Selling Stocks with a Purpose

It's been a long while since I've posted on this humble investing blog. The reason being that this Singaporean child here is currently residing in Sweden for student exchange programme. Settling in has been time-consuming. In this post, I want to touch on the topic of selling stocks. If you did not know, I advocate long-term value investing as influenced by Warren Buffet. This means that you buy undervalued stocks and hold long term as the intrinsic value will definitely be realised eventually. Personally, I think holding stocks is the easy part while selling brings about more emotional struggle.

In one of the books I've read (but cannot remember), the author suggested investing and by extension, selling stocks with a purpose. This purpose is non-exhaustive and can range from buying a car, paying child's university education to retirement fund. The concept is essentially like a saving accounts albeit that investing in stocks will generate high returns. Need money for house at 32 years old? Start putting money into stocks every month till the time you buy a house.

The reason why I’m mentioning this is due to the fact that I had sold my Apple Inc holdings recently. I had mainly thought to sell Apple Inc as its iPad sales were weak and the next catalyst should be the launch of iWatch. Having tried the cheaper version of Mi band, I feel that wearable devices are not going to be as indispensable as something like the iPhone. Within one month putting the Mi band, I had stopped wearing it as it was too troublesome to keep it on all the time and the function of tracking steps and sleep was not worth the trouble. Having Apple trading at the high, I decided to sell it at $124.30.

Should I have sold this stock due to short-term gains? For me, investing right now is for capital appreciation and to fund my university education. Selling in this period even for short-term gain seems like an OK choice personally. The lesson to take away here is that investing should be done with a final aim in mind. Only when you are approaching the period when you need the physical cash that you should start liquidating the holdings you have.

Apple is currently trading at $129.49 and it looks like I sold too early or on wrong premises! However, gain is still a gain. 40% gain for this stock.

ST Engineering (S63.SI)

Amidst the recent drop in oil prices, there are gems to be found. Some are oil-related stocks like Keppel Corp which may or may not have been oversold compared to crude oil price. Others, like ST Engineering (S63.SI) are dragged down by the pessimistic market. Upon some search on how oil price affects the business of ST Eng, I found this statement in the company's 2009 annual report:

"Oil prices have been on the uptrend since the beginning of the year and was around US$70 at year’s close. High oil prices would have a negative impact on the Group’s customers in the Aerospace sector, and this may in turn impact the Group’s performance. However, such an environment of high costs could present opportunities for third-party MRO providers like ST Aerospace, as airlines outsource more MRO work in an effort to contain costs." 

Although a report in 2009 is too outdated for my liking, I will conclude that oil price does not affect the company negatively at the very least. Due to its slump in stock price, the dividend yield had been bumped up to 4.7% from 4+% previously. Attractive, in my opinion.

However, as fate would have it, I chanced upon an article which highlighted the hidden risk of dividend stocks. In the article, SIA Engineering was cited as an example where high dividend payout did not mean that it was a good buy. This was due to its unsustainable dividend policy where dividends regularly exceeds its earnings. The shortfall between earnings and the dividends have to been patched up using its cash pile.

Following what the article did, I went to compile a list of ST Eng's financial and dividend history as below.

Financial Stats

Year	EPS (cents)	NAV (cents)	Dividends (cents)	Payout Ratio
2004	12.26	47	12.39	101.06%
2005	13.64	51.2	13.6	99.71%
2006	15.15	53.1	15.11	99.74%
2007	16.95	54.7	16.88	99.59%
2008	15.82	52.7	15.8	99.87%
2009	14.78	52.09	13.28	89.85%
2010	16.21	53.38	14.55	89.76%
2011	17.28	57.79	15.5	89.70%
2012	18.76	61.51	16.8	89.55%
2013	18.73	68.14	15	80.09%

The Earnings Per Share has been increasing steadily throughout the years with a slight bump in the wake of 2008 Financial Crisis. Dividends had been steady since 10 years ago. With decreasing payout ratio, it seemed that ST Eng had been prudent with its cash pile. This also implies that ST Eng does not need to dip into its cash reserves in order to maintain same dividend payout even if EPS drops. ie Sustainable Dividend Policy

Having bought half a lot of ST Engineering at $3.37, I would seek to complete my other half of the lot by waiting at $3.24. ST Engineering is a very solid company as I see it as a company that is effectively backed by SAF. During NSF days, almost all the vehicles were serviced or modified by ST Kinetics, a subsidiary of ST Engineering. Following Warren Buffet's advice, I would still see ST Engineering existing 50 years down the road and thus bought the stock amidst some market turmoil. 

