Wednesday, December 30, 2009

Let's talk about Goldman Sachs (US:GS).

The Goldman Sachs Group, Inc. (Goldman Sachs) is a bank holding company and global investment banking, securities and investment management firm that provides services worldwide to corporations, financial institutions, governments and high-net-worth individuals. Its activities are divided into three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services.

Here's my analysis for Goldman Sachs (US:GS). All currency shown is in US$.

GS is a fundamentally sound. Her diluted EPS for the first three quarters are $3.39, $4.93, $5.25, which adds up to $13.57. My estimate for their 4th quarter earnings should be about $5, and FY 2009 to be about $18. Using the current price of $165, the P/E ratio is only 9.16. This is way too low, compared to their 9-year average P/E of 17.1. If we take the average P/E to multiply by EPS of $18, the fair price should be $307. Even if I mulitipy by only P/E of 12, the fair price should be at $216. Initial earnings if we buy GS at $165 is between 10.9%.

GS's Book value at 3rd Quarter 2009 was $127.38. Hence the Returns on Equity is about 14.1%, which is 0.4% lower than the 9 year average RoE of 15.7%. Hence, I would say GS's management is doing a very good job in a drastic year.

Take note: Estimated numbers are according to my own analysis. It does not represent the actual results of GS which is out second week of January 2010.

Watch this video:

Kindly share your views.

Sunday, December 27, 2009

How having 2 properties worth $900,000 is better than having 1 property worth $1,000,000?

Have you ever come to this situation where you do not know if you should upgrade to a $1 million property or to own 2 properties worth only $900,000 in total?

Well, I would prefer the latter.

Case 1 ($1 million property): I pay $200,000 downpayment and take 80% loan at a rate of 2%. I will be paying interest of $16,000 in the first year. At the same time, I have to slog till my very last breath just to pay the installment of the property. You may argue that but the property price will appreciate in the future. Well, it's true and I may even make a profit of $200,000 if I sell the property in 5 years time. But I would have also paid $80,000 in interest to the bank, which means realised profit is only $100,000, minus the commisions and taxes.

Case 2 ($900,000 properties): I am staying in a $400,000 property taking a loan of $320,000 at rate of 3% and bought a second property of $500,000, taking a loan of $400,000, also at a rate of 3%. Total interest paid for the year is $21,600. My initial downpayment is only $180,000. But my second property fetches a rent of $24,000, minus taxes and maintenence. Hence, I actually earn $2,400 per year, less interest and at the same time, the value of both properties are also appreciating.

So now, which is better? Decide for yourself.

*Take note: Housing loan is paid using CPF, while the rent you collect is in cash. Invest the cash and grow at a faster rate.

Cheers! Merry Christmas and a Happy New Year.

Saturday, December 26, 2009

Did I make a mistake by selling NutriSystem (US:NTRI)?

In April 2009, I bought Nutrisystem (US:NTRI), a US company that provides weight management system based on a portion-controlled, prepared meal program. They have no debt and earning a profit every year since 2001.I bought in at US$15.15, inclusive of commission and fees. They are estimated to earn US$1.01 in the year 2009. Hence, I have acutally bought this company shares at a P/E ratio of 15.
However, in November 2009, I have sold the shares at US$21.74, at P/E ratio of about 21, making a return of 43.4% to my investment. The price of the shares as of 24 December 2009 was US$33.24. I could have made another US$11.50 per share if I were to sell just before Christmas. So, did I make a mistake by selling Nutrisystem in November 2009?

Yes, I have made a mistake. As a value investor, I have committed a unforgivable mistake for selling a fabulous business that I paid a reasonable price for.

However, I also did not make a mistake. I feel that at about US$22, NutriSystem was overpriced. Hence, I sold NutriSystem and reinvested my money into another undervalued company, trading at future P/E of 9, and is currently in the oversold territory, due to bad news phenomenon. I know I did not make a mistake when this company announces there FY2009 in January 2010.

What is the takeaway here?
As one cannot predict the emotion of the people who buy and sell the shares, so long as you feel that you have done the right thing, do not brood over it. Move on and invest into some other undervalued companies to make up for this 'LOST'. Anyway, I still follow Rule #1: DO NOT LOSE MONEY.

