The odd one out (Golden Agri)

I have previously listed the names of the stocks which I have bought (see here).

Among them there are consistent winners, and I do not have to worry much about them (main worry is how to add to my positions in these stocks since there are rarely any major corrections eg. Vicom). On the other hand, there are others whose fundamentals are weaker or cyclical by nature and have yet to register any unrealized gains. Like the teacher who tend to focus more on the problem kids rather than the ‘A’ students, I do pay more attention to these stocks which are not performing up to mark.

Among the weaker performing stocks in my portfolio, eg. SIA, SMRT, CapaitaLand and Golden Agri – some have turned the corner and registered (unrealized) gains while others have their narrative / economic outlook changed (for the better – at least for the near term).

In the case of CapitaLand, it is the ECB quantitative easing (which might inject more liquidity into properties/property companies) and KepCorp buyout offer for KepLand (which might cause liquidity to be rotated into other property stocks within the same universe eg. CapitaLand). With these news it is no surprise that property counters in recent days have increased in price.

In the case of SIA and SMRT, the recent plunge in oil prices have lifted transport related stocks. Hence SIA and SMRT are obvious beneficiaries. The government also recently announced a new model for the public bus industry that might improve SMRT’s profitability.

The only odd one out is Golden Agri (read here). Like the son who never do good – this is one bad egg that has been persistently under-performing (from early 2011). Normally I do not pay much attention to the macro economics, and am more of a bottom -up investor (focusing more on the company’s fundamentals and growth narrative). However, in the case of Golden Agri it is hard not to, as its performance and fundamentals are closely linked the macro economics / price of Crude Palm Oil (CPO). I have read up on Jim Roger’s comments and it seems that he is not in favour of palm oil (and mentioned that palm oil has long term issues). On the other hand, Dr Doom, Marc Faber thinks otherwise.

And as I read more, I came across an article that talks about Crude Oil price and Crude Palm oil price correlation. It states that there was a strong increase in soybean oil supply, leading to a drop in palm oil price. And there was a drop in demand in oil, leading to a drop in palm oil used for bio-diesel. However, we are seeing price reversals in agriculture at this moment. Things are looking brighter for palm oil stocks.

Another article had a target price of 0.46 for Golden Agri and listed out the reasons why the recent uptrend in CPO prices (due to the worst floods in Peninsular Malaysia) will not continue:

seasonal supply recovery,
record South American soybean harvests,
drop in crude oil prices and
prospective shift in Indian demand to soybean oil.

Frankly, whether the trend in the near future is upwards or downwards for CPO prices, I am not sure. Any point or forecast I am making from the above? Frankly no. I don’t really invest base on macro economics. Did I anticipate the recent up trend in CapitaLand, SIA or SMRT…eh no, will the trend remain up in the near future..eh no idea (not George Soros here). However, I do believe mediocre stocks will not perform well over time. So there is always an urge to replace them with companies that comes with better value and growth prospect- hence my plan to slowly up my cash quota. However I don’t sell shares often, and try not to.

“Time is the friend of the wonderful company, the enemy of the mediocre.” Warren Buffett

If you are to ask me if I will sell (Golden Agri) now, the answer is ‘no’. It is still the same company producing palm oil, and global demand is not something they can control. The Walter Schloss in me would probably think of it as a bargain base on Golden Agri price to book value (0.63). However the Total Debt/Equity ratio of 32.58 is a turn-off. Total Cash is $475.56 Mil, Total Debt is $2.89Bil. Charlie Munger will probably flip, as he likes businesses with durable competitive advantages that generate high returns on equity with little or no debt.

Nevertheless, there are good points about this company (read here):

The percentage of institutional ownership is much lower than that of the company’s insider
The palm oil producer has been consistently profitable over the past 10 years.
Golden Agri-Resources’ debt to equity ratio comes up to 30%, which is a fair bit lower than the Straits Times Index’s average of around 75%.
Golden Agri is expanding its palm oil plantations and is in the process of “exploring new initiatives for cost efficiency such as mechanisation and alternative energy”

“Sell is tough. It’s the worst, it’s the most difficult thing of all.” Walter Schloss

“It takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore.” Warren Buffett

“If you can’t convince yourself ‘When I’m down 25 per cent, I’m a buyer’ and banish forever the fatal thought ‘When I’m down 25 per cent, I’m a seller,’ then you’ll never make a decent profit in stocks.” Peter Lynch

Talking about Peter Lynch: Peter Lynch who made many investments in cyclical companies, mentioned that cyclical investors need to think differently. He said that with most stocks, a low PE ratio is a good thing, but not with cyclicals. Buy high, sell low. Looking at the past PE ratios of Golden Agri (below), the PE ratios has been consistently high in recent years – so if that is the case, isn’t it not the time to sell?

Another article mention that investing base on P/E for cyclical stocks is tricky: Investing based on a low price-to-book value is a much smarter strategy. When a company is priced below book value, investors are saying that its future is so bad that the firm isn’t even worth the money that management has spent on assets to conduct business. Buying at a price below NCAV allows you to achieve significantly higher returns than your peers when the industry eventually turns, while taking far less risk. The approach is to buy cyclical NCAV stocks when the industry is deeply depressed and then to sell those stocks shortly after they reach their average earning potential.

Have superimposed the Price to Book ratio chart against the Stock price Chart below.

Well, what I can do now is to read up more on palm oil news, and news on Golden Agri. And oh yes to find stocks that is not so dependent on macro economics or cyclical in nature 😛