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. 

Market Timing

Commodity stocks Wilmar and NOL seem to be getting battered over the last 2 days.

Bloomberg came up with an article about palm oil prices which may give some insight into the palm oil profitability this year:

Bloomberg Palm oil

I'm glad i thought twice about buying more stocks a couple of weeks ago.

Wilmar

A mini head and shower has developed with Wilmar closing at S$3.5 today. A break below this level might see price fall to the next critical support at S$3.36. If it breaks this level then Wilmar is going downtrend again.

I will monitor over the next few days to see how it goes.

NOL

OCBC had given a hold call despite disappointing results, but mentioned that they are confident about the long term prospects, well me too. For now, there seems to be some support at the 100 day MA, support is at S$1.15.

I will monitor over the next few days to see how it goes.

I guess what i learn from this is market timing. While i may have had the fortune to spot the bottom in November, i need to be able to better identify exits. One key indicator is when analyst start to write really bullish reports and i start to question the sustainability. 

Note to myself- as i'm mostly invested in commodity stocks, these stocks move really quickly and with more impact than the general market. A proper exit strategy must be in placed with the discipline to follow through.

After we missed the peak it always feels like we just wanna hang on a little longer for more upside only to realise later, we missed it.

Bullish Trap

I have been very tempted by market news lately. It seems almost all news these days are of analyst making bullish calls, expecting a great year ahead and reporting money moving into the stock market. On the other hand, the market is due for a technical correction.

The question here is that will investor irrationality keep pushing up the stock market? I believe that most investors have already entered the market over the last 3 months and anyone entering the market now is just the few that has missed the boat and want to catch onto the last part. 

Caught up in the greed and exuberance of the market, i made some target prices for several stocks on Monday, on hindsight, i think i will put them on hold and wait over the next couple of weeks for more earning news. I have this feeling that the market will correct in 2 months and bottom out again in the May - June period. If i turn out wrong, at least i know i am just being rational. 

Just looking at the STI chart over the past 10 years has revealed that the index takes a longer time to accumulate (sometimes even years) than the time taken for a reversal. Better not to get sucked into the idea of potential gains at the expense of good value, after all, what really affects your bottom line is not small expenses like our day to day food, but poor investment decisions that wipe out up to 10 - 20% of your net worth in a matter of days. 

Portfolio restructure

Seems like the market is undergoing short term consolidation. Immediate support is at 20day MA with next support at 50 day MA. With all the optimism going on, i feel this short downtrend is only technical and will not fall below the 50 day. 

Everyone thinks the market bull is here to stay for 2013 and even continue to 2014, but i feel we should be cautiously and buying only into value.

Alot of optimism have been priced in lately. So i suspect that even with all the liquidity going around, the market uptrend for this year will not be stellar.

 Some target stocks i have in mind:

IndoAgri:

Technically seems to be converging, temporary support at S$1.28. Value buy at S$1.25.

Q3 financials revealed that balance sheet and income statement is okay. Don't think there will be much changes when results are released on 27th feb. Majority owner increased stake by 2% to 71%. Firm is owned largely by Salim family. Price should not drastically fall without any action from the family. Dividend is negligible though.

Noble:

I have been watching this stock over the past few months and noticed it finally went down. My inital target a few weeks back put target entry price at S$1.18. Support and current price seems to be established at 50 day MA (S$1.175). FY12 saw noble trading between the range of S$1.05 to S$1.355. 3 resistance levels to FY12 upside of S$1.355 with next support at S$1.1 and strong support at S$1.05. Putting this in % terms, from current price, potential max upside =  15.3%, potential downside = 11.9%. Entering now seems okay to me. Lowest analyst forecast stands at S$0.99.

Financials are out 28th Feb, 14 May, 8 Aug, 12 Nov. Overall FY12 Net income will probably be slightly better than FY11. High debt utilisation of approx USD4.5bn against market cap of 7.72bn (69.9%). Firm seems to be gearing up over the years. High intangible assets of USD820m. FY11 financials revealed that 22.6% of revenue was from agriculture (cotton, coffee, cocoa, soybean, oilseed, grain, sugar) and wheat, 63.8% from energy (coal) and 13.5% from metals, minerals and ores (iron ore). Firm does not produce the commodities, it is a supply chain manager. Let's do a little research given that 63.8% of its revenue is from Coal. Noble exports coal to China and the risks involve in this is that the Government is going in the renewable energy direction. It has also increased its coal production capacity (despite some accidents reported that shut down mines). I feel in the next 2-3 years demand should still be there, so that's okay. Smallish dividend yield of 1.74%.

NOL

Entered at 1.12. Current price seems to have consolidated at S$1.24. I remain bullish on its long term outlook. Many think that shipping is still facing an oversupply, however, i believed it has already been priced (NOL lowest point S$1.0). Firm is still not making profits but may just squeeze out a small turn around in FY13. Has exposure to China's recovery as it ploughs on the trans pacific route between USA and China. USA economy seems to be picking up lately too. Might pick up more of the stock at this price.

Wilmar
Entered at S$3.16, guess i missed the high of S$3.9. Support level of S$3.59 was tested on Friday. I suspect it will consolidate around this level given the U shaped recovery it exhibited earlier. Next support at S$3.4 (5.5% downside), next resistance at S$3.76 (4.7% upside). Smallish dividend yield of 1.7%.

I feel this stock has long run potential as well. Value is alright but given the price of S$3.59 i think i'll invest in the other 3 stocks for diversification benefits. The market might fall in the short run, but i believe over the next 3 to 12 months the stocks will be higher than the current price.