Sunday, April 24, 2011

Investing in Growth Themes Part 1

Technology appears to have made a strong come-back after years of investor neglect, epitomised by Apple's meteroic rise from US$80+ in early 2009 to US$350 currently, a rise of over 300%. Apple's success has been attributed to its strong product offering, beginning with the iPod, then iPhone and more recently, the iPad. Apple fans will wax lyrical over the superiority of Apple's products, and long queues which form at each new product launch is possibly a testament to the fanatical respect the company commands from technology product users.

At its current price, Apple's market capitalisation is about US$320 billion, and few companies are larger. Google Finance puts Apple's historical PE at 16.72X, not an expensive multiple of earnings, while the company's latest earnings blowout suggests that valuations are likely to fall further, should the company's explosive growth continue. Also, the macro-picture for Apple appears extremely favourable, considering the huge shift towards mobile computers like the iPad. Coupled with the relatively untapped emerging markets, the growth possibilities are enormous. Is Apple the sure-fire way to tap on an unstoppable growth theme? 
Before we get ahead of ourselves, history offers an alternate opinion. The automobile was a revolutionary invention which changed the way people travelled. However, few investors made money investing in this "sure" trend, and the 2008-2009 crisis even saw the collapse of the "venerable" General Motors, a member of the Dow Jones Industrial Average since 1915. Many automobile companies have collapsed, leaving investors much poorer, even though the industry has boomed (if the number of automobiles on the roads is a measure of the industry's success). Warren Buffett has been quoted to say that the best way to invest in the automobile industry would have been to short the stocks of horse-drawn carriage companies.
Similarly, the airline industry revolutionised long-distance travel, but investments in airline companies has been generally fared poorly in comparison to the growth in the sector. Engine and aircraft manufacturers were the beneficiaries of the sector's boom, while the airline operators saw shrinking margins as competition intenstified. Many airlines also went bust despite the astronomical growth in air travel over the years.

What does this tell us about investing in the next major growth trend? We could take an appathetic approach and ignore the growth trend (which has not generally not resulted in poor investment returns, if one considers both the airline industry as well as the automobile makers). Alternatively, we could seek investment opportunities that ride on the trend - we are looking for the horse-drawn carriage companies to short, the Boeings and Airbuses which benefit  directly rom a trend, but maintain pricing power, or the indirect beneficiaries like the Exxons and Shells, which drill and refine oil needed to power the increasing number of vehicles on the road.

Given all this, how then does one ride the growth trend of "portable new media"? We will highlight two themes that may benefit from this growth trend in our next post.    

Sino Techfibre - Fraudulent Fire?

Last Thursday, Sino Techfibre announced that a fire broke out at an office which did not affect any staff, but unfortunately destroyed books and financial records (see$file/Sino_Techfibre_Announcement_210411.pdf?openelement).

How convenient. The company's stock was halted for trading on 13 April, after auditors raised issues over the legitimacy of invoices. Now, the financial records to "verify" those invoices (likely to be "receivables" on the company's books) will most probably be lost in the fire, rendering an audit impossible.

This latest incident only serves to highlight the poor quality of S-Chips listed on the Singapore Exchange, something which has kept us from investing in the sector despite having bombed-out valuations. When balance sheets cannot be trusted, it is impossible to ascertain the true value of a company, and the track record of the sector in terms of corporate governance has been attrocious. In academic terms, the "risk premium" attributed to an investment in the S-Chip sector should be extremely high, which goes a long way in explaining the ridiculously-low valuations of most companies in the sector. We sympathise with investors who have fallen prey to these poorly managed companies and will continue to seek value opportunities outside of the S-Chip sector.

Saturday, April 16, 2011

Excess Cambridge Rights

In the recent Cambridge 1-for-8 rights issue (at $0.429 a share), we subscribed for excess units (920 more) to bring our holdings in the REIT to a round lot multiple. On 15 April, we received all our excess units, and now hold 29 lots of the trust.We are looking forward to receiving about $350 each quarter from our holdings, based on an estimated $0.012 quarterly distribution.