Straco: Art of Pricing Stock Price

When looking for stocks to invest in, there should be a fixed tangible strategy in place. In that way, it is really  investing and not just a game of luck and chance (aka gambling). For me, I use the methodology set out in the book written by Mary Buffet (check out my reading list post). To scout for stocks, the company must have:
1) a competitive economic moat, and
2) a steadily increasing EPS.

Competitive economic moat refers to the high entry barrier that a certain business may possess. For example, setting up a bakery is easier than setting up a smartphone company. A bakery may need bakers, baking equipment, retail space and cashiers. A smartphone company needs the patents and technology, supply chains, distribution lines.. not to mention the manpower! Between these two types of companies, which do you think is easier to set up? Companies with high economic moat mean that their businesses are not easily threatened and margins may be higher. Choosing to invest in these companies ensures your investment has high level of security against business failure.

Mary Buffet also stated that Warren Buffet liked companies with increasing EPS over the years. The companies he mentioned in the book include Coca-Cola, Johnson & Johnson and Kraft Food. It signals the strength of management and business. Furthermore, the intrinsic value of stock can be calculated from the EPS growth.

In my case study, I'll use Straco priced on 18 Aug '13 as an example. The closing price was $0.775.
Straco (S85.SI) is listed on the Mainboard of Singapore Exchange. The company owns and manages a number of tourist attractions in China. These include Shanghai Ocean Aquarium, Underwater World Xiamen and cable car services at Xi'an. It had also ventured into entertainment business with startup of Straco Creation Private Limited.

The EPS of Straco over the years are as follows:

Year Earnings per share (cents) 2005 0.34 2006 0.39 2007 0.71 2008 0.89 2009 1.02 2010 2.15 2011 1.91 2012 2.31 2013 4.01

From the EPS, you can see that Straco has a steadily increasing EPS over the years, barring the drop between 2010 and 2012. This may be the sort of business you want to be interested in. Though Straco certainly isn't the sole player of tourism in China, it is the first few and enjoys the first-mover advantage. Furthermore, China is increasingly into domestic tourism which is positive for the company.

Once you determine that the business model and EPS growth is satisfactory, you can proceed on to estimate the intrinsic value of the company. The steps are shown below.

First Step (Finding CAGR):

Between 2005 and 2013, in which 8 years have elapsed, the EPS of the company has grown from 0.34 cents to 4.01 cents. Using a CAGR Calculator found here, find the CAGR of the EPS. 

Input the data accordingly:

Beginning value: 0.34 (starting EPS)

Ending value: 4.01 (ending EPS)

Number of periods: 8 years (years elapsed)

If done correctly, you will yield a CAGR of 36.13% per year. 

Second Step (Finding the Future EPS):

Once you have establish how fast the EPS is growing, you can estimate the EPS the company will earn in the future. First, you must determine the time frame for the stock investment. For me, I am more interested in the middle term time frame (~ 5 Years). 

With the time frame decided, proceed to calculate the future value of EPS with Future Value Calculator. 

Input the data accordingly:

Interest Rate Per Time Period: 36.13 (this value is the CAGR obtained earlier)

Number of Time Periods: 5 (your desired time frame here)

Present Value: 4.01 (latest EPS of the company)

If done correctly, you will yield a result of 18.75. This is the estimated EPS of the company in 5 years' time. 

Third Step (Establishing the Future Stock Price):

The EPS of the company is estimated to be 18.75 cents ($0.1875). Now, how do we translate this piece of information into stock price? That depends on the price-to-earning ratio (P/E) of the company in 5 years' time. Once again, we have to estimate the P/E of the company. You can do that by studying the historic values of the P/E ratio.  

Being more conservative, I set the model P/E at 8. Normally, P/E is between 10-20.

To get stock price, multiply the EPS with P/E. Therefore, Stock Price = $1.50

Fourth Step (Deal or No Deal?)

The current price of Straco is $0.775 while the predicted value is $1.50 in 5 years. This is an increase of 93% in 5 years. Also take note that the increase is not including dividends! 

Make sure to double check that the calculations have been accurate enough. Take note if there had been one-off gains in EPS and strip it off accordingly. 

When everything is done and the potential return proves to be tempting, the hardest part will be to press the buy button.