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Contrarianism Part 2: Lessons from Templeton. Vote for your stock!

If you like this column, please start voting which stocks you would like them to write on in their next article! This is your chance to interact with them and they will write on the most voted stock of your choice!

How to vote: Comment any of the 4 listed stocks of your choice mentioned in the article (M1, Comfort Delgro, SPH, SIA Engineering). The most number of likes/comments by Monday morning will be chosen. It’s that simple!

Voting starts now and ends on Monday (31st July) when market opens (9am)!

Disclaimer: this article simply provided analysis on stocks from the fundamental perspective, it does not represent any buy/sell recommendation from Investingnote. *All the dollar unit ($) in this article refer to SGD.

This column is written by @j_chou.
–Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.

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With S&P 500 and NASDAQ closing at record highs today and VIX Index at a 23-year low, the timing seems ripe to revisit the contrarian approach!

Besides Dremen, another famous investor whom we can learn the contrarian approach from is Sir John Templeton. Known for his acumen in global stock-picking, Templeton’s principles of purchasing at “maximum pessimism” pushed him towards stocks that had been entirely neglected. His story of profiting off the Great Depression is legendary: in 1939, he purchased $100 worth of every stock which was trading below $1 per share on the New York and American stock exchanges. This totaled about 104 different companies, a whopping 34 of which were bankrupt, and Templeton’s initial investment was $10,400. After four years, he managed to sell those shares for nearly four times the money he had initially invested. His genius proved to be timeless, as yet again in 1999 during the dot com bubble he famously predicted that 90% of the new Internet companies would be bankrupt within five years, and he very publicly shorted the U.S. tech sector.

Let’s look back on some of Templeton’s famous words of wisdom and see if we can gain any new insights into the current market!

“The four most dangerous words in investing are: ‘this time it’s different.'”

Against the calls of caution by some prominent hedge fund managers, there are many who have instead been up in droves to quash any bearish sentiments. Many bull investors view this run as different from the dot com bubble; they believe that this time round stock market appreciation is driven by fundamentals and earnings growth.

In fact, even prominent bears are increasingly turning bullish.

Robert Shiller, famed for creating the Shiller P/E and predicting the dot-com bubble and housing bubble, has frequently warned that the market looks “very expensive” but has recently claimed that several sectors in the market are relatively cheap, including the best performing tech stocks and “stocks could go up 50% from here”.

Three years ago, famous bear investor Jeremy Grantham of GMO was firmly in the camp that the extended post-crisis market rally was due for a correction. However, recently Grantham has decided that U.S. large caps deserve to trade at higher multiples than the past as they have far more earning power.

Even Warren Buffett, once famously averse to technology stocks, is now one of Apple’s (AAPL) biggest shareholders. He pointed out at Berkshire Hathaway’s recent annual meeting that big tech firms are different from traditional companies as they do not require much capital to grow.

Maybe this time it really is different?

“Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Templeton warns against being too confident of one’s own investing abilities, as “An investor who has all the answers doesn’t even understand the questions.”

The brilliant former Business Times columnist Teh Hooi Ling noted: “Humans are by nature optimistic. When two views are presented, the optimistic and pessimistic ones-we tend to think that the optimistic view will pan out. That is until we are proven so dead wrong that we lose hope entirely and regard any light at the end of the tunnel as an oncoming train. That’s the time we would dismiss any optimistic prognosis.”

It is indeed common sense that one should buy low and sell high. Yet due to human behavior it is hard to go against the herd mentality. As such, it is best to rely on technical indicators to provide a clear outlook of the market.

One such indicator as suggested by Teh Hooi Ling in her article “Spotting A Bubble From Some Distance Away” was to use the equity risk premium(ERP). By analyzing when to hold stocks or cash by setting a buy signal when ERP rises above 4%, and selling when ERP is below 2%, for a period of 15 years, she managed to generate compounded annual return of 10.5%, above STI return of 6.2% for the same period.

Hence, when ERP gets too low it may indicate a bubble forming, and it may be better to hold cash until ERP increases.

“Focus on value because most investors focus on outlooks and trends.”

As InvestingNote members often gripe, being contrarian is easier said than done. How are we to be greedy when others are fearful, when we are at the same time afraid of catching a falling knife? The answer, as surmised by Sir John Templeton, is to focus on intrinsic valuation. It is no coincidence notable contrarian investors are also strong believers of value investing: Graham, Buffet, Klarman, Dreman, Neff, Templeton etc. Instead of panic-searching for news or analyst opinions, assessing a stock based on fundamental analysis and healthy ratios into the long term is probably the safest and surest way to successful contrarian investing. After all, if due diligence was done your investments will be protected by margin of safety.

