Lawar kah Melewar?

One of the best selling advice that I have read is:

A stock begins to show decaying fundamentals, such as lower profit margins or lower return on invested capital

Hmm… decaying fundamentals? Err… Ah Poh says ‘Fat-Kan-Moh’ isn’t it? :D

Doesn't this mean that the company ain't the same anymore? Say if i invest in a company (errr.. Ah Poh says we ONLY want to invest in a GOOD company… hor!) and the company fundamentals starts to decay, isn’t this telling me that the company ain’t NO longer good?

So should i kasi chance sama dia?

Or should I just lari kuat-kuat?

Do the H&H on it? HOLD and HOPE that company will become good again in the future?

However, the logical thing that should be considered is the issue ‘when’. When will the good again happen? One year? Two year? Three Year? Four year? Am I willing to hold that long? And while I am holding, what will happen to the stock price? If the stock fundamental continues to deteriorate and decay, what would happen to the stock price? Would the stock price decay too? Isn’t that not a possibility? Would I look kleber holding and hoping a stock and watch the stock price decay along with the stock fundamental?

So isn't the best time to sell a stick is when the stock begins to show decaying fundamentals, such as lower profit margins etc etc?

How?

Here is another famous teaching:

Remember that a stock represents a business, and, when its management or its products fail you, sell -- without delay and without sentimentality.

Sooooooo........ I was looking at Melewar Industrial Group which announced their latest quarterly earnings recently.

Now Melewar used to be that stock called Maruichi and yes Maruichi used to be a decent stock considering its track record…

        Sales      Net Profit  Margin
2001    378.328    59.502      15.73%
2002    352.320    53.935      15.31%
2003    390.849    56.201      14.38%
2004    462.255    64.441      13.94%

So there was some justifications for an investor to buy and hold this stock since 2001. The company was indeed making some decent moola.

Now take a look at the following quarterly earnings table from Melewar, which took over Maruichi’s operations since the beginning of FY 2005. Have a look here: Melewar's track record

From fy 2001 to fy 2004, this stock represented a company which was had net profit margin around 13-15%. Which was pretty decent.

However, since the start of fy 2005, the classical lower net profit margin started to emerge.

For 2005 Q1, a lower net profit margin of only 9.69% was seen. Two quarters later, 2005 Q3, Melewar net profit dropped to an alarming 6.48%.

So from a company having net profit margin of around 13-15%, this company is now operating on a much lower net profit margin of only 6.48%.

Now applying the best selling advice, ie selling a stock which BEGINS to show signs of decaying fundamentals, such as lower net profit margin, shouldn’t one acknowledge this issue and sold Melewar after it reported its 2005 Q3 earnings?

A fundamental sell signal had been generated on 16th December 2004.

Quarterly rpt on consolidated results for the financial period ended 31/10/2004

Now look at the subsequent quarterly earnings from Melewar. Look at the very latest quarterly earnings, Melewar announced a truly shocking quarterly earnings of only 1.252 million or a net profit margin of only 0.84%.

They say a picture paints a thousand words….

Have a look here !!

Ah…yes... when a stock displays some weakness in their fundamentals it does provides one with opportunity... but in the case of investment, this (opportunity) is provided if the weakness or subdued financial performance is only a temporary situation. Cos if the subdued performance would drag on or continue for a long(er) time, surely this would render the stock investment as unattractive.

Tiok boh?

So what i am saying is this... when we see a weakness in a stock's financial performance (which leads to lower price) sometimes this is an opportunity to invest in PROVIDED if the weak financial performance is temporary, ie a blip. For if the weakness continues, some might even view it or define it as deterioration in the company's financial fundamentals.

Remember the previous mumbling of ACPi? (see I wanna Hold your hand.. )

ACPi used to be a share trading at around 3.14++…

Now? ACPi trades around 0.66 sen.

This is the same unreal risk if the decay in Melewar’s fundamentals continues. If Melewar's quarterly earnings decay somemore, the stock price has a rather good chance of decaying also!

Soooo…. if some half-baked bugger asked u to bet on Melewar….what would you do?

Does it make much sense in betting Melewar rite now? Betting on a company whose earnings is on a clear downtrend? Betting on a stock when we are unsure when its earnings will turnaround? Does it sound like a smart bet?

You tell me… I could be wrong here…

(Melewar is now trading @ 1.26. Its warrants is trading @ 0.205)

:D