROE, the consistent growth that you can see happening for the next 10 years. how many topglove can you find in the market? Realistic Expectations? In 10 years, Topglove should be able to average 800-1 billion in earnings per year, smashing the current DCF valuation for a rock solid highly scalable company which sells the world over.
what becomes unrealistic is when valuation becomes RM24, 64.7 billion valuation, PE95 valuation because if you know that if one day there will be a vaccine, the demand will lessen. By how much? We can then look at an elevated realistic expectation of the market demand and use that for the next 10 years post covid. You know that gloves can make double or 3x the profits in the year to come, but after that ship sails? You will be left with multiple new companies that have suddenly built glove production capacity and fighting with you for new market share and cut throat prices. A few years of profitable COVID earnings followed by multiple years of huge compettition for market share and supply. Then you will realize what the competitive advantage of Hartalega and Topglove is throughout the years ( huge cash position, patents, and lowest scale producer). But mark my words, with China face shield market as a indicator, it will be a painful set of years to follow. This part is easy to predict. When it will Happen? No idea. Will it happen? Almost definitely (supply and demand )
So looking at comparative growth? Look to the chart above again.
If you have the money to buy a Ferrari for 64.7 billion, what kind of sportscar are you looking to go for? Assuming it doesn't break down and if the value of rare one of a kind cars increase over time, a 60 billion sportscar should get you within the range of 2.8 - 8.4 billion (horsepower).
However, cars break down and new electric cars become popular. Companies like banks will become profitable one day (after huge reset of the NPL loans and borrowings to bankrupt companies and economies in the near future post moratorium) and oil prices will not stay below $40 forever, benefitting those companies that are oversold.
Again, buy low sell high.
So, knowing that one day in the future (we can't predict when the rain will come, but we can build that roof over our heads) will come, all you can do is BUY LOW SELL HIGH. In this case invest in low priced BLUE CHIP STOCKS. So what happened with the recent huge selloff of the stock market of glove stocks? A cooldown of the shares? A profit taking by people who made millions playing the glove stocks?
Who knows? Who cares? In the short term there can be thousands of reasons why all these things are happening. BUY HIGH, SELL HIGHER? SELL HIGHER BUY BACK HIGH? Its a confusing attack of information, which NO ONE can predict.
In the long term the answer is simple:
Most of them are will be SELLING HIGH, to BUY LOW. Timing this market or frontrunning everyone? Very stressful, almost impossible if you dont have a huge pool of data to work with and tons of data engineers to help you collect and sort important information, and scrub anomalies. Not impossible. But very, very hard. There is a reason why most of the traders (80%) that use IB, Thinkorswim, RobinHood etc ALL lose money in their first years.
So the simple answer to why the share prices crashed after an excellent QR? FEAR, UNCERTAINTY, PROFIT TAKING, CONTRA, VACCINE. WHO KNOWS? Why should you care unless you BOUGHT HIGH something you didn't understand.
One last mental model to consider,
"The highest risk is not when stock price is at its lowest, it is at its highest and everyone is full of optimism in the market that risk is highest. The lowest risk is then when the stock price is at its lowest, when no one wants to even look at the business, and when everyone is looking to sell. All you have to ask yourself is this: Is this TEMPORARY or PERMANENT?" Making a profit has nothing to do with risk, you can gamble your life savings all on red and double your money, but it doesn't make it less risky. In fact, building risky habits will hurt you in the long run.
I hope this Covid19 stock market experience has given you some exciting lessons, and I hope you learn something new today.
P.S. I am trying something new as the collection of mental models (important big picture concepts that is easily understood by everyone that we can use to make important decisions), in the future I will start to highlight these mental models in blue, so we can start to learn how to make useful decisions and avoid emotional and greedy ones.