Lately, I received an email from Mr. Teh (Teh) as follow:
It is intended to ask about my approach to a stock that is ‘turning around’. In his email, he did not reveal the actual identity of a stock. But, he attached 2 images on the stock’s financial data, where:
- Image 1: Teh’s summary of the stock’s annual financial data.
- Image 2: the stock’s quarterly financial data
Image 1:
Image 2:
So back to the question – “What will I do?”
- If I do not own this stock, would I invest in it?
- If I do own this stock, do I add more, keep or sell it off?
Well, let’s get into it.
#1: Figures at Image 1 are “Faulty”
At Image 1, Teh’s computation of shareholders’ earnings and EPS were faulty. In this case, focusing on financial year (FY) 2022, he had used the following figures to calculate its shareholders’ earnings and EPS:
Teh’s Mistake:
Thus, my first step is to rectify these figures as follow:
Rectification:
As Image 1 offers quarterly revenue data, I shall proceed to calculate the stock’s annual revenue.
Add Revenue:
At the end, the edited annual financial data of the stock is as follow:
Edited Annual Financial Data:
With it, we are now ready to assess the financials of this stock.
So, let’s move onto:
#2: Financial Assessments
Based on the edited annual financial data of the stock, I discovered:
- 2018-2021: Revenues and Earnings
Revenues had declined. Earnings had turned into losses in 2021. So, the numbers clearly don’t look good. So, the question is: ‘Why is that so?’. - 2022: Revenues and Earnings
Revenues improved but losses widened. Again, the question is: ‘Why?’. - 2020-2022: Dividends
The stock stopped paying dividends starting in 2020. Hence, what I’ll do is to check out its “cash flow statements” for the past 5-6 years to study its actual cash inflow and outflow.
Since the stock’s financials had deteriorated, I believe such is the ‘root cause’ of the fall in its stock price from RM 1.05 in 2017 to RM 0.32 in 2022. Hence, it is a classic example of “Falling profits = Falling stock prices”. Such a price fall is not a discount to grab as it is reflective of its deterioration in business fundamentals.
#3: But, It Churned Out “Slight Profits” in Q1 2023
So, is this a sign of a possible “turn around”?
I don’t know.
But, I would say that such is not my concern.
This is because my goal is to build a sustainable dividend-growth portfolio. So in my portfolio, I focus intensely on the fundamentals of a stock. This means, their business models and delivery of profits and cash flows are solid. “Being focused on fundamentals” is key to success. Thus in the above case, I don’t try to ‘guess’ as to how this stock’s financials or stock price will or might perform for the next few months or years.
Maybe, there are other people who focus on “turnarounds”. I’m not into those. This is because “turnarounds” tend to attract people who are into capital gains, not dividends or cash flows.
Think about it.
Why would people buy a fundamentally deteriorating stock at RM 0.33 a share, which is 70% below its stock price of RM 1.05 in 2017? Are they trying to buy at RM 0.33 and sell at RM 0.50, RM 0.70, RM 1.00, … etc in the future? Could such a tactic work in the stock market? Is this the best way to make money?
I don’t know. What I know is: ‘If you are into this, I can’t help you.’
Conclusion: What Will I Do?
If I don’t own this stock, I avoid it. But, if I do own this stock, I would sell it off in the market (whatever the price may be). I would then recoup the capital and be using the capital to invest in stocks that have better fundamentals than this one mentioned.
That would be my take.
That is it for now.
For those who want to learn how to invest better and avoid mistakes like the illustrated above, you may check out a free training session:
Link: How to Build a Stock Portfolio That Pays Increasing Dividends?
