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Saturday, April 21, 2012

Talk about bread or just stick to Breadtalk. Buy $0.56

After a week of extremely boring market movement, I decided to make things even worse by going home early on a Friday night. Talk about being masochistic, I am every bit a masochist as I am an egoist. Haha. Believe me when I say it was only quiet on the markets front but on the current affairs side, we had such an uproar in Singapore on the list of sex offenders and this has provided plenty of talking points in a week that could put anyone to sleep.

This week lets have a casual post on some of my thoughts on the market. Every time earnings season starts, it reminds me how another quarter has passed by and suddenly we are closing quickly onto the month of May and almost half the year has gone by. Earnings have been strong coming from the banks which have all outperformed from the pick up in trading activities. Bellwethers have looked good so far. Microsoft, Mcdonalds, etc have all done well and the markets should be cheering right? Of course they should, but market's is also constrained by one particular stock which is ironic. What stock is that? Give it an educated guess. The answer is of course APPLE. Ironically, this has been the stock that pushed the S&P500 up strongly over the past 3-4 months. It also saved last quarter's earnings season by reporting out of this world results. However as this quarter's earnings announcement draws nearer, APPLE has fallen from its lofty perch of $630 to $578 as I am drafting this post.

Why would a stock like Apple stifle the upside of major indices? Well Apple accounts for close to 20% of the Nasdaq 100 and 4.5% of the S&P500. A weighting not seen by any company since 1999, when Microsoft Corp had a 4.9 percent weighting. Apple is the largest holding for many money managers, to say nothing of the billions of dollars in index funds of which Apple is a core holding. The question here is whether the strength in the other large cap stocks can mitigate any of the weakness in Apple. Now that the great Apple is showing some weakness with this current 10% drop, it is starting to look a little weak technically. The reason for this weakness? The company has probably run up to much too fast. Also an indicator of the possible end of Apple's solid end is the ludicrous expectations of analysts. We have seen crazy proclamations of $1000 stock price when the stock is currently trading at close to $600 per pop. This in my view is what we call complacency. When an analyst puts a target price on a stock at more than 60% upside from current levels is ludicrous but to put it at 60% upside after the stock has hit an all time high, that is just insanity. Bear in mind that Apple is already valued as the most valuable company in the world. Above Exxon and when a consumer electronics company is more valuable than the largest oil company in the world....what does that mean....? Remember when did gold make its turnaround? When analysts started predicting $2200-$3000 target price while the spot price was $1800.

French elections are over this weekend and the run off if any will be May 6. This is going to be an important event over this weekend because we are looking at the possibility of radical reforms should the front runner Francois Hollande come up tops. In my view, in the current situation we are in, it would be best if the incumbents win in their respective elections. Why? Because they will all be in their 2nd and final terms and that would mean that they do not need to think so much about their political careers going forward. There is not going to be a 3rd term, thus they will be able or even willing to make the necessary decisions to help the economies to get back on their feet. As I have mentioned many times, the problems the US and Eurozone are structural and they will need political leaders to make very tough decisions. If we have new leaders, they will be too caught up with the longevity of their political careers thus they will find it hard to make unpopular decisions. Who can blame them? Also they may make radical moves that may hurt the overall economy in the long run and cause market volatility in the short run.

The other day I was looking at a company which I always found interesting but did not understand enough. But now that I have looked at the company I am going to put my neck out that this is a company that has one hell of a future. At its helm, is a CEO whom I have nothing but utmost respect for. It all started when I graduated and came back more than 10 years ago. My friend asked me whether I had tried the latest sensation in Singapore, I was bemused as to what was the latest craze after the bubble tea debacle and she said.....pork floss bun. Have to be honest, when I heard that answer, I just thought that Singaporeans fascination with food had fallen to new depths after falling in love with bubble tea and now a pork floss bun? By now most of you should be able to guess which company I am talking about. Breadtalk the bakery sensation that took Singapore by storm more than 10 years ago is a company which I have been looking at it since IPO in 2003. From 2003 till present, Breadtalk has delivered more than 150% returns to shareholders so far and I believe it will continue to do well as long as the current management is in place. In the years, they have grown across 16 countries, with more than 400 boutique bakeries, 40 food atriums and restaurants, supported by global staff strength of 6000 employees. For those of you that think that Breadtalk is just a bakery company, think again. I believe in the company because of the vision of its founder of being a versatile food and beverage player. Under its stable of restaurant brands, they have Ding Tai Feng, Toast Box, Food Republic and Ramen Play and I would challenge anyone to try to get a seat in Ding Tai Feng during lunch or dinner. Good luck on that front. The company has not rested on its laurels and expanded to other restaurant concepts to try to diversify away concentration risks from its core bakery business. Most of the time when a company diversifies away from its core business, there are execution risks but if they do not veer too far away from their core capabilities, the risks are significantly lower. That is where Breadtalk has been so successful in their expansion into other businesses. Now they have started to dabble a little into retail space investing through their investment in Perennial Retail Trust's revamp of Katong 112. They have also bought into 10% of Chijmes with Perennial. Both are good acquisitions in my view. Currently, the company is generating a very nice S$45 million operating cash flow consistently on a yearly basis and they are putting the money to good use. That is what I love about companies that have consistent cash flows from operations, they can put the money to good use and grow the value of the company outside of their businesses. That is the same for all of us, investing our free cash into investments that deliver returns so that we can grow our wealth. For those that are depending on their work to add value to their wealth will have to work harder and longer. As for valuations, the company is not trading at a cheap valuation of 14 times p/e but I believe this is a good entry point as there has been a lot of selling by funds on this stock and the price is still holding up well. I believe that investors in this stock should try to be patient as this is one for the long term but it will be a steady path as long as the management remains intact. Key man risk is an issue but George Quek still looks pretty healthy to me. Thats all I have for this week. Have a great week ahead! Best, SVI

