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By the time you read this essay, Supermax share price would have gapped down in the stampede out of the opening gate (9:00 am, Dec 14, 2020). Such is the immerse brand power of a Wall Street investment bank JP Morgan. Hopefully, smart-money will see through the fraudulent analysis and start to scoop up the bargain.
A report by JP Morgan, appeared in The Edge Market on Dec 12, 2020, is a damning one to the stock prices of the glove companies. The key points of the report are as follows:
1. Supernormal growth cycle of glove makers is over.
2. Near-term concerns on rising costs and long-tern overcapacity risk spell downside risks.
3. Demand for gloves will decelerates in tandem with the pace of testing for Covid-19.
4. The analysts, Jeffrey Ng and YY Cheah, expect glove prices to weaken in the 2nd half of 2021.
5. Most investors are already into gloves leaving little investment money to drive the price higher.
There is nothing new contained in the report, especially points number 1-3. Point 4 is something the glove manufacturer themselves should know better, and they know that the ASP is still rising.
The Stock market is dynamic. To claim in point 5 that there is no more liquidity to drive the market higher is mindboggling. What drive the market are sentiments. Sentiments are news-driven. I believe Supermax can still generate at least 4-5 more quarters of rising profits. Rising profits are the orgasm of the stock market. I can't imagine a dynamic stock market will not spin another viable narrative to fire up a glove rally with at least 4-5 more quarters of rising profits.
What the JP Morgan report did achieve was to stir the negative sentiments for another selldown of glove stocks.
Has there ever been a pandemic that never comes to an end? Of course, not. Every pandemic ultimately comes to an end. Covid-19 is no exception.
From the very start of the Supermax rally in April, investors were clear that every pandemic must ultimately come to an end. They knew the expected supernormal profits were just that - supernormal profits. Someday, glove profits will normalize. Yet the Supermax stock rally higher and higher then. Why?
The simple answer to the above question is just as simple: This is how the stock market works.
The expectation of higher and higher profits is a powerful magnet. It arouses investors' greed, more potent than drugs.
Many of you are veterans in trading the stock market. There’s no point in me trying to pull the wool over your eyes. That is not the intent of this essay. But I think there is space to help us refocus on the essence of the stock market.
Take a look at the Supermax price chart on your computer or smartphone. You will notice that as expectations of higher Supermax profit rise, the stock prices also rise. But once the results are out, the price falls. This trend repeats multiple times.
Many investors interpret such a trend differently. The most popular of which is, buy the rumors, sell the news.
But when Supermax released the quarterly results on May 20, the stock price did not fall. Instead, the stock price continued rising for 6 more trading sessions. The rally only came to an end when the stockbrokers announced a cap to the trading margin on glove stocks.
My interpretation of this trend is that as the stock price rises, the traders sell the shares for two possible reasons. First, take profits. Second, they might have thought that Supermax next earnings wouldn’t go any higher, only to be confounded by another higher quarterly profit.
In the short term, no one really knows which direction the stock price will advance. The Oracle of Omaha famously said, “…, the rearview mirror is always clearer than the windshield.”
In other words, the news drives sentiments, and sentiments drive stock prices. What we predict of the future may or may not pan out. That’s why whenever a piece of good news splashes across the news media, which the market did not anticipate, the price of the respective stock surges. That’s sentiment.
In the “loooong” run, Jeffrey Ng and YY Cheah’s prediction may come true. Who knows how long that “loooong” run maybe? By then, you may not even be a shareholder of Supermax anymore.
Let me share with you two pieces of my private research on Supermax.
A quick note of caution to use this chart: the quarter indicated are calendar quarter, not financial quarters. This means that Q1 is from Jan-Mar, Q2, Apr-Jun, and so on. This is to equalize the change of Supermax financial year in 2016.
The chart is self-explanatory. Supermax stock price consistently follows the ebb and flow of earnings. For example, H1N1 began in Sep 2008. Supermax profits continued rising quarter after quarter for the next 15 months. They started to fall when the WHO pronounced the end of the pandemic on Aug 10, 2010. When that happened, the Supermax stock price followed suit. A similar trend repeated itself in the MERS and Ebola epidemics. The profit surges were not as strong in those cases as they were relatively minor epidemics.
Please be very careful when using this chart in making your investment decision. Bear in mind that each earnings bar on the chart is a period of 3 months. Within that 3-month period, Supermax stock price fluctuated every trading day. To analyze what actually happened to the stock price during those quarterly periods, please check your charting program and zoom into that respective period. You will find that within a one-bar period, prices fluctuated substantially.
The point I am illustrating here is that stock price follows earnings – irrespective of the long-term prognosis. But prices fluctuate in the interim. The Supermax stock price is currently doing just that.
The above chart is a list of Structured Warrants issued by the investment bankers. Forget about the mass of numbers in there. All you need to focus your eyes on are the first and the last columns – Expiry and Breakeven.
Notice that the IBs are smartening up. Many of them are pricing their SW breakeven points at the teens, as high as Rm21.50 by Macquarie, which expires on Apr 16, 2021. The pricing of SW by the smartest investment professionals in the investment banking industry gives us an insight into the real forecast of Supermax stock price. Remember, the IBs were caught off guard by the pandemic like anybody else. But, given their expertise, I expected them to mitigate their would-be losses. They are, after all, in the business to make money, not lose money.
So where do we go from here?
My money is still on Supermax stock price to rising further – much further. All tangible arrows point in that direction. Some Covid-19 vaccine makers have brought their products to market in record time. Never in human history has any vaccine been clobbered together in such a haste. Merck spent 4 years to develop the vaccine for mumps. That was the fastest ever done. But it took the mRNA vaccines just months from stage 1 trial to stage 3 to administer to humans on a massive scale. It is unheard of. The mRNA is a brand new technology. It has never been administered to humans on a mass scale. No one really knows the long-term health consequences. It would be years before the side effects rear their ugly head. Should the mRNA vaccines go haywire, the world would be in a worse shape than the Covid-19. For the sake of humanity, let's hope such a catastrophe will not happen. Even in the best-case scenario for the mRNA vaccines, we will not see the end of Covid-19 for years to come. That’s why I am confident that Supermax earnings will continue to enjoy supernormal profits for many more quarters.
As I said before, “The stock price is like a dog on a leash. The dog can run up and down, left and right, but eventually, it comes back to the owner who holds the leash. In the stock market, that owner with a leash is the rising streams of earnings.”
Supermax earnings will be higher in 2Q21, and 3Q21, and 4Q21. For visual impact, I have included them together with the actual quarterly results. Will you bet against a rising earnings chart like this?
https://klse.i3investor.com/blogs/sts/2020-12-14-story-h1537566048-SUPERMAX_SHARE_PRICE_WILL_IT_BE_SUNK_BY_JP_MORGAN.jsp
