Sunday, December 31, 2006

Tis the Season to be Jolly!

Tis really the Year to be Jolly! And what a year it has been for the Asian markets. The folks at Margin of Safety (MOS) principally feature ideas available on the (usually) sunny island of Singapore but frequently intersperse it with choice picks from the region as well.

With the inclement weather lashing down by the bucket load, we thought it would be interesting to start our own MOS Awards for the ideas featured on this calendar year. Initially, there were arguments against such a format of basing returns on a calendar year because value picks often take time to unlock. But, we hope our regular readers understand that this is really a tongue in cheek exercise on a damp afternoon.

And there is no better way to kick off the MOS Awards by examining the biggest red blot on the report/blog card...

#1: MOS Top Dog of 2006: Magnecomp: -44%
Featured in March, Magnecomp International Limited is a company engaged in manufacturing and sale of suspension assemblies, metal stamping and sub-assembly of stamped components, tooling and die making. It appeared cheap on a sum of parts basis and had indeed moved beyond the price on feature date subsequently. However, a profit warning issued in May/June sent the whole pack of cards crashing through the floor. What went wrong? On hindsight, at the price of S$1.37, Magnecomp may have incorporated growth expectations and thus lacked sufficient discount from intrinsic value. However, in recent months, things are brighter and an opportunity may surface at current prices.

#2: MOS Star of 2006: Thomson Medical Centre: +84%
A meteoric rise since being featured in February when it was trading at only $0.29. At the price then, the counter was trading marginally under book. It has nearly doubled since as investors zeroed in on its cheap valuations and exciting growth prospects in Vietnam.

#3: MOS Top Foreign Star: Sincere HK: +36%
We started featuring foreign listed securities after lamenting about the dearth of value plays on the local bourse. So, its apt to have a special category for them. Bagging the bragging rights is Sincere HK which staged a stunning reversal in fortunes after being featured in early November. Investors took to the counter overnight after seeing that Sincere HK is well poised to tap on the rising affluence in North Asia.

The entire list of ideas discussed this calendar year are set out below:

Date* --Security -- Price then -- Price now** -- Return to date
16-Feb --G&W -- 0.18 -- 0.295 -- 63.9%
23-Feb --Thomson Medical Centre -- 0.29 -- 0.535 -- 84.5%
14-Mar -- China Lifestyle -- 0.235 -- 0.42 -- 78.7%
16-Mar -- Magnecomp -- 1.37 -- 0.77 -- (43.8%)
20-Apr -- MTD -- 1.88 -- 2.01 -- 6.9%
29-Jun -- BIL -- 1.35 -- 1.68 -- 24.4%
18-Aug -- Micro-Mechanics -- 0.48 -- 0.69 -- 43.8%
10-Oct -- Frontline -- 0.135 -- 0.125 -- (7.4%)
6-Nov -- Hotung -- 0.13-- 0.135 -- 3.8%
7-Nov -- Sincere HK -- 0.57 -- 0.78 -- 36.8%
4-Dec -- Yellow Pages -- 1.12 --1.12 -- 0.0%
7-Dec -- Ayala -- 510 -- 540 -- 5.9%

* Date refers to date featured on blog.
**Price now refers to price on market close on 22 Dec.

It has been a great year for the Straits Times Index - returning nearly 24%. On the other hand, Margin of Safety's featured securities turned in only marginally higher returns - about 24.8%. Strictly speaking, the returns are not comparable for the latter return was derived by equal weighting the returns to date of all securities. But we thought it might demonstrate how difficult it is to beat the index. Some may consider the performance of MOS' picks laudable as none were index securities. However, others would question the effort in such arduous stock picking when index tracker funds are readily available.

Indeed, in a situation where the rising tide raises all boats, we also cannot conclusively attribute the returns purely to alpha generated by superior stock picking ability. The true test, may well be when the bad times strike. As the year comes to a close, we make merry and revel into the night. We consider it apt to leave you with a tidbit of wisdom from the venerable and respected Mr Warren Buffett who wrote in the shareholder's letter of Berkshire Hathaway in February 2002: "It's only when the tide goes out that you learn who's been swimming naked."

Until 2007, MOS is ghost.

Important note: This is not a sample or model portfolio. The author and his/her associates may not be holding onto any of the above named security. It is also not a recommendation to buy or to continue holding onto any security. The above is purely for illustrative purposes.



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