A Correction Overdue?

Lots of analysts these days are talking about a possible and looming correction that has not occurred over the past 3 years of the bull market.

Historically, a correction occurs almost every 12-18 months. We have not experienced 1 for 3 years and this has lead to many people worrying about a correction and guessing when it will hit.

My view is that a correction will not hit us anytime soon, at least not till December arrives. 3 reasons I have to support this view.

1) We need to know what a correction is and what constitutes it. A correction is a pullback of the stock market (usually 10%-20%), a normal and natural phenomenon. It occurs because the stock market has grown ahead of the economy and hence a pullback occurs to level both of them.

The US economy is currently growing. Though it might not be as good as others have predicted, nevertheless there is still growth - better housing figures, high profits etc. The stock market is also not performing extraordinary well. In fact, the S&P 500 year-to-date recorded a near 7% increase, which while is not fantastic, it has still gone up.

So the economy and stock market this year are both going through a slow and steady upward trend, with no one leading by a lot, which is good news.

2) All 3 major US Indexes (S&P500, DJIA and Nasdaq) are going through several days of reds and several days of greens for the year while reaching new highs. The stock market is going like zic-zac pattern trending upwards instead of an 'only-up' upward trend.

It is way better to see a zic-zac pattern with ups and downs than to see an 'only-up' chart. When there are ups and downs, it means that market participants are pretty balanced on both sides, which helps keeps prices reasonable and ensure that the stock market does not go crazy and run ahead of the economy. It is only when we see an 'only-up' chart where we need to be panicky because that means that everyone is optimistic and no one is on the pessimistic side to keep things balanced - that is usually a reason why corrections occur.

3) It is already priced in by almost everyone, and what is priced in cannot really happen - it technically had already happened. Almost every analyst I hear are talking about a possible and upcoming correction because it is long overdue and must occur. The fact is, there are no such things as "MUST" in the stock market, it is a probability thing and I must say that judging from the current situation, I really do not see a correction coming.

If most analyst says that a correction should be coming soon and they are pretty much prepared for it, I would say that it is already priced in. So while I do not expect the stock market to be up a lot this year, I do think that we probably will not see a correction at least till December - 2 months of market performance to enjoy!

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Yahoo! Now Has An Accurate Value Meter

With Alibaba (BABA) now listed on the New York Stock Exchange (NYSE), there is now price transparency on the Alibaba stake Yahoo! (YHOO) has on its balance sheet. In the past, the value of Yahoo!'s stake was only via estimates. Now there is a definite value - depending on the price of Alibaba shares in the open market.

With the 2 most valuable assets - Alibaba and Yahoo! Japan (YAHOF) - now openly trading on exchanges, the actual value of them can be tabulated and included into Yahoo!'s share price accurately. This allows for a comparison of Yahoo! between its market price and the value of its underlying assets, and a respective action can be taken by investors or by the management.

Yahoo! sold close to 140 million shares of Alibaba in its listing at $68, total proceeds is around $9.5 billion pre-tax, $6.2 billion after tax. Though there has been some arguing that Yahoo! is able to utilize the cash for a period until the tax are required to be paid during annual filings.

Yahoo! currently owns around 384 million shares of Alibaba after its listing. Based on the closing price of near $89, its stake is worth near $34.2 billion pre-tax. After tax (35%), the stake is worth close to $22.2 billion. The actual value may be higher since it was noted that the shares were likely to be held in Hong Kong which is tax-free if they were sold.

Yahoo!'s 35% (2million plus shares) stake in Yahoo! Japan is mark-to-market valued at close to $8.4 billion pre-tax, close to $5.5 billion after a 35% tax. However, I do expect the tax to be a lot lower because Yahoo! selling out Yahoo! Japan stake in the open market does not sound very likely. Instead I would expect a more of a cash-rich split off or buyout, which has a lower tax implications.

Yahoo! on its latest filings stated that it has $2.7 billion cash and cash equivalent on its balance sheet.
On a conservative estimate, valuing Yahoo!'s core business at 0 and subtracting away the $1.2 billion long-term debt, Yahoo! actual value is $35.4 billion, excluding other upsides like buyback and most importantly tax and the value of Yahoo!'s core business.

