Sunday, May 25, 2014

Contrarian Play : MAS (Malaysia Airline) Stock - Worth to buy?

Some people say that to be a successful investor you need to be contrarian. The problem is what is the definition of a contrarian ?

Most would say that buying MAS at the current price is a contrarian investment.

The balance sheet is impaired, they have had a succession of quarterly losses, and they run their business in a highly competitive environment. They have a weak moat. The list of bad news goes on including the Flight 370 disaster.

My definition of a contrarian play is to find a share with some temporary difficulties but has sound financials, high margins and competent management. MAS does not meet these qualifications.

An example of a contrarian investment that meets my criteria would be Tanjong PLC which went private a few years ago. They had been sold down hard by reported losses in a gambling venture in Germany.

The rest of their power generating business which accounted for over 97 % of revenues continued to perform.. Management were honest and competent , the balance sheet rock solid and they had a strong moat.

We bought and held until Tanjong was taken private. Capital gains were over 84 % not including handsome dividends.

JTI is another contrarian investment we made. We bought in the massive 2008 collapse when there was blood in the streets. At the same time the government was planning to require cigarette companies to place health warnings on their packages.

The financials were solid with gross margins of over 60 % . We met the management and the CEO at the AGM told us that health warnings do not effect sales much as evidenced by the health warning effect in other countries.

The investment while unpopular to the crowd but at least it had a solid foundation of cash flow, no debt, inelastic demand and a rock solid moat. Now after 6 years JTI has been taken private earning handsome profits for our shareholders.

Not all of our investments win. But losses are smaller compared to potential profits as we buy in times of panic when the crowd has sold and few are left to sell.

Presently there has been massive shifts of capital from high flying internet, biotechnology and high PE shares in small cap indexes to large cap conservative shares. This is worldwide.

Small caps in Malaysia are down 4 % since 30 April 2014. The US Russell 2000 is down over 10 % since Jan 1, 2014. The Russell is a small cap index which in January sported a PE of 102 but is now down to 76.

This index is dominated by high PE shares some with no revenue, questionable management and high debt. These are popular with gamblers and the get rich quick crowd.

As foreign funds slowly return to Asia, they are buying high quality blue chip shares. That is why the KLSE blue chip index has recovered 12 % off the lows for the year.

In Singapore REITs are up 7 %, Utilities up over 6.3 % and Telecommunications are up over 8 %.

Small cap Singapore shares however have underperformed.

For the rest of 2014, focus on contrarian shares, unloved by the crowd that offer good value at a reasonable price.

The SGX and KLSE do offer some hidden gems but require the hard work of company visits and careful scrutiny of their financials.

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