Many investment bloggers can quote Warren Buffett’s famous saying “Price is what you pay, value is what you get”. But how many of them can actually truly understand what he means?
One of the greatest cardinal sins made by investors is to fall in love with the stocks they have invested in. In doing so, they suffer from investment blind spots and subsequently sustain heavy losses when market turns sour. It is as though they go to sit in for an examination without studying for the subject and then expecting to obtain an ace for it.
Many investors don’t determine the value of the stocks and don’t set entry/exit levels. Most of them buy stocks based on prices. The key reason for this folly is because most investors cannot differentiate between price and value.
A classic example would be Singapore Exchange Limited (SGX), Singapore’s stock market operator. The counter surged to a high of $15.90 in 2007 and then dropped to today’s $6.82. Die-hard fans who bought the counter in 2007 at such price would be staring at massive losses now.
Even though the company has been consistently paying good dividends, the amount of losses would have wiped off the dividend gains accumulated throughout the years. It would have been an awful investment for this group of investors and I would not be surprised that these dudes would never touch stocks again.
This is not to say that SGX is a bad stock. In fact, it is a good company to invest in as it is Singapore’s main stock exchange. With more than 700 listed companies, SGX provides listing, trading, clearing, depository, market data, member services, connectivity, collateral management, and issuer services, as well as counterparty guarantee services.
Recently, the company is also diversifying into other areas, such Market Data and Connectivity, Depository Services and Issuer Services.
2Q FY2016 Financial Summary
- Revenue: $195 million, unchanged from a year earlier
- Operating profit: $98 million, down 4%
- Net profit: $84 million, down 3%
- Earnings per share: 7.8 cents, down 3%
- Interim dividend per share: 5 cents, up from 4 cents
Given the current weak market sentiment, SGX’s share price is expected to continue to decline in 2016. Let’s take a look into the company’s financial strength and then determine its intrinsic value:
- Current asset: $1.164 billion
- Total liabilities: $584 million
- Total number of issued shares: 1.071 billion
- NCAVPS: $0.542
Even though the NAV for the group is $0.82, investors should note that NAV will include non-tangible assets, which can be subjective. That is why I always prefer using NCAVPS to gauge a company’s value because it is more conservative.
Based on the value of $0.542, I would give a 30% buffer and thus would buy SGX at $0.70. Given the long term growth prospect of SGX, I would then sell the stock at $4.00. Even if there is a massive market correction and SGX is forced to liquidate, my downside risks would already have been mitigated. This is how to determine a company’s value and set my exit/entry levels.
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