Here is an excerpt of an email sent to me by a DividendVault.com subscriber:
In summary, the subscriber had:
1. Found Mudajaya from Dynaquest, a thick stock guidebook.
2. Bought Mudajaya 10+ years ago at an average cost of RM 2.67 a share.
3. Revealed that his reasons for purchasing it were:
- Good financials: EPS and DPS were rising.
- Valuation: P/E Ratio and Dividend Yields were attractive.
- Growth Potential: a “Big Project” in India.
4. Thought that the “Big Project” in India faced issues after he invested.
5. Sold off his Mudajaya at RM 0.19 a share.
In short, the subscriber incurred 93% in capital loss in 10+ years for holding that stock. It is tragic. Here, I studied his email and Mudajaya closely. Of which, I had uncovered certain lessons that all investors should take note when investing for the long-term. They are as follows:
Part 1: Mudajaya Before 2013
Source: Google Finance
First, the question is: “What’s the fundamental strength of Mudajaya?”. For me, I find this to be important because investors could build long-term wealth, from holding onto stocks that are fundamentally solid as their businesses, assets and income continue to grow and expand in the long-term.
So, when it comes to Mudajaya, I learnt that it derives most of its income from:
a. Construction projects.
b. Property development projects.
Typically, it is vital to note the following:
- Projects tend to contribute financially based on their contract periods.
- Once these contracts expired, they ceased to contribute financially.
- Different projects deliver different profit margins as they are unique.
- Such stocks need to secure bigger contracts to grow sales & profits.
In Mudajaya’s case, it had reported a strong growth in earnings in 2004-2013 as follows:
From its Annual Reports, Mudajaya had revealed that it has secured a project in India to set up 4 x 360 MW IPP for US$ 721.4 million (about RM 2.64 billion). As for its other projects at that time, most were valued below RM 500 million. So, I discovered that the rise in Mudajaya’s profits was contributed hugely by its one “Big Project” in India.
Once again, there are 2 ways a stock can generate $1 billion in revenues:
- Have 1 customer that brings in $1 billion in sales.
- Have 10 million customers that bring in $100 in sales.
To me, I prefer the latter as the concentration risk is lower.
Next, we would look into Mudajaya’s valuation. In terms of its P/E Ratio, we can easily compute the following:
The subscriber’s average cost is RM 2.67 a share. Based on 43.5 sen per share, I suspect that the subscriber could be attracted to a low P/E Ratio of 6.14. In that instance, the subscriber “unconsciously” made an assumption where Mudajaya could deliver 40+ sen in EPS consistently in the long-term.
Such an assumption is flawed as Mudajaya’s earnings were attributed mostly by the one “Big Project” in India.
Also, based on the stock price chart, it is possible for the subscriber to view this stock as a “discount” as the stock had peaked at RM 4.00 in 2010 and 2011.
Part 2: Mudajaya After 2013
Eventually, the “Big Project” in India had reached completion. Without securing more “Big Projects” of such magnitude, Mudajaya had recorded a sharp decline in sales and subsequently, incurred losses in 2014-2020.
Red bars: periods before / during the investments in Mudajaya.
Blue bars: periods after making the investments in Mudajaya
Clearly, Mudajaya reported signs of deterioration in profits in 2014 and 2015. In this case, if an investor made a mistake investing in Mudajaya, it is possible that he or she could admit it and sell it off at RM 1.00-1.50 a share at that time.
Source: Google Finance
The capital loss incurred would be 44%-63% if he sold off at RM 1.00-RM 1.50 a share. However, psychologically, it is still not nice. Maybe this is one reason why the subscriber chose not to “let go”. The subscriber may be hoping for a revival, a rebound, or a resurrection of its stock price.
But such “revival” is not possible as it continues to make losses up till 2020.
Holding onto Mudajaya in 2015 after having a 40%-60% capital loss is likened to clinging onto a relationship that is not fruitful due to a fear of a painful breakup in the short-term.
Part 3: Hypothetical Case
The subscriber has invested RM 26,700 in 1,000 units of Mudajaya before 2013. Then, he chose to dispose of Mudajaya at RM 1.00 in 2015 and thus, recovered back RM 10,000.
Of which, the subscriber redeploys the RM 10,000 in capital and buys himself in total 4 Alphabet shares in 2015 at US$ 600 a share each (prior to 20-for-1 split). What would be his outcome?
Well, for a start, Alphabet Inc had increased its earnings since 2015 as follows:
Source: Alphabet Inc
Of which, his RM 10,000 investment into 4 Alphabet shares in 2015 had risen to RM 45,000 (80 shares of Alphabet valued at US$ 122.14 each). In essence, this subscriber would not only recoup back his capital loss from Mudajaya, but also, enjoy a great capital gain from his subsequent investment in Alphabet in 2015.
Source: Google Finance
Hence, the key to recoup capital losses is not to “cling onto” loss-making stocks. But rather, it is to:
- Sell off stocks that reported / incurred losses.
- Redeploy capital into stocks that reported growing profits.
- Make sure that the stocks invested are “attractive” in valuation.
Now, if you would like to turn your losses into winners, I believe it is best to first understand the educator’s mindset and skill sets when investing before signing up for a course. Thus, if you intend to earn growing and recurring dividends from your stock portfolio, you can check out the processes I use to build my own portfolio by our 1-Hour free training session as follows: