Between the Lines, by C.S. Tan
THE stock market last week had the same theme as the movie “Sum of All Fears” which starred Ben Affleck. The movie centred on terrorism and the fear of an explosive catastrophe. Like the movie, the market was a thriller.
Fears over consumer spending power, interest rates, uncertain corporate profitability and political stability gripped local and foreign investors. That led to a broad sell-off of blue chips as well as lower liners.
The selling, often indiscriminate, caused decimation in the market capitalisation (cap) of listed companies. On the second board, the market cap of 88 companies fell below RM30mil, less than the minimum paid-up capital of RM40mil for companies on this board.
Stamford College Bhd, an old name education group, was modestly profitable, with earnings of RM1.2mil in its latest quarter, yet its market cap had dropped to RM11.2mil.
It’s the same on the Mesdaq market, with 51 companies that held on to a market cap of less than RM10mil each.
Most of the companies with diminished market cap were, of course, those that incurred losses and where a convincing turnaround is not in sight. Furthermore, there are a number of companies categorised under Bursa Malaysia’s Practice Note (PN) 17, some of which may be delisted.
Even so, in the haphazard sell-off, companies that could achieve double-digit earnings growth also suffered double-digit compression in market value. This could be due to too many fears faced by investors over macro factors.
That would eventually lead to good value in some of the stocks if held for a few years. That may sound crazy in these fearful times but Sir John Templeton, who pioneered American international investing, put it this way: “People are always asking me where the outlook is good, but that’s the wrong question. The right question is where is the outlook most miserable?”
It is not that he set out to lose money in markets of misery but he sought to make the most money where share prices were beaten down the most. One of the most successful fund managers, he has a sound track record to prove his thesis.
Air time
The airline industry is seen as being as shaky as the global economy, with frequent media reports that the airline industry will lose billions of dollars this year due to record jet fuel costs.
The general pessimism and negative media reports may indicate it’s time to buy airline stocks.
As Templeton put it, investors should buy at the point of “maximum pessimism.”
Jim Rogers seems to believe that point has been reached in certain airline stocks. He told Bloomberg TV recently that he’s just bought airline stocks, saying, “24 airlines went bankrupt this year. How much more pessimistic do you want to get?”
He speaks with first-hand experience. A frequent flyer, he noticed the planes are full, and there is a huge demand for new aircraft. “If you order a plane today, you can’t get one for several years,” he said, adding that airlines are raising fares.
This is not his first outing into airline stocks. Many years back, while still a partner of George Soros, he got the fund to buy airline stocks at a time when airlines were on the brink of bankruptcy or heavy losses. That turned out to be a good bet.
Airline stocks are certainly a lot cheaper than they were just six months ago. The share price of Virgin Blue Holdings Ltd, which operates a budget carrier in Australia, has fallen 70% so far this year.
Here, Malaysia Airlines is down 30% during the same period while AirAsia Bhd has dropped 47%.
Planting higher
While the global economy is viewed with pessimism on all continents, oil palm continues to flourish on an island of optimism.
Hence, several brokerages and a public-listed planter last week raised their forecasts for palm oil prices.
IJM Plantations Bhd is understood to hold the view that crude palm oil (CPO) prices could hit RM4,000 a tonne again in the second half of the year.
The basis for this is believed to be the floods in the US Mid-West that would further tighten global supplies of vegetable oils. Its view of the average price for the next 18 months is at least RM3,500.
Citigroup raised its forecast from RM3,100 a tonne to RM3,300 for next year while PT AmCapital Indonesia raised its forecast for CPO to about RM3,300 for next year.
In a note last week, Goldman Sachs said CPO is undervalued relative to crude oil and soybean oil which have risen 17% and 7% respectively over the last two months while the CPO price was up just 1%. “We see more upside for CPO prices over the next three to six months,” it said.
One would expect, however, the new US president, taking office next year, to remove mandatory blending of corn ethanol with petrol. This is likely in the face of pressure from several international agencies.
That would reduce the demand for corn, ease the fight-for-acreage situation and reduce prices for the main US food crops - corn, wheat and soybean. However, there could still be some conversion of corn ethanol as a biofuel substitute for high-priced petrol.
