Follow this blog by email for more convenience!

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

No comments:

Post a Comment