Property is on a high

I have been reading alot of smart articles lately about how the stock market is being overpriced and how REITs have run up so much lately they're not worth investing anymore. These are exceptions among the multitude of bullish articles we are reading and I call them 'smart' articles because they dare to hold the differential insight, the reality or fundamentals of the matter that everyone else is ignoring.

Property/Reits

Property and Reits have generally made quite a good run up over the past few years. If you're one of those that entered the market early, whether in the form of stocks or real property, I'd like to congratulate you as you're probably sitting on a healthy sum of profits or paper gains. However, I'd also like to earnestly advise you to keep in mind selling them or better yet, to err on the conservative side and sell them within the year. 

Some points to note:

• Over the last 2 years people have been flipping properties and making their money from it. Such activities have since cooled down. Their mindset may be that they have already made the money and don't want to re-invest into property which have already seen an increase in prices and have uncertain prospects.
• The government has introduced several rounds of cooling measures. These cooling  measures dampen prices but do not level the property cycle. They merely flatten it preventing a less drastic fall in prices when the down cycle occurs.
• Any Reits or Development stock chart will show an amazing run up.
• Every tom, dick and harry is talking about property. Suddenly everyone seem to think they are experts and are super bullish on property, saying just how it is good. There could be some irrational exuberance affecting the pricing of today's property.
• REITs themselves are aware of the bullish sentiment and are using this opportunity to raise huge sums of capital by timely listing on the exchange on by one. They are aware that they will miss out on obtaining such capital on less bullish times.
• Small developers are no longer as active as say 2 years ago. Small developers are firms that buy over small pockets of land and then redevelop them to sell them at a profit.  They largely depend on debt funding from the bank and make their margins from selling the properties subsequently repaying their debts. They are usually family run businesses who are into wealth preservation and are thus acutely sensitive to any price movements or events that may negatively impact their finances.  A slow down in their activities is a sign that they are holding a conservative view, in light of a possible slow down. As small developers do not have large sums of capital to tide them over bearish property cycles they will stop developing before the crash comes. As their projects typically take 1-3 years to complete this might indicate that they believe a property turn around is due over the next 3 years.

Conclusion: Property prices are on a higher end of the cycle now with potential downside possibly vastly outweighing potential upside.

  

From my point of view, the property market now is on a high end and it might be wiser for those who are invested to withdraw their profits. Just remember that if the market falls the value of these stocks or physical property can fall greatly, say by half in a very short time . Assuming that if the fall happens over 3 days, many retailer investors will not be able to react quickly and have the value of their holdings fall by 50%. This would mean for them to just break even, their accumulated gain over the run up would have to be 100%.

If you are already sitting on sizeable gains and potential upside isn't as high as it used to be, why not consider the danger that you might lose all your gains and  just sell it now for a healthy amount?

Weekly update

Recovery factors the market is looking at (By Mohamed El-Erian, Pimco)

• A fundamental recovery in terms of data i.e. housing, unemployment
• The US central bank's continued fiscal and monetary policy
• The support of other central banks in stimulating economic 
• Political resolve, despite noise, to kick the can down the road

Keep In View:

Swissco - Fundamentally sound, low leverage compared to peers. Volume however is low. Market traditionally underprices this stock. Oil & gas cyclical play and recent bull market has lifted it up. Penny typically crash when the market goes bad. 

Conservative entry = S$0.20

Lian Beng - 

From a technical perspective, Conservative entry = S$0.40 to ride on the rebound.

Long Term Investing

So maybe the question for real long term investing is, can i still be holding this company 30 years later??

Indo Agri

Palm oil stocks seem to be a laggard in the bull run of late, they fell on Italian election news and did not make a quick recovery. 

Indofood Agri:

Indo agri continued on its downtrend and at current price of S$1.19, it is approaching its support at S$1.14. At the start of the year they had expanded into the Brazil sugar business which isn't exactly a hot industry right now.

Some sugar facts:

• Prices are on a lower end which means revenue will be lower. 
• Since prices are low, acquiring sugar related assets are at a lower premium.
• A foray into sugar generally takes a few years to mature and contribute to the margins.
• Sugar prices are volatile, largely affected by the weather.

From my point of view, for a stock that is largely family controlled, it is rather active in its business expansion. This means that the family is interested in growing their wealth and not just sit on it which gives it room for further long term upside. 

On Palm oil, it is currently having an oversupply with lower margins. Some analyst seem to think the lower margins have been priced in. Well, my take is that it is partially priced in. Perhaps the larger institutional investors have trimmed their holdings in palm oil, but a fair number of retail investors might still be holding on with the high prices on 2011 in their minds and hoping for a recovery. The point here is that, while i believe it will recover in the long run, margins will continue to be low throughout this year and these retail investors might not have an investment horizon long enough to wait out the fall in margins, such that upon release of results for each quarter this year, they sell the stocks. 

In my opinion, palm oil and sugar are good fundamentals, and prices are at relative low now. Entering these stocks now with long investment horizons of say greater than 3 years will probably yield profits. In the short term however, prices will continue to erode with the gradual fall in margins. 

Next support seems to be at S$1.14, but those looking for long term buys should consider the approaching 3 year low of S$1.14. To end off, on a cautionary note, this stock registered a low around of S$0.45 in Jan 08.