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NeraTel: BUY. Target price $2.00.

Sunday, August 11, 2013

Some people ask me if it is still a good time to buy into NeraTel. Since I was willing to pay 70+c recently for its stock, it must be a good idea to buy at the current price too, especially when a dividend of 2c has just been declared, right?

I think some people got me wrong. They have to understand my motivation for being invested in NeraTel in the first instance. It is primarily for income. For income? Yes, I added to my long position in the stock in a big way not too long ago because I was looking for a non-REIT to become a bigger part of my investments for income. NeraTel fits the bill.

"So, the 10x increase in my long position in NeraTel stems from a need to look for alternative investments which are high yielding but with a low or zero probability of being affected negatively by interest rate hikes." Source: Motivations and methods in investing.

As I revealed, I first got into NeraTel not at 60c or 63c. I first got into NeraTel at 40.5c. I know people who got in even lower. I didn't do much by way of due diligence back at 40.5c. So, it was a smallish position. I just bought and held.

Due diligence in June confirmed that:

"This is a net cash company and has a record of paying consistent and meaningful dividends. Its last payout was 4c a share with an EPS of 5c. At today's closing price of 61c, we are looking at a dividend yield of 6.56% which is very decent. With its recurring revenue streams, dividends are probably sustainable." Source: Which stocks have I been accumulating in June 2013?

Now, at 80c a share, with a DPS of 4c, we are looking at a dividend yield of 5%. That is still pretty decent for anyone who is investing for income but I don't think of it as extraordinary. I think of it more as ordinary. So, in my opinion, it is a fair price. Not expensive but not cheap either.

Then, why did I buy at 70+c? Regular readers might remember that I did that only to restore my long position after a partial divestment at 84c earlier. I did not end up with a long position bigger than what it was prior to that partial divestment. This is consistent with my primary motivation to have NeraTel contribute meaningfully to my passive income. The gains from trading was a bonus.

So, do I not think this is a good time to buy more of NeraTel's stock? Weren't NeraTel's results good? Don't I think NeraTel will be able to deliver on their KPI of a 100% growth in profits over the next 3 years?

Paraphrasing my recent comments on my Facebook wall (https://www.facebook.com/assi.ak.9), I think the results are good. It is a good business to invest in. However, with the share price being where it is, anyone buying now is buying into a belief that the company will do even better in future. Much better. This is not hard to believe but there is, obviously, a risk that we could be wrong.

3 years although not long is not short either. Many things could happen in 3 years. If 100% growth could be achieved, this stock should be worth $2.00 by then. $2.00? Yes, this is just a back of the envelope estimate.

How do we balance the history and the future of the company? Looking at past performance is easy but to look into the future with accuracy? That is definitely not easy. However, this does not mean that people will not try to do it and there are many BUY calls with their own target prices and fair values for the stock. We have to remember that all these are based on expectations.

Although Mr Market is able to accept much higher PERs for growth stocks, if NeraTel should disappoint, Mr. Market will show his displeasure very quickly in the usual way. So, what are the downside risks?

If someone is still wondering if he should be investing in NeraTel at current prices, very importantly, ask what is his motivation for investing in the stock. The investment is a good fit for my motivation at the prices I got in. If I were not yet invested, I might initiate a small position. Is it a good fit for his motivation?

As I am corrupted by TA, I also said that investing in NeraTel at current prices is possibly not for the faint-hearted and if we look at the weekly chart, it is easy to see why I said that:


Now, no chartist in this world is able to tell us that NeraTel's share price will definitely retrace to test any of the supports shown by the Fibo lines. No chartist can tell us that NeraTel's share price will not go higher. Heck, depending on one's motivations, charts might not even be relevant!

On that note, happy holiday!

12 comments:

matchbox said...

Dear AK,

Allow me to pick at your brains for abit, please?

When holding stocks of a fundamentally strong & consistent company, bought at an attractive price for long term dividend income investment - At what price level do you decide to do some profit taking and what price level to buy back the units you sold (Assuming the fundamentals have not changed)?


matchbox

AK71 said...