Currently valued at $38.7 billion, Yahoo! is quite fairly valued, considering that Yahoo!'s close to $16 billion unrealised tax bill from unsold securities of Alibaba and Yahoo! Japan are very unlikely to be charged fully anytime soon and are allowed to compound tax-free. In fact, I would at most expect Yahoo! to pay only half of its $16billion tax bill in any circumstances.

However, with the current value of $35.4 billion, this can serve as an indicator for investors to know when to invest in the company when it is undervalue and for Yahoo!'s management to perform buyback at price below its asset value, which help improve long-term shareholder value.

Personally, I would consider Yahoo! currently undervalued because of the tax issue where I consider 50% of the tax not going to be paid by Yahoo!, which adds close to $8 billion to the above conservative value of $35.4 billion, making it worth $43.4 billion.

I am currently long Yahoo! and will continue to load more shares when I can when the price reaches level below $40.

PS: I am merely posting my views about this company. I am also not receiving compensation from the above company or any other company. Above are just my 2 cents view of the company's valuation and are by no means any form of recommendation to purchase the stock.

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Buckle's Coming Big Special Dividend

The Buckle's (NYSE:BKE) dividend history shows an alternating special dividend history. Buckle gives its shareholders a special dividend that is 1 year huge and the following year small, followed by a huge special dividend the next year.
(click to enlarge)
2012's special dividend is a huge $4.70, followed by 2013's smaller $1.42 special dividend. This trend has repeated over the years that Buckle had issued a special dividend. While the exact special dividend amount cannot be accurately predicted, the amount should be the average of the past years of around $2.5 per share.
At the current price of $47.19, the projected special dividend yield is around 5.3%, excluding the $0.22 quarterly dividend and any other potential upsides. Including the quarterly dividend ($2.5 + $0.22), Buckle's next quarter's projected yield is around 5.76%.
I would be interested to add Buckle into my portfolio if it falls to below $45 because the projected dividend yield would be boosted to 6% ($2.72/$45).

PS: I own no shares of the above mentioned company. I am merely posting my views about this company. I am also not receiving compensation from the above company or any other company. Above predicted results are just my estimates and are by no means any form of recommendation to purchase the stock. 

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Investment is Sure Lose?

A lot of people says that investment is risky, is a sure-lose thing, is like putting money in the casino, its a gamble.
Most would hear from parents, grandparents and friends that they or they know of someone who has lost a lot of money in the stock market. Many even went bankrupted.
Here is the interesting part: tell them to give you some real names of people who lost that much money. Most of them will quote your TV drama names.
Actual Fact: TV makes the stock market looks more dangerous than it is.

The danger of the stock market is the same as driving a vehicle on the road. Putting someone who never learned anything about driving behind the wheels definitely makes it a dangerous thing. Just like not knowing anything about investment and randomly putting your money into the stock market, it is equally dangerous.

Recommended Post: Can I use my CPF to pay for my housing after age 55?

To prove that stock market investing is not risky, look at the chart below:

The S&P500 is an index for the US stock market.
From the 1950s to today, it is almost an upward only steady trend.
Have you ever wonder how can anyone ever lose money in such a scenario?
Ironically, people did lose money during this period because they tried to jump in and out, thinking they are Einstein and that they can predict when are the top and bottom.
Apparently, there is a reason why the turtle wins the race.

Recommended Post: Shares Not Risky & Bonds Not Safe?

The world's top and best investor, Warren Buffett's advise for the public regarding stock investments:

 










So, the next time someone tells you that investment is risky, show them the chart above that it is really hard to lose money in the stock market if you took the turtle route.


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Outliers: The Story Of Success by Malcolm Gladwell

I would like to recommend this book to those that have not read it and are interested in finding the trends that contribute to success stories. Readers should take it with a pinch of salt as these are just general trends and generalizations that may not apply to individuals. However, it still gives a different perspective as to how people become successful which often are due to invisible, and what seems like insignificant factors.

