Catalysts and PNE Industries update

I like to think I’m aware of some of the biases that hurt investors: hindsight bias, consistency bias, anchoring, etc. Unfortunately being aware of biases doesn’t stop you from experiencing them.

Buffett compares investing to shopping for groceries: if you’re going to be a net buyer of groceries and stocks, you want prices to go down. I know it is fine if a cheap stock I own doesn’t move or gets even cheaper. Still, I have always found it difficult to hold stocks that don’t seem to move and that don’t have a “catalyst”. I think this is called action bias. You try to improve results by ignoring or switching out of stocks that aren’t moving into stocks that do have a catalyst. It has been one of the biggest leaks in my investment process and it has been difficult to plug. In the last year or so I do think I have gotten better at buying illiquid stocks without a catalyst. I can now often “force” myself to buy a small position in stocks that are so cheap that I think I have to own at least a little.

It has been an expensive lesson though, I have passed on many cheap, cash rich stocks without a catalyst that subsequently performed very well. I only began to notice my mistake when I started adding those stocks to my watchlist on Google Finance. From time to time one of these stocks did move significantly and the catalyst I thought wasn’t there just emerged one day. Talking to other investors has helped me to recognize this flaw as well.

One thing I realize now is that among value investors there’s is a large group of Buffett-style investors. They will invest in high quality companies and they run a concentrated portfolio. These investors will tend to despise deep value stocks without a catalyst, because buying a large position in them is a bad idea. Since you don’t know if a catalyst will emerge, let alone when, you should take a more diversified approach when investing in them. A lot of negative comments on forums and blogs about these deep value stocks are probably coming from investors using a style of investing that is not very suitable for these stocks. That’s not the stock’s fault though. These comments need to be discounted by investors using a more diversified approach, let’s call that approach the Schloss-style of investing.

I’m more of a Schloss-style investor than a Buffett-style investor. Most of the stocks discussed on this blog are illiquid, lacking a catalyst and in general are not great compounders.

Example: PNE Industries

A good example is a stock I wrote up almost a year ago PNE Industries, a Singapore listed net-net. For almost my entire holding period, PNE Industries has been a very boring stock to hold. The price barely moved and remained close to my purchase price of around S$0.085. At the time of investing there was no catalyst and the stock was very illiquid. However, it was also trading at just 0.42x book value and 0.56x NCAV, had more than half its market cap in cash and a solid history of profits and dividend payments. So I bought a little and nothing happened for a long time.

On April 28, the company announced results for the 6 month period ended March 31, 2014. PNE Industries showed S$3.0m in net income for the period versus S$2.0m last year. Book value is now S$71.9m and cash and bank balances have increased to S$18.6m. A positive surprise was the announcement of a S$0.005 interim dividend by the company. Last year the company did not pay an interim dividend, only a final dividend of S$0.004 which was paid in February 2014. A dividend of S$0.005 looks very small, but it is a 4.5% yield on the current stock price. If the company will continue to pay an interim and a final dividend of S$0.009 combined, that’s a 8.0% yield. They might be opportunistic about paying interim dividends though.

It was probably the announcement of the interim dividend that finally moved the shares from S$0.089 on April 28 to S$0.112 currently. A 25.8% move in a few days. With shares currently trading at 0.52x BV and 0.65x NCAV they still look very cheap to me.

It is a typical example of the type of stock I talked about in the first part of this post: illiquid, no catalyst, but very cheap. It can be frustrating to watch a stock like this languish in your portfolio. As a group these stocks tend to work out very well though, all the while offering great downside protection. I find it is best to simply buy cheap and not worry too much about catalysts.

Disclosure: long PNE Industries

Posted in Singapore stocks and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

6 Comments

  1. Nice review. Well written.

    Nevertheless, PNE has ever hit a high of 84 cents SGD in the year 2000 august month

    My idol and mentor is Mr Jesse Livermore.
    His book “How to trade stock” has taught me how to identify potential stocks that are going to fly, is starting to take over, with volume, of course. So, through this methods, I was able to identify PNE once PNE crossed 10 cents and stay above 10 cents which was the pivotal point and now still currently is.

    PNE share price had already behave something not the same with when she was 1 year, 6 mths, 3 mths and 1 mth ago. This time round is for real.

    Therefore, I was glad to have such a great teacher Mr Jesse Livermore for teaching me only to buy stock when there is volume higher than the previous weeks, price break above pivotal points, and most importantly, follow the line of the least resistance.

    Thank you pal, for sharing such informative and lovely article you have there.

  2. Pingback: Datronix Holdings: a cash-rich net-net | ValueInvestingBlog.net

    • http://infopub.sgx.com/FileOpen/NoticeofEGM.ashx?App=Announcement&FileID=300466

      Gezien? Zou weer wat flappen moeten opleveren, market cap is 60m MYR en ze hebben 42.8%, groffe schatting 10m SGD. Vraag is natuurlijk wat ze er mee gaan doen.

      Ja, positief nieuws, want PNE PCB Bhd heeft nogal wisselvallige resultaten en ik denk dat het een goede beslissing is om hun belang te verkopen. Hopelijk komt er een special dividend als de verkoop lukt. Gezien hun cashpositie lijkt het logisch dat tenminste een deel van de opbrengst uitgekeerd wordt aan de aandeelhouders.

      Heb je voor je Japanse mandje ooit hier naar gekeken? Ziet er interessant uit:

      http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/5965-jp-fujimak-corp/

      Ik heb een paar posts gelezen over Fujimak op het blog van Bovine Bear. Het lijkt erg goedkoop en is in dezelfde industrie actief als Maruzen (5982) die ik wel een tijdje in m’n Japanse mandje heb gehad.

      Op het moment heb ik 8 Japanse aandelen en ik denk niet dat ik nog meer centen in Japan moet stoppen. Ik weet niet of Fujimak een betere keuze is dan wat ik al heb. Er zijn nog zat goedkope aandelen te vinden in Japan, dat is zeker. Ik denk dat ik binnenkort een post maak met een update over de Japanse portfolio.

  3. Hi just my 2 cents. I will not dare to invest in Japanese firms mainly because of their culture; they do not sack their staff no matter how bad they are! This practice has become a burden to their companies with the head heavy bottom light. New positions have to be always created to fill up these redundant people, hence is weighing heavily on the profit margin. With their government printing money to support their economy and companies, we should be expecting the Japanese companies buying up other companies worldwide. This could create more positions and revenue temporarily, however the profit margin will not be fantastic. In long run, Japanese firms are dead. We used to have most of our household items made by Japanese, but not anymore. In fact, we hardly see any Japanese brands in our house now. Isn’t this a signal of a failing business?

    • I can understand your sentiment and there are a number of things about Japanese companies I don’t like myself, particularly the capital allocation. My view is that at some price even Japanese companies become so cheap that I’m willing to own them.

      The companies I currently own in my Japanese basket are all trading far below book value (most trade well below NCAV too), most grow their book value at a decent rate, pay a reasonable dividend and some of them even repurchase shares. Even though I know little about each individual company, I think it’s pretty tough to lose money on a basket of stocks like this. Something good could happen to some of these companies as well and I believe I’m not paying anything for this upside potential.

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