Hi matchbox,

Some might use FA. So, if the stock is no longer cheap (i.e. it has become overvalued), sell. Then, buy again when it becomes fairly valued or undervalued.

Some might use TA. Prices do not go up in a straight line. They hit resistance and pull back. In such an instance, buy again at support.

In the case of NeraTel, I used more TA than FA. Anyway, it was a trade and TA is more appropriate for a trading mentality.

matchbox said...

Dear AK,

I see. Thank you for sharing the methods you use.

I guess for the case of Neratel, i should looking at price levels where yield is compressed to unattractive levels and a high volume long white candle to do some profit taking. :)

matchbox

AK71 said...

Hi matchbox,

Sounds like you have a plan. Indeed, if the yield should compress to 4% or less, the case for staying invested in NeraTel for income in the short term is much weaker. Assuming a DPS of 4c, a 4% yield means a share price of $1.00! :D

Capricon said...

AK
How do you determine it is no longer cheap and hence sell even when fundamentally still maintain ? Base on yield ?

Thanks

AK71 said...

Hi Capricorn,

Good question. When to sell?

Something in the book I am currently reading really resonates with me.

"... if you know why you bought a stock in the first place, you'll automatically have a better idea of when to say good-bye to it." Peter Lynch.

If you haven't gotten your copy, I would really recommend that you get one: One Up On Wall Street.

If the EPS should double in three years, could we see DPS doubling? We might but even if we don't, we should stay invested if the share price should double which would mean that yield shrinks 50%, everything remaining equal. So, yield alone would not provide us the whole picture.

Capricon said...

Hi AK,
We buy to make a profit out of it, but how do you determine it is overvalued and cash out ? And wait again.

Probably the thing in my mind is trying to sell at the high which we can't outsmart Mr Market.

But would you be able to share how u determine overvalue in your personal opinion ? I tend read in most value investing seminars or blogs, always never tell you how to determine overvalue stocks. :)

AK71 said...

Hi Capricorn,

You know, by coincidence, I thought of blogging about this 2 weeks ago but it is a really difficult topic to blog about. So, till now, it is half finished. I don't know if it would ever see the light of day.

I think anyone who can tell us if something is overvalued is doing so based on his own measurements which are probably different from someone else's anyway. This is because valuation is a subjective exercise.

So, this blog post was really inspired by when people asked me what do I think is a fair value for NeraTel. Do I really think fair value is $2.00? Well, given a set of conditions, which if met, it could be.

One reason for selling a stock is if it hits our target price. So, if it hits $2.00 3 years down the road or earlier, we sell. Simple.

Of course, we could complicate things by looking at whether it could continue to grow at a breakneck speed. If it could, then, $2.00 could still be too cheap. See?

There are no absolutes and that is probably the reason why we don't see people really telling us with a set of rigid rules how to determine if a stock is overvalued. ;)

Capricon said...

hi AK,
i absolutely agreed with you that valuation is subjective.

However,it would be helpful to share your past experiences and how you did the valuation. Well, of course it does not mean the same shall apply for future. :)

It is about learning from each other, hence looking forward to your post.

cheers

AK71 said...

Hi Capricorn,

I hit a writer's block with that blog post. Honest.

If I cannot write an effective blog post, I rather not publish it. This won't be the first too. I have had several such unfinished blog posts.

Let me revisit the draft when I have the mood to do so and see if I could overcome the block. No promises. ;)

Toma said...

Hi AK,

Have been following all your posts on Neratel and did some analysis on the company as well. Am quite interested in buying the stocks but would like to seek your advise.

Would you recommend to enter Neratel at current price 75cents/share? Is it considered over-valued in your opinion?

Thank you!

AK71 said...

Hi Toma,

Off the top of my head? I think it is a fair price to pay for Neratel. Not overpriced. :)

If we would like to buy it undervalued, then, perhaps, it would be a good idea to wait a bit. Will the share price go lower in future? Your guess is as good as mine. ;)

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