Don’t worry about indexes. Worry about your stocks. Super Group

“I would highlight that equity-market valuations at this point generally are quite high,” Ms. Yellen said. “Not so high when you compare returns on equity to returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

“The four most dangerous words in investing are ‘This time it’s different.’” John Templeton

Been reading about the high valuation in the China Stock Market and Nasdaq. (read here and here). However, in comparison to the past (prior to the dot.com bubble), this rally is led by companies with strong earnings rather than being propped up by irrational exuberance about the tech sector as in the past. (read here)

For a moment, I was contemplating on shorting the Nasdaq using PSQ, QID or QQQ (read here). However, the quality of the companies leading the market run-up do seem better as compared to the previous peak. Never did try shorting the market before…hmm..

You never see a bubble until it pops. Most people don’t recognize bubbles until they’ve burst, while precious few seem quite capable of recognizing bubbles even while they are still intact.

From another angle I have considered buying into Russia ETF (might have missed the boat). I reckon that buying a country whose economy is highly dependent on crude oil is more reliable than buying companies whose core business deals with oil & gas. Well, the likelihood of a country collapsing is far lesser than that of a company’s.

However despite all these macro view points, I have hesitated to put my money in these options.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

“Focus on Bargains and not Stock Market Valuations” – Michael Burry

Well, the very basis of my investment thesis has always been that I can’t predict the market. I can’t predict the macro-economy. However when one reads the news, one inevitably will read about these macro views. Unavoidable. Frankly I even have trouble predicting the future of my cyclical stocks. eg. Golden Agri, SIA, etc. Very rarely do we have stocks that keep expanding and doing fine.

Lately, I have noticed that there was a flurry of ‘smart money’ flowing out from Super Group. Read here. In fact, I am not the only one, some people in Share Junction (read here) has mentioned that Capital Funds has been selling their stake.

In gist, if you read the report, these are the companies selling:

The Capital Group Companies. Sold shares on 18-May-2015. Deemed Interest dropped from 8.03% to 7.99%.
Capital Research and Management Company . Sold shares on 18-May-2015. Deemed Interest dropped from 8.03% to 7.99%.
SMALLCAP World Fund, Inc. (“SCWF”). Sold shares on 18-May-2015. Deemed Interest dropped from 7% to 6.96%.

In fact, The Capital Group Companies & Capital Research and Management Company sold shares even before the 12 May 2015 quarter results were out. (read here)

The Capital Group Companies. Sold shares on 06-May-2015. Deemed Interest dropped from 9.03% to 8.99%.
Capital Research and Management Company. Sold shares on 06-May-2015. Deemed Interest dropped from 9.03% to 8.99%.

It’s no secret that institutional investors are the ones with the financial muscle to move a stock.

And what a change of fortune. Just a quarter ago, Super Group was thought to be turning around. Now, there is a sudden drop in price, after the poor quarterly results. Like what is said in the Share Junctin forum, this stock is not for the “weak heart” investors.

As highlighted in my previous post, the recovery in Super Group’s performance is not that obvious even with the previous good quarterly results. (read here) In fact the previous quarter did not perform well if we omit the sale of the Group’s property in Chin Bee Crescent, Singapore. Well, this quarter’s EBITDA increased marginally (compared to last year same quarter), but net profit performed badly probably due to the the following: Effective tax rate increased to 20% of profit before tax in 1Q15 from 10% in the previous reporting period.

Somehow I feel that the performance of Super Group is blurred by people’s focus on the overall net profit in the quarter results rather than the underlying improvement (and also the temporary lack of innovative products).

The fundamentals of the business is still intact, although it is not an easy business to be in. One just need to look at Food Empire (read here). Food Empire Holdings Limited operates as a branding and manufacturing company in the food and beverage sector. Its products include instant beverage products, frozen convenience food, confectionery, and snack products.

In comparison to other similiar companies like YHS and Thai Beverage, Super Group does have the lowest PE and EV/EBITDA.

Super Group:

P/E (TTM):18.71;
Enterprise Value/EBITDA: 16.26 (Generally, the lower the ratio, the better it is.)

Yeo Hiap Seng:

P/E (TTM):31.70;
Enterprise Value/EBITDA: 23.09

Thai Beverage:

P/E (TTM):29.23;
Enterprise Value/EBITDA: 24.26

Well for all it is worth, I have been collecting small bits of the Super Group shares as the price drop. Definitely not the ‘smart money’ here :p As what they say about value investing: Often undervalued securities are found in areas unloved by the overall market, thus requiring value investors to zig when most zag. Before making any investments, value investors consider and analyze not how much money can be made but how much money can be lost.