SUPERMX (7106) SUPERMAX CORP BHD SHARE PRICE CRUMBLES – TO SELL NOW OR TO BUY MORE?
There is an undeniable truth in the stock market. When one sells the shares, others buy on the other end. Both can’t be right at the same time, or can they?
Why is Supermax share price falling?
A simple answer is, more sellers are willing to sell at lower prices than buyers are willing to buy at higher prices.
Oh, give me a break. Everyone knows that. You’ve got to do better.
Okay, how about this? People are selling because the vaccines are coming.
Now, this is getting somewhere. But what has vaccine got to do with people selling down Supermax share price?
Well, this question is a little more complicated to handle. Generally, the investors believe that Covid-19 vaccines are the panacea that will finally defeat the Covid-19 pandemic. Without the pandemic, the demands for disposable gloves will crumble. The Average Selling Price (ASP) of gloves will fall, and so goes the earnings. Since the stock market is supposed to be forward-looking, investors have this incredible telescope that can look into the future. Having seen with their telescope what the future has in store, the smart investors start to sell Supermax shares today to beat others less clever than them.
Hmmm. This kind of makes sense. But how did the price of gloves get bid up so high in the first place since March 2020? Didn’t the investors have the same incredible telescope that allowed them to look into the future? Didn’t they see then that the Covid-19 pandemic would eventually come to an end just like every other pandemic or epidemic in the past? Since the stock market is forward-looking, shouldn’t the investors have known in March 2020 that these super-profits would end?
You see, there are smart people around. Sure. These smart people actually saw with their incredible telescope into the future way back in March 2020. They saw that the pandemic would eventually end. They also saw that Supermax profits would rise, then tapper until the profits normalize. But they also saw that there was such thing as sentiments in the stock market. Since they are so smart, they knew that the forward-looking stock market perception is only jargon. They can make use of this jargon to manipulate the investor sentiments. They understand that the stock market, in the short-to-medium term, is actually driven by sentiments and nothing else. When the sentiments for Supermax become favorable, a tidal wave follows. Buyers will bid up the price higher and higher. Then, we will have another rally.
So who drives the sentiments? Is there a driver driving the sentiments, just like a driver driving a car or a truck?
Yes, there is. A driver called news is driving the sentiments. I read a research paper written on this subject by some smart investment researchers in America years ago while preparing for my CFA exams. Believe it. News drives sentiments, but sentiments drive Supermax stock price.
I see. News, huh! Now, a fusillade of vaccine news is driving negative sentiments, dampening the Supermax stock price. Does it mean Supermax stock price is sliding down the chute of no return?
Not necessary. This is not how the stock market works. You see, while the average investors (mainly the amateurs – the not-so-smart ones) fear volatility, the smart investors actually relish volatility. Without volatility, there will be no trading profits from the stock market.
Gosh, this is getting confusing again. With volatility, the stock price goes up and down. There will be losers and winners. The smart investors entice the not-so-smart investors to sell at low prices and entice them to buy at high prices. Does this not make the stock market a casino?
Casino? Yes and no. It all depends. There is one factor that many investors are sort-of knowing, yet not knowing it. It is called earnings or profits! This is the constant in the equity investments, be it equity in the stock market or equity in the other non-public markets. In the stock market investment, it is difficult to predict what the sentiments may be. The incredible telescope the so-called-smart investors use to peep into the future is sort of blurry from the front view but, the back view mirror is always clearer. So, super successful investors instead focus on earnings, earnings, and earnings. So long as Supermax continues to rack up higher and higher earnings, quarter after quarter, these super successful investors tend to ignore the short-term noises. The noises are the sentiments driven by the daily news flow. So if investors focus their investment strategy on sentiments or noises, they can lose money like in a casino. But if the investors can focus on the earnings and filter out the noisy sentiments, the stock price will invariably follow the earnings. As the earnings continue to grow, so goes the size of Supermax equity. As Supermax becomes wealthier because of growing profits, so goes the stock price. So it doesn’t matter what price you buy. In the long run, the price will always catch up with the growing profits. When this happens, the news will drive positive sentiments to lift the stock price.
But vaccines will dampen demands for gloves, driving down ASP and profits of Supermax?
Again, not necessary. So far, only 2 vaccines have claimed to be 90-94% effective. We expect the Chinese vaccines to claim similar efficacy within a matter of weeks, if not days. The 3rd stage trials are still not completed. The FDA cannot license the vaccines for mass vaccination until data from the 3rd stage trials become available. For now, the FDA is likely to approve the vaccines only for emergency use. The number of people who will be vaccinated under emergency use will be small. Until the masses (“masses” means world population) are vaccinated with effective vaccines, we will not see the end of this pandemic. There are 7.5 billion people on earth. Considering the principle of herd immunity and the accepted protocol to-date of 2 doses per person, mathematically, the world will need 10.5 billion doses to get us through this pandemic. No one really knows how long this process will take. There will be hiccups along the way. Vaccines may not work as effectively as advertised. Rumors and conspiracy theories may instigate some to rebel against vaccination. Logistic may hinder vaccination in less developed countries. The Covid-19 virus may continue to infect those with vaccinated immunity. A host of other problems may arise along the way, prolonging the pandemic for years to come. Manufacturing and the logistic of distributing the vaccines take time. Educating the masses to accept the vaccines takes time. The scale needed to stamp out this pandemic worldwide is just too massive. Don't expect the pandemic to go away anytime soon. It will take years even with the advent of vaccines. The truth is the world needs disposal gloves for many more years to combat the pandemic. The heightening demands for Supermax gloves will still be there tomorrow, the day after, the month after, and the year after. I am certain that the market will come to terms with this truth as Supermax earnings continue to grow quarter after quarter.
So, does it mean that better days are still ahead for higher Supermax stock price? If that is so, isn’t the vaccines stories kind of gotten ahead of themselves?
Without a doubt, earnings growth will continue to be the main engine driving stock prices higher. But, there is another constant in stock investing, and that is sentiments. Sentiments always get ahead of reality. The vaccine sentiments driving down Supermax stock price are no exception. They will blow over. Supermax earnings for the next 3 to 4 quarters will grow higher and higher as demands and ASP continue to rise while Supermax expands its capacity. 1Q21 earnings are already at Rm800 million. There are widespread disclosures from the glove manufacturers that the earnings reported so far have not fully accounted for the still rising ASP. As such, we can expect the 2Q21 earnings to come in at Rm1,000 million. The new capacity will easily boost 3Q21 to 1,100 million and 4Q21 to 1,200 million. Should these conservative projections materialize, Supermax FY21 earnings will be Rm4,100 million, giving it a sterling EPS of about Rm1.60. At the current price, this EPS represents an extremely undemanding forward PE of 5, making Supermax a compellingly undervalued stock despite its proven growth trajectory.
So, should I buy more Supermax shares now, or should I sell like other investors?
Well, as I said earlier, in general, many investors are sort-of knowing, yet not knowing about earnings. I shall leave the question to the individual investors to decide. It is not possible to teach old dogs new tricks. There are only 2 groups of investors – the smart ones and the not-so-smart ones. I know for a certainty that those smart, big-time investors are collecting Supermax shares to make a killing when the sentiments swing in its favor in a not-so-distant future. The not-so-smart investors are selling, fearing that the price will crash to nothing by the vaccine stories, irrespective of what you tell them about earnings. So, are you smart investors or not-so-smart investors? Look yourself in the mirror and chant, “Mirror, mirror on the wall. Who is the smartest of them all?” :) :) :)
Disclosure: I wrote this essay as a teaser. But there is a lot of useful information an investor can glean from it. Please read with discretion.