Saturday, April 7, 2012

This week was about DBS doing national service. What are your thoughts?

These days I have not had much time to post due to work and personal commitments. The lack of momentum is affecting my train of thought so why don't I just write whatever I feel like writing today. Be it about the markets, asset classes or even about life. Like I always tell my protege, I love thinking about life and how it really sucks. Haha. Just kidding. Lets get back to reality and maybe some of my passing thoughts or even sarcasm.

The past two weeks have been good for two of my favourite stocks. Auric pacific and QAF. Both of which are still strong buys on my list but I know many of you are too impatient to wait and like higher beta stocks. Over my investment career, I have always liked the under the radar kind of stocks to achieve my alpha and it has worked. So I beseech all of you to consider taking the patient approach to investing and you will see the returns. Be it over 2 - 3 years.

One stock that has moved weaker over the past two weeks has been Dukang which I can only attribute it to the fall in Baijiu prices in China over the past month. The mainland distillers have also suffered in terms of stock price performance so it should not be looked upon as a company specific move.

Was screening the for stocks in Japan recently and for those who know me will understand why I have been so bullish on Japan over the past two years. No thanks to the earthquake and ensuing nuclear fallout, the Japanese market recovery stalled. I believe barring any acts of god that we are on the way to a multi-year recovery in Japan and am looking to put some money there. Problem that I am facing is the weakness in the Yen. I do believe that it is a catch-22 situation because one of the key reasons that I am bullish on the Japanese market is the anticipation of a weaker Yen. Found a couple of stocks which made me interested but I am still trying hard to translate their info from Japanese. When i finally graduate from my Japanese classes I will tell you guys more.

IPOs are all coming back, with the explosive debut of Cordlife and now we are going to see Bumitama Agri make its highly anticipated debut. For me, when there is a flux of ipos coming to the market, it is a signal that a correction is coming. Ipos tend to come in when the market has a sustained rally and when it becomes overbought in the short term. Market volumes have also come down in March and early April. If you are looking to trade be wary, if looking to buy and hold, take this opportunity to buy.

In recent times, it has gotten tougher for me to find anything worth writing about because most of the good penny stocks in Singapore has been sieved out and it is getting harder to find undervalued gems. I am currently looking to accumulate more of the ones I picked so far and probably venture out to foreign markets. Suddenly, I am starting to sound more like Temasek, moving out of Singapore into foreign markets to establish a foothold. The main difference is that I will not have other vehicles for which I can hive off my assets at an attractive price to. For those following the news, will know what I am talking about.

Many of my clients who hold DBS in their stable of stocks have been asking me about what I think. Even the guy whom I play badminton with asked me whether it was a good move or not. For those who have been working with me will know that I have never been a fan of DBS for a very simple reason. Poor management....There is without a doubt that by valuation, DBS is very attractive compared to the other two banks but I would have to put a discount on its valuation for the fact that DBS is country owned and thus may not be thinking so much for its minority shareholders. Their track record for acquisitions has been as good as Whitney Houston's choices in life. Suicidal. That is why over the years whenever DBS is linked with any acquisitions, the stock always takes a hit. For me, this is a clear illustration on why top fund managers steer clear of state owned companies because they have to tend more to the state's interest than minority shareholders. Just ask Sinopec and Petrochina.

Right at this moment, DBS shareholders understand how K-Reit unit holders felt when Ocean Financial Center was bought by K-Reit from Keppel land. Talk about getting F*$ked up your butt. All I can say is, try not to touch companies with poor management record. Leopards will never shed their spots.

Now there are talks on the European crisis rearing its ugly head once again and this time they are talking about Spain once again. The yields are no doubt moving higher at this moment but the speed of the rise and the levels are no where close to what we saw in August last year. The market is not silly and it understands that the Euro crisis is not even close to being solved. The problems underlying are structural and it will take time to solve. This is exactly what the ECB bought with their Long Term Refinancing Operations...TIME. Now the market is watching the moves which the governments will take to address these structural issues and time is of the essence. If the moves are right and the markets are convinced, more time will be given. The biggest danger the world faces now is complacent thinking which will lead to passive behavior in terms of structural reforms proposed. The election cycles are just starting now with the May elections for France, followed by the US and soon Germany. Will the fear over losing their political careers lead to passive behavior by the incumbent governments? That is something which I would advice to monitor closely.

Still too busy with work to look at the company which I wanted to look into. Will write more the next time. Have a good week ahead!

Best,

SVI