This book consists of 3 different parts: an introduction, opportunity and legacy. The introduction offers a terrific summary of how the book is going to be structured by offering a case study on the Roseto Mystery. The author explained that in order to understand an individual's outcome, one must look beyond the individual. We must look into the effects of how different cultures, social connections or even the history of the town can structure one's mindset as one progresses into the society. I believe this is also the reason why Singaporean parents are frantically enrolling their children into the "prestigious" schools as they feel that this will aid their children in getting an inherent first advantage as they grow older.

Part 1 on opportunity offers insight on how opportunities are presented to the right set of people with the right set of characteristics. With this set of people, few are selected to be the success stories as they took upon the chance and grind towards their goals. While most are of nature such as birth dates, a person's IQ and their parents' demographics, there is an active attribute that we can adopt in order to increase our chances of reaching success. That is the 10,000-hour rule. Most success stories often only occur once the person has accumulated 10,000 hours. While the author did not explain the reason, what he offered is that the brain seems to evolve into another level, reaching a state where it is able to do that one activity with excellence once 10,000 hours of practice is achieved.

Part 2 on legacy shows how distinctive cultures affect our thinking subconsciously, thus contributing to success. This part explains the inherent part within us where we are influenced by our family, friends and co-workers. Some of which can affect the success of which industry we can thrive in. An example given in the book was the Hofstede's dimension where low power-distance-index (PDI) countries thrive better in being a pilot. This is because both pilot and co-pilot have to check and balance each other's flaws and coordinate in times of crisis.

There are numerous examples given in each factor to illustrate the trends that the author discovers. As I have said so in the beginning, it is advised that readers take it with a pinch of salt as it applies to the general society and people without the inherent characteristics can still succeed through determination and hard work.

Note: This is my first book review and I hope I have done it well. While I hope to offer more content on the book, I also wish to balance between offering insight instead of giving full information as stated in the book. I also hope that I have established a certain amount of interest in the book such that you will want to read it as well and benefit. Do post your comments and discuss below!

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Thoughts on predicting share price

I was browsing through investment blogs and for a long time, I have noticed most of them are themed on predicting future share prices. They often use many different methods which can be grouped under technical analysis. The point is that this method is usually used alone.

While this method has its own merits, I often feel that they missed out on a very important fact. Investing in a company means owning the business. This means that some form of fundamental analysis has to be present because you need to understand the company that you are going to invest in. There are several weaknesses to this method, though. One is that the company may doctor its balance sheets to make it attractive to potential investors and secondly, the balance sheet is backwards dating. Hence, it may not be extremely helpful in predicting the future of the company.

Hence, there are some ways which I think is useful in countering the weaknesses of fundamental analysis. First, is to try to predict the forward Price to Earnings ratio (PER), with accuracy. Note: it is with accuracy. What I mean is that you would want to invest in a company that has a higher chance of increasing its earnings in the future. Let's say the PER of company X is now 10. The company is engaging in food and beverage industry in Russia and is not affected by the sanctions issued by the government. This definitely translates to a earnings as now there is higher demand for its products, coupled with lesser competition. If X's share price is now $1 and the earnings increase by 20%, the share price should increase to $1.20, given that the PER remains the same. However, predicting the future is difficult, or else, impossible. The way is to predict with certainty. This is of course provided that the company is stable and sound in terms of its current financial position.

While back dated information suck big time, who else has the current up-to-date information? Well, its the business owners themselves! One way to know if the company is really doing well is to check if there are any insider movements or share buybacks. If a director or key personnel is buying up some shares, this might indicate that he/she has faith in the company, or else he/she would not even risk their own money. Otherwise, the company might think that its share price currently is trading at a discount and it might be a good time to buyback some of its shares to increase its return ratios.

While these methods do have the limitations too, I feel that they are counteract measures against fundamental analysis and should be used concurrently to improve your investment decisions. This post is also of no offense to people who believe technical analysis is accurate. I, too, use technical analysis to time my entry. But this is just my 2-cents, hence, the blog title: "Thoughts on predicting share price". Rather that: "Facts on predicting share price".

Do leave a comment and share your views.

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