In an
earlier blog post, we linked to one of Warren’s Buffett’s classic articles on value investing. In it, there is the following quote:- “if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me”.
A stock on Bursa Malaysia recently proved this concept. The stock is Titan Chemicals Corp (TITAN). Titan manufactures chemicals to be sold to manufacturers of flexible and rigid packaging, fibers, automobile parts and other products.
In early May 2010 (just 2 months ago), I flirted with this stock, but unfortunately did not finally consummate the purchase. At that time, it was trading at around RM1.25. Based on this price, it had the following results on a value perspective:-
Dividend yield: Approx 4%
PE Ratio: Approx 6
Net Assets per Share: Approx RM2.50
Based on the above, this definitely qualifies as a value stock. Solid dividend yields prove steady recurring earnings; low PE Ratio (lower than the benchmark of 10) means it is under-valued earnings-wise; and finally, you can get RM2.50 of assets for RM1.25. That’s like getting it all at a 50% discount. Exactly the kind of deal Buffett looks for.
And true enough, someone (Honam of South Korea) came along and
offered to buy the company at RM2.35. At this price, Net Asset Value is better reflected and the PE Ratio rises to approximately 10. It is not a steep price at all, simply that the value has been recognized.
And if you had bought the share at RM1.25; it was last traded on the open market on 15 July 2010 at RM1.85; a profit of 48% even before the actual offer made by Honam.
Of course, this doesn’t mean that every value investment you make will make quick profits. Most of them will stay undervalued for quite some time. But if you hold enough value stocks in your portfolio, ‘good things’ will probably happen to you one after another. And always remember that value stocks are inherently lower risk than others, simply because they are so undervalued that there is not much room left to go down even further.
------------------------------------------------------------
$
Posts
