“To be a value investor, you must buy at a discount from underlying value. Analyzing each potential value investment opportunity therefore begins with an assessment of business value.” (Seth Klarmen, Margin of Safety, page 121).
Posted by qqq3 > Jan 17, 2019 04:26 PM | Report Abuse
[value here value there....can buy Vitrox or QL or not at any stage in the last few years?
value here value there....I remember in 2017, when asked, KC recommends people to sell Vitrox at $ 3 after the surge from $2 to $ 3..( all adjusted prices)....It has never been "cheap". Good shares are never "cheap"
yes, PE is one of the factors to consider when buying a share. On average u don't buy a PE 50 share because at that rate it takes 50 years of earnings to be equivalent to the price....The key words being " on average"
But , it is your job as investor, if u want to make good money, is to find the exceptional shares....not the average shares.
If are satisfied with average performance, then be an average investor la.....we are talking about those with above average intelligence and above average ambitions.]
I was bemused (again) reading the above comment from the loudest noise in i3investor mentioning my name KC Chong again. Let me ask him when and where in i3investor that “KC recommends people to sell Vitrox at $ 3 after the surge from $2 to $ 3”?
In fact, let me ask him when and where KC has “recommended” to buy or sell any share in i3investor?
You made a fake statement like that, all the time, isn’t it fair that you must look through all my articles, 350 of them, and all my comments, 14,130 of them, and find a statement that I have recommended to sell Vitrox, or any share for that matter? If you don’t do that, and can’t find that, what shall I call you? A serial liar and that you have been telling lies all the time in i3investor?
Isn’t that shameful for a 60+ year old retired “accountant” to tell lies without blinking your eyes?
I have written an article on the pitfalls of PE ratio as below,
https://klse.i3investor.com/blogs/kcchongnz/63417.jsp
I hope you can also write something to share rather than just shouting buy high PE ratio stocks!
Ok, let come to the real stuff.
Low PE or high PE?
The statement by triple q above implies that a man with “above average intelligence” will buy a share with a PE at least above 50 like that of Vitrox and QL, and those who are below average intelligence will buy a stock with low PE. It also indirectly implies that those stocks with high PE will make extra-ordinary return and vice versa.
May I ask what evidence you have for the above assertion, that those investors who have bought high PE stocks all are rich people and those invested in low PE are all pok kais? Can show us some research findings ah?
If you can’t do that, can I say you are just a loud mouth good-for-nothing, or a serial liar?
Yes, I am a value investor, I agree, and yes, I “value here and value there”.
Value investors look for two things, not just one. We also look for a good story first but it doesn’t end there. We want to see some numbers too. A great story must also come with some great numbers. That is just what we value investors do, and you can’t blame us. Your knd of panic moment, dynamite investing, sailing and margin type of investor, need not follow us. Do what you like, but don’t carry out personal attack and telling lies.
Here, I will teach you something for free. Yes, it is value here, and value there again. Let me just use QL as an example, your favorite now. What a big improvement from your previous sailing and margin on Jaks and Sendai. Congrats!
QL Resources
Some time in early of the year 2018, a few of my course participants were trying to organize another retreat when we would share investment ideas and invite corporate speakers to give us talk about their company business. I personally invited QL Resources as I have the opinion that QL is one of the best companies listed in Bursa which has been creating long-term shareholder value. Hence, there is no argument about the story of QL. It was trading below RM4.00 then as shown in Figure below.
Sentiment
Price = Value + Sentiment
The PE ratio of QL was about 30 then, I think. QL share price has risen to RM6.90, or for a gain of more than 70% from a year ago, despite the rout in Bursa. The PE ratio is now 54. The profit before tax (PBT) for year 2018 ended 31st march was actually 2% lower than the previous year at RM255.3m. For the first half of financial year 2019, PBT was marginally higher by 3% only.
So what drove the share price so much higher?
It appears that investors are more bullish about its future resulting in the expansion of the PE ratio from less than 30 to 54 now.
The average PE ratio of QL for the last 10 years was about 25-30, with a compounded annual growth rate (CAGR) of slightly less than 10%.
The question is how much more the PE ratio can expand, or is it likely the law of mean reversion will take place resulting a shrinking of the PE ratio to its historic figure?
Another question is how much more growth it will attain, and for how long a period, taking into consideration that as a company grows bigger, it makes it harder to grow faster, and more likely to slow down.
I know, it has some plantations with young trees, and it is growing its Family Mart chain with more stores opening. Its other core businesses are also expanding. But what are your numbers?
PEG
Peter Lynch, one of the greatest fund managers in Wall Street in the 1990s popularized the term Price-earnings-growth ratio in his book “One Up Wall Street”.
Everything equal, a high growth company deserves a higher market valuation, provided the growth is quality growth of which the return on capitals is higher than its cost, otherwise it is shareholder value destroying. The return on capitals of QL has been about 10%, not bad, but nothing great to me.
Historic PEG = 54/10 = 5.4 >>1.0
Is this PEG great?
Of course, the future growth is more important, but what is your number?
Private Market Value
Seth Klarmen in his book “Margin of Safety” says that "A frequently used but flawed shortcut method of valuing a going concern (compared to present value) is known as private-market value. This is an investor's assessment of the price that a sophisticated businessperson would be willing to pay for a business. Investors using this shortcut, in effect, value businesses using the multiples paid when comparable businesses were previously bought and sold in their entirety."
I have written an article about this valuation at the firm level in the link below,
https://klse.i3investor.com/blogs/kcchongnz/84689.jsp
Warren Buffett mentioned before, the fair EV/EBIT is 7 for a normal company. My rough estimate of QL’s EV is about 34 times its operating profit for the last twelve months. As a value investor, I do not think this is a fair value, even taking into consideration of its great growth story. Do you?
Price-to-book
Few investors care about this valuation metric. It is not that important for an ongoing business. Any how we just discuss a little bit here.
Price-to-book = 6.85/1.12 = 6.1
As a value investor, I sometimes look at this way. If I require a return of 10% investing in a company, I am willing to pay a price twice its book value if it can obtain a ROE of 20%, twice my required return.
Fair price = ROE/Require return * Book value =15/10*1.12, assuming ROE improves to 15% this year
This definitely not a good metric if you decide to invest in QL.
Absolute Valuation
The above valuation methods are not really true valuations, but rather relative price comparison. They can be used as good guides to quickly decide if a company is selling cheap or expensive, or if worth investing.
John Burr Williams, in his book “The Theory of Investment Value”, written over 60 years ago, set forth the equation for value, which is condense below,
“The value of any stock, bond, or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset.”
This principle is widely used by many super investors, analysts and investment bankers. We can do this too with some educated assumptions if we wish. I have done it too for QL.
Value investors look at two things as equally important; a good story, and some numbers to decide on investing in good or great companies at fair prices, and better if they are selling cheap. We do see this happened during some crisis in the past, and even during normal time and now. I should have invested in QL during the financial crisis in 2008 and hold it for long-term, but nothing to regret about as you win some and you lose some. Maybe I even got better return in other stocks.
Will the share price continue to go up, faster than the rest of the stocks? I really don’t have a clue.
But at this price, I can only keep it in my To-be-reviewed file for the time being. You may buy more if you wish.
To me, the most risky thing in investing is to buy something at high price.
Good luck.
https://klse.i3investor.com/blogs/kcchongnz/190731.jsp