About NutriSystem:-
NutriSystem, Inc. is a provider of a weight management system based on a portion-controlled, prepared meal program. The Company provides a weight management program, consisting primarily of a pre-packaged food program and counseling. The Company’s customers purchase monthly food packages containing a 28-day supply of breakfasts, lunches, dinners and desserts, which they supplement with fresh dairy, fruit, salad, vegetables and low-glycemic carbohydrate items. Most of the Company’s customers order on an auto-delivery basis (Auto-Delivery), in which it sends a month’s food supply on an ongoing basis until notified by the customer to stop the shipments. The Company’s NutriSystem Advanced program consists of over 150 portion-controlled food items that provide dieters with an intake of carbohydrates, proteins and fats. On July 1, 2008, it acquired certain assets of Power Chow, LLC (doing business as NuKitchen).

Wednesday, December 23, 2009

Should one reduce the home loan by making a lump sum payment? Make full use of your CPF.

A number of friends have been asking me this question. "Should I make a lump sum payment to reduce the home loan amount, so that I do not need to pay more on interest?"
There is actually no right or wrong answer. I will just share my personal view here.
Take for example, Mr Lim and his wife has worked for about 10 years and have accummulated $150,000 in each of their CPF ordinary account, $300,000 in total.
They have just bought a $500,000  flat and have two choices.
Choice A: Take an 80% loan of $400,000 at 2% interest.
Choice B: Pay up $300,000 and take a loan of $200,000 at 3% interest. (Normally, promotional rates are for higher loan amount.)
Hint: CPF is paying 4% interest for first $20,000 and 2.6% thereafter.

Calculation for the first year:
Choice A, interest paid will be $8,000. Interest earned in CPF is $5,760. Hence, actual interest paid $2,240.
Choice B, interest paid will be $6,000.

Hence, let's have a coke because "the choice is clear".

But how can we actually earn more by choosing choice A?
The answer, get a second property and  rent out.
After paying the downpayment for the flat, Mr Lim and his wife have $200,000 left in their CPF accounts. However, only about $140,000 can be used because they have maintained a minimum sum of $120,000 (ordinary + special account combined). They bought a $400,000 investment property and took a loan of $320,000, leaving $60,000 in their CPF OA to pay for both properties. The first year interest for second property is $5,120. The property is rented out at $2,400 monthly, earning $20,000 annually minus tax and maintenance. The $20,000 earned is in cash, while the monthly instalment is paid using CPF.

Assuming the couple are still working with monthly income of $4,500 each and they are paying $3,000 for both properties using their CPF. Hence in a year, they are paying $36,000 for both properties and have an income of $20,000. In actual fact, they are paying only $16,000 for two properies in a year.

You may ask, "Wouldn't the CPF be used up in a year?"
Because both are still working, hence they will still have CPF contribution of $2,340 into their OA account. Remember, the couple still has $60,000 in their CPF OA account that can be used to pay for their instalment. Only $660 is deducted from this $60,000 (which is still earning an interest rate of 2.6% annually) monthly. This $60,000 can last them for about 85 to 90 months of instalments, i.e. about 7 years.

Another hint: How much do you think both their properties will be worth 7 years later?

Now, the best choice still lies in the eyes of the beholder. This article is written to voice my personal views only, it should be used to affect your decision for the use of your CPF funds.

Wednesday, December 16, 2009

This is the one dividend stock to buy right now.

On 11 Dec 2009, Popular Holdings reported their quarterly results and declared dividend of 1 cent per share. The current price of Popular share is $0.18. If you calculate at this price you are already earning 5.5% initially.
Is the yield really 5.5%? Let’s do our sums now.
John purchased 50,000 Popular shares at $0.18. Including commission and clearing fees. He has incurred a cost of $31.50 for commission and other fees. If he sells the 50,000 shares at the same price, then he has incurred another $31.50 for commission and other fees. In total, there is an administrative cost of $63.
Now let's do the math. The dividend earned is $500. After deducting $63, the actual dividend earned is $437. Hence, the actual returns is only 4.86%, instead of 5.5%. Anyway, 4.86% returns already beat CPF interest and all the other banks' interest.
However, fear not...
The stock prices do change, up or down, I do not know. All I know is to follow Rule #1, do not lose money.
Remember, James bought 50,000 popular shares at $0.18. If the price goes up by $0.01, he will earn another $500. After getting the dividend, if he sells the shares at $0.19, his total returns is $935, not only $437. Therefore the returns is actually 10.4%.