Contrarian opportunities in SGX?

Recently, there have been some SGX stocks that have seen a plunge in prices and generated negative sentiments in the InvestingNote community. Are these companies a contrarian opportunity or are the fall in prices justified?

Vote in the comments below and let me know which stock you would like me to analyse!

$M1(B2F.SI)

Post by @RetiredOldMan: https://www.investingnote.com/posts/143401

Post by @KallangRiverWoof: https://www.investingnote.com/posts/146351

Post by @Sporeshare: https://www.investingnote.com/posts/146442

$SIA Engineering(S59.SI)

Post by @CASHFLOW: https://www.investingnote.com/posts/145930

Post by @PhilipCapital: https://www.investingnote.com/posts/146289

$ComfortDelGro(C52.SI)

Post by @akwl88: https://www.investingnote.com/posts/145310

Post by @BrennenPak: https://www.investingnote.com/posts/144298

Post by @Jimes: https://www.investingnote.com/posts/145354

$SPH(T39.SI)

Post by @indigo: https://www.investingnote.com/posts/144840

Post by @mlow: https://www.investingnote.com/posts/141963

Post by @Turtle_Investor: https://www.investingnote.com/posts/141131

Please cast your vote on your favourite stock (pick 1 out of 4) in the comments below before the market opens on Monday at 9am!

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Salvatore

With my divestment of $ComfortDelGro(C52) I have bought into $AEM(AWX) at a price of $2.75. :) Here is my brief coverage of this company.

I previously held this counter and released all I had at a price of $2.65. After a barrage of good news, I decided to enter the foray once again.

Throughout this entire coverage, I am assuming a profit margin of only 9%, which is a tad lower than their Q12017 profit margin of about 9.8%. Therefore, all my calculations here will be UNDERSTATED if they were to improve their profit margins, which has been the case over the last few years.

What I am also assuming is that there are no further sales order received from customers, which is almost zero probability.

Ready to read on? LETS GO!

"The Company is pleased to announce that it has received as at 31 May 2017, sales orders worth S$182 million for delivery in FY2017. This represents an increase of S$30 million in sales orders received over the previous sales order received announcement made on 18 April 2017."

With a profit margin of 9%, $182m of revenue equates to $16.38m of profit, which averages out to $5.46m per quarter. Adding q1 earnings, total year earnings will be 20.5 million, which equates to an EPS of $0.32.

With such an EPS, the share price of $2.72 represents a PE ratio of ONLY 8.6x. Everyone knows that this is an INSANELY low PE ratio, and that the market has not fully priced in the growth that is to come.

Even if it goes to an undemanding PE ratio of 12x, the price would have already grown to $3.8. I personally do not think that the management would allow the stock to escalate to that price, and they would issue bonus shares to improve the liquidity of the shares.

To give a comparison, $Micro-Mechanics(5DD) is trading at a PE ratio of 13x and $UMS(558) is trading at 17x (Info extracted from Stockfacts, correct me if I am wrong.)

What else do we want? It does not stop here! The company states - "Thirdly, with clear visibility of growth into the next few years, we intend to adopt a dividend policy to pay annual dividends, including interim dividends, of not less than 25% of profit after tax excluding non-recurring, one-off and exceptional items."

With a minimal profit estimation of AT LEAST $20million, 25% profit means $5m paid out, which equates to a dividend of at least 2.8% for an insane growth company.

To top it all of, institutional investors are buying in to AEM as well. "is pleased to announce that several long-only institutional funds have bought AEM shares and have become new shareholders. The institutional funds took up 2,737,800 shares at $2.70 a share from Orion Phoenix on 5 June 2017."

With this massive inflow of funds, I believe that AEM will attract many more institutional investors. I do not see Orion Phoenix reducing the percentage of their shares any further. With Institutional Investors buying at a price of $2.70, there is a major support there and I only see the price going up.

This is only the beginning of AEM!

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Sporeshare

Stock counter to be in the historical bearish mode and beaten down price such as SPH ,M1 , CDG & SH may see further selling down pressure. $ComfortDelGro(C52.SI) $SPH(T39.SI) $M1(B2F.SI) $StarHub(CC3.SI) It might be good to monitor and wait for price to stabilize FIRST before zooming in to bottom fish . As always , do remember to do your own homework and due diligence .. Not a call to buy or sell.

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gingwien avatar
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gingwien

After This Decline, is $M1(B2F.SI) a Buy?

At a P/E of 11.86 compared to StarHub 13.82, M1 certainly presents some value.

https://www.probutterfly.com/blog/after-th...

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