We have seen several global events unfold this year. The downward spiral of oil prices, US Federal Reserve interest rate adjustment, China economic slowdown, threat of terrorism and the continued sluggish commodity demand.
I have nothing much to shout in my portfolio. But it’s with the negative sentiment that I smell opportunities. Jack Ma once said “if 90% of those present at a business meeting vote in favour of one or other suggestion, I’ll always throw it out”. You can see more of his quotes here. What this means is that if everyone thinks about a particular idea, agrees and acts on it, the idea becomes stale because all, including your competitors will jump into the bandwagon. By then, it’s too late.
My thinking is different. Some call it “Contrarian”. Myself? I label it as “Market Opportunist”. I can buy stocks at a better valuation when majority remains superbly pessimistic. Don’t get me wrong. I will not select companies blindly but have a broader assessment of industry dynamics (mostly applicable for cyclical businesses) by weighing the risk-reward circumstances and the “what-if” scenarios by splitting columns of advantages and disadvantages.
There is no hard formula to quantify. Rather, a mix of historic numbers, cycle histories, emotional traits, qualitative assumptions (must make logical sense) and a forward thinking vision shaped by evolving trends. Some mind-mapping knowledge is required. It’s near to the trough that you can hunt for bargains. Analysts will debate that it’s not possible to time the market. I fully agree. However, one can hypothetically visualize by looking out for clues in your daily life and external sources. Investigation that suggests the sector is in a downturn without any positive indicators.
Take for example, Keppel Corporation. A quick summary of their third-quarter earnings (1 Jul 2015 to 30 Sep 2015) can be found here.
Although Keppel Corporation is able to depend their earnings on property and infrastructure, their key revenue contribution is in oil rigs. There is a high risk of order cancellation or deferred payment as their clients do not feel the urgency to have them due to an oversupply of oil barrels (read: oil crisis). Thus, Keppel Corporation will not receive 80% of the remaining payment from the contracts. Revenue is in millions and billions of dollars. And there is the Brazilian state-run oil company Petrobas in a corruption scandal, a key client of Keppel Corporation. A company-level problem due to structural issue. Another clue is the drop of oil prices below US$40 per barrel, a typical benchmarking basis.
Henceforth, as a “Market Opportunist” – is it a good time to buy Keppel Corporation?
Not so easy for one has to consider other factors. Keppel Corporation is in huge debt and there can be a chance of a cash call (read: rights issue or convertible bonds). A peer-to-peer comparison, Sembawang Marine is expected to post their first quarterly loss since 2003. That’s how bad the situation is. That said, it’s less unlikely that Keppel Corporation will file for bankruptcy since Temasek Holdings should offer their financial support.
Regarding dividends in Keppel Corporation, I will take it as a bonus. Their business nature does not constitute to sustainable payout nor a fixed dividend policy. In other words, I buy Keppel Corporation for capital gains.
My thought is this
If I am to plough my money into Keppel Corporation, I expect a longer time horizon. Personally, I foresee the oil crisis to hit equilibrium in supply and demand - estimated FY2018 – judging from the past cycles (there are graphical illustrations to look at – just Google it and you will see a convergence of happenings bounded together). Perhaps, oil producing nations and America are able to reach a compromise, influenced by allied countries whose income dependable on oil. After FY2018, there may be a gradual uptick of oil prices and demand starts to flow in. Projected time period of estimated FY2021 to FY2022 for bustling economies across regions driven by digitisation and technological advancements, as well as facilitated by easier trade movement from bilateral cooperation. This is where I will sell. Alongside, there can be unexplained sentimental changes for you can never anticipate unknown market forces. The key is adaptability to your target price. In my opinion, the difficult part is to sell and not buy. I need to be ultra-sensitive to certain actions undertaken by OPEC, BP/Shell/Exxon and the Middle Eastern countries. Therefore, I have included first and second layer of my selling price (in percentage terms).
At current moment, I have buffered the wider fluctuation of Keppel Corporation share prices and add more should opportunity arise. According to Google Finance, my range bound is between the low of $3.41 during the last 2008 crisis and the high of $11.90 in 2011 and $11.80 in 2013. Keppel Corporation NAV (net asset value) is $5.93.
Of course, such easy conclusion is prone to huge debate. 9 out of 10 people disagree. The downside is you will lose track, just like my days of buying into NOL (Neptune Orient Lines) where I would have sold in 2010 - but did not, anticipating 2013-2014 cycle upturn. Any wrong calculation results in a loss.
But, the truth is - it’s only myself that can make a difference. Successful Businessmen and time-tested Innovators venture into areas unknown, transforming into market leaders that few can dream of. They do not belong to the herd; don’t always stick to conventional ways but likes calculated risk that gives them above-average returns while balancing their current cash flow.
In short, I am long in equities – at the moment buying into potential bigwigs that have dropped drastically in prices. I like to use a concentrated strategy, building into a portfolio of dividend yielding stocks/Reits and cyclical firms.
At least for myself - that’s how a “Market Opportunist” works.