Think about it....

You can access to get their financial infomation.

Thursday, December 10, 2009

Gannett Co. (US:GCI), buying opportunity now?

Gannett was trading below US$10 before it closes at US$10.29 on Friday 4 Dec 2009. Yesternday, 10 Dec 2009, Gannett closes at the price of US$12.84. That's a 24.8% gain in a week. What has caused this gain?

The reason: "Gannett provided investor update at UBS conference; comfortable with high end of current Q4 EPS estimates Co reported on business strategy and presented outlook for 2010."
"Co is clearly comfortable with the high end of current Q4 2009 EPS estimates which range from $0.48-0.62." (vs $0.52 First Call consensus)

This is the reason to bring Gannett to last night price. Some people may regret that they have missed the boat to buy the stock at US$10. However, there is no reason for one to regret if homework is done.
For the first nine months of 2009, Gannett has a total EPS of US$1.15. If we take into account the above announcement, then Gannett's EPS for this year will be in the range of US$1.63 to US$1.77.
The average P/E ratio of the Gannett for the past 10 years was 16.8. Multiplying this P/E, the share price of Gannett should be around US$27.38 to $29.74. (This is just a rough estimate using the fundamentals. Fundamentals can only estimate the price but cannot control investors' fear or greed. The decision to buy or sell the stock still lies with the individual investor.)
The growth rate for Gannett's EPS from 1999 to 2006 was 6% compounded for the 7 years. The growth rate for Gannett's Equity was 12% compounded for the 7 years. (2007 and 2008 was excluded because of the crisis.)
To buy or not to buy? The decision is yours.
About Gannett: Gannett Co., Inc. is an international news and information company. In the United States, the Company publishes 85 daily newspapers, including USA TODAY, and nearly 850 non-daily publications. Along with each of its daily newspapers, the Company operates Websites offering news, information and advertising that is customized for the market served and integrated with its publishing operations. Newspaper publishing operations in the United Kingdom, operating as Newsquest, include 17 paid-for daily newspapers, almost 200 non-daily publications, locally integrated Websites and classified business Websites with national reach. The company has three principal business segments: publishing, digital and broadcasting.

More infomation on Gannett can be found in or

Tuesday, December 8, 2009

Here's an example and what is scrip dividend scheme?

The link below will lead you to OCBC's financial summary for the past 10 years.
This is a good example where we see growth in the past 10 years.

Let's take a look at EPS of OCBC.

In 1999, OCBC has EPS of $0.233. It has been going on an uptrend till 2007, with an EPS of $0.659.
In 2008, OCBC has EPS of $0.546 only because of the global financial meltdown in that year.

From 1999 till 2007, the earnings growth rate is 12% per annum compounded.
Let's use $0.546 (EPS in 2008) and use rate of 12% per annum to estimate the EPS of OCBC in 5 years time.
In 2014, OCBC is expected to have EPS of $0.96.
Multiplying by a future P/E of 10, the stock price of OCBC should be $9.60 in 2014.
Multiplying by a future P/E of 12, the stock price of OCBC should be $11.52 in 2014.
Multiplying by a future P/E of 15, the stock price of OCBC should be $14.40 in 2014.

But what is the price that we should buy now? Nobody can give you the answer.
Using the future price of $14.40, I will do these calculations. (This is the most optimistic.)
Assuming that I expect a return of 15% annally, then I would buy OCBC shares at $7.16.
But if I expect a return of 12% annually, then I would buy OCBC shares at $8.17.
For a return of 10% annually, then I would buy OCBC shares at $8.90.

Remember, the returns are actually compounded annually.
Therefore, the lower the price we pay for the shares, the higher the returns.

Another good practice by OCBC is their scrip dividend scheme. What is this scrip dividend scheme?
In this scheme, shareholders can ask to convert their cash dividends into OCBC ordinary shares at a certain price, the price will be determined by averaging the market price for a number of days.
So what is so good about it?

Well, let's look at this example where James bought 1000 OCBC shares at $8.20 each.
(Note: This is just an example, the figures shown below may not be accurate.)
In 2008, OCBC gives a $0.14 dividend ($140 for James) in August and another $0.14 dividend ($140 for James) in February 2009. If he chose to take out as cash, then he will have $280.

Now, let's see what happens if James chose to convert his dividend into OCBC shares.
In August 2008, conversion price was $7.80. (James will have about 18 shares of OCBC)
In February 2009, conversion price was $4.80. (James will have about 29 shares of OCBC)
In total, James had 1047 OCBC shares in March 2009.
The extra 47 OCBC shares are worth ($8.60 x 47) $404.20 now, compared to the $280 if he were to take the cash dividend.
What's more, in August 2009, OCBC gives another $0.14 of dividend. Hence, James' dividend in August 2009 is ($0.14 x 1047) $146.58, instead of only $140.
If he continues to convert his dividend into ordinary shares, can you imagine how much will his initial investment of $8,200 will become in 2019?
You can try to estimate on your own.

Disclaimer: This article is just for reference only. It should not be used to instigate a buy or sell of the company's shares.

Monday, December 7, 2009

What are the first things that we look for in a company?

Rule #1 for investment is "DO NOT LOSE MONEY."
If you cannot remember Rule #1, then remember Rule #2.
Rule #2 is "DO NOT FORGET RULE #1."

Always invest in companies that you intend to hold for a long term. Either sell only after making 50% profit, or keep the stock forever. DO NOT contra. Always buy shares that you can afford to hold.

Every year, listed companies must produce annual reports. The annual reports tell shareholders and public how companies have fared for the year. They allow investors to know if a company is making a profit or loss, the amount of assets a company has, the amount of liabilities that a company incurrs, how much reserves/cash a company has, how much debt a company has and so on.

So what are the first things that we are looking for?
1. EPS - Earnings per share
    EPS tells us if a company is a making a profit or loss. Share prices are shown on per share basis, hence EPS
    can tell us how much returns we are getting inrelation to the price we paid for the company's shares.
    What we are looking for is the growing EPS in the past 5, 7 and 10 years.

2. Total Sales/ Total Revenue
    The total sales/revenue of a company allows us to see if there is increase in sales for the past years. If sales did
    not increase or have a decreasing trend, then we are not interested in this company at all.
    Just like EPS, we must see the growing sales in the past 5, 7 and 10 years.

3. Equity (Reatined Earnings)
    Profit made by company can be either retained or given out to shareholders as dividends.If more earnings are
    retained, there will be growth in the equity. Retained earnings can be used for normal operating expense or
    to expand the company further, so as to bring in more profits.
    We are also interested to see the equity grow through the past 5, 7 and 10 years.

4. Total Debt
    If a company has got no debt, it means the company is able to self run without the help of loans. This is good
    news to investors because the company gets to keep 100% of the profit after tax.

The above 4 items are the basic things that I will look for at first before doing more intense calculations to find the
intrinsic value of the company.

So start getting information from the Internet.

For those who are only interested in Singapore Market, surf the company's website to get a copy of their annual reports for free.

For those who are also interested in U.S. Market, you can try MSN money.

Have fun.

Sunday, December 6, 2009

How can we start investing?

What can be considered an investment?
Actually, the moment when you buy a product, it's a sort of investment.
For example, you intend to buy a LCD tv. What are the considerations that will run through your mind?
Do you decide to buy a product by just looking at the price? Or is there other considerations, like brand, history of the brand, your past experience with the brand and so on?

In summary, I feel that when we buy a product, we do ask ourselves if it is value for money, isn't it?

It's the same thought in investment in companies. When we buy the shares of a company, we need to ask ourselves these questions:-
1. What is the value of the company that I intend to buy?
2. How do I know if the company will do well in the future?
3. Do I pay the right price for this company?

Well, investing your own money in companies always creates the doubt if you have made the right choice.

All these doubts can be eliminated if you have done your homework to check on the company's past results.

You may ask, "Do I have to spend so much time to 'investigate' the company that I am interested to invest in? Can't I just follow the crowd or even the analysts out there?"

I would just say, "There is no free lunch in this world." How would you know if the crowd or the analysts made the right choice too?

With the Internet, it is much easier to start your own investment research in the comfort of your own home.

Meanwhile, here are some of the easy to read investment books that I would recommend to my friends.
1. Rule #1 by Phil Town
2. Understanding Wall Street by Jeffrey Little
3. The Buffettology Workbook: Value investing the Warren Buffett Way by Mary Buffett and David Clark

Here are some others that you can check out.
1. The Intelligent Investor by Benjamin Graham
2. Security Analysis by Benjamin Graham, David Dodd and Warren Buffett