How to invest in equities during volatile market

In the past two weeks, we saw the S&P 500 index dropped from 1263 to 1158 that's a 8.3% drop. Historically, a bear market is determined if an index drops more than 20% within two months, and we had witnessed a 17.3% drop in the S&P 500 index from July to August this year. However, the index recovered 16.9% once again within the September and October period, this volatility is a real roller coaster ride for most investor.

With such volatility, it is no surprise that investors holding certain individual stocks may have suffered significant losses and some of it may not have seen the light of the day since then, even during the sudden surge in October. One example would be MF global, the investment service firm declared bankruptcy mainly due to it's wide exposure to European sovereign bonds which causes major shortfall in customer's investment accounts. This unsystematic risk, known to be mitigated by diversification, can be detrimental to investors if they put all their eggs into one basket for etc. MF Global shares.

Thus, diversification may be the best bet. However, as individual investors, it would be hard to determine the best way to invest their money as most people wouldn't have the time to look into companies balance sheet, keep track of corporate actions and also the skill sets to determine which is a good buy and what is not. Most investors also lack the ability if not, capacity to invest in many equities at once mainly due to high brokerage cost and also the lack of exposure to other markets.

The solution is to invest in mutual funds, in Singapore we call it Unit trust. Unit trust is a form of collective investment constituted under a trust deed. Fund managers has a specified investment objective to determine the management aims and limitation. This is made possible as fund managers pooled together many investors money and allocates the funds into different markets and assets classes. Fund managers are usually well trained, qualified and have a group of individuals assisting him in making his investment decisions. These people are investment analyst, fund administrators and fund accountants and are legally enforced to be working for the benefits of the customers. Unit trusts in Singapore can be purchased through all the local and foreign banks (Citibank, Maybank, Standard Chartered etc.). Recently, retailers are able to buy it from sites like fundsupermart and dollardex at a lower cost but subjected to an additional platform fee.

While having the idea of professionals managing your money is considered one of its perks. Buying a unit trust comes at a cost as it's not available to be purchased in the stock market unlike traditional stocks and shares. Usually, there is a front end sales charge usually up to 5% of total amount and also yearly management fees ranging from 0.5 - 2%. Investors must be aware of these when they buy and usually if they buy in big amount, they are able to bargain for a lower sales charge. One of the most attractive aspect of Unit trust is the probability of fund managers achieving Alpha due to it's active investing methods. This happens when fund managers are able to beat the performance of an index that the fund are being compared against. An example can be using s&p 500 index as a benchmark and the funds being allocated to different companies or similar companies within the index at different weight-ages. However, during the Global Financial Crisis, it is realised that as little as 40% of fund managers are capable of doing so.

The idea of investing in Unit trust is to diversify your money into different asset classes to avoid mishap and unsystematic risk with the expertise of a fund manager. Investors are advised to have a medium term investment horizon or a target profit before investing.

Price of gold went up the hill, Price of Silver Sailed through Space!

The turmoil in the Arab world has brought oil prices to a 29 months high as the Libyan Dictator Muhd Qadaffi refuse to step down from his position that he had held over 40 years, amid mass protest and demonstrations. Such incident was not the first of it's kind. During the past few months, the world witnessed a regional uprising among some of the arab countries and China?. Reasons can be attributed to the rising food price, the citizens consciousness for more democracy and rights and of cause the result of years of suffering under a regime that had not help the country to progress much into a modern society.

Politics aside, investors took opportunity of the mayhem and seek safe havens in commodities especially in oil, gold and silver. While Gold has hit consecutive all time highs in the past weeks. In terms of percentage yield, silver has been a more favorable bet as investor could potentially realize at least a 30% profit if they were to put their money into silver since the end of January. While the previous year has seen the rise of silver of up to 80%. The beginning of the year saw some draw backs and then the resumption of its bullish behavior yet again noticeably during the whole month of February.

Silver all time high goes all the way back 30 years ago at the price of $49USD/Oz and back to $10 some time later in due to market manipulation by two infamous traders. Until then Silver had not seen the light until 2009. There are assumptions that silver trade on the scale known as the Gold and Silver Ratio thought to be in the range of 11-14 historically until recently where gold price surged to a number of all time high as silver stubbornly lags behind, messing up the ratio to an uneven proportion. The Ratio today is almost 40 and if the trading mentality still persists, silver should range between $80-100 USD /OZ at the current rate. So for people who are looking to get into these so called safehavens, i recommend you to get into silver but take precaution that this surge in price is technically caused by the middle east crises and may not be a sustainable bet. The price that i predict most investors would wanna see is at 40usd/oz and then if the situation stabilises in the middle east, we'll probably see huge profit takings and silver will grace back its 25-30USD/oz range again. Pure technical play here.

Verdict: Long term play for silver is the best bet, but look for any pull back before getting vested as this 30 years record price seems unsustainable if not unreal.

Declaration: All opinions are my own and i shall not be liable for any losses caused by my assumptions and analysis.

MIDAS ANNUAL REPORT 2010 ANALYSIS

		2010	(s$000)	2009
Revenue		207413		149993
COGS		137939		93398
Net Profit		48508		37259
Cash		244722		101223
Receivables		99984		54934

Midas reports a 2010 year end net profit of S$48.5 mil, a yoy growth of 30.2%. Revenue increased yoy by 47.7% to S$207.4Mil. Gross profit margin however falls from 37.7% (2009) to 33.5% (2010). Current assets increased more than 2 folds from s$174million to s$381million. This is probably the result of a significant cash inflow by the proceeds of Midas Dual listing activities in the Hongkong Stock exchange during the third quarter of 2010 coupled by a double leap in receivables and inventory holdings (yoy).

Financial Ratio		2010		2009
Debt to Equity		0.31		0.35
Current Ratio		3.4		1.8
Net Profit Margin		23.40%		24.80%
Gross Profit Margin		33.50%		37.70%

The slight decrease in margins is mainly due to higher Cost of goods sold. The rising price of commodity which includes Midas primary product Aluminium is the major cause of the COGS increment. Stability of debt to equity ratio implies on Midas ability to be consistently solvent. Higher liquidity ratio increment in 2010 means that Midas may effortlessly be able to meet its short term obligation. However, the huge increase in receivables is a slight concern in terms of potentially incurring more bad debts for Midas in future.


DUPONT MODEL

		2010		2009
ROE		11%		20.70%
		=		=
Tax burden		81.20%		80.80%
		x		x
Interest Burden		96.90%		98.30%
		x		x
Operating Profit		29.70%		31.50%
Margin		x		x
Asset Turnover		35.60%		42.90%
		x		x
Financial Leverage		1.33		1.95

The above analytical method is done using the extended five part DuPont system of analysis. This approach is used to analyse the Return on Equity (ROE) of Midas using different function of ratios to break down its ROE value.

2010 Sees a marginal drop of ROE from 20.7% to 11% from the model above. The main culprit of such decline is mainly due to lower Financial leverage (Higher equity) taken by Midas, Asset turnover rates and lower operating margin. While lower financial leverage may not be all bad for the company itself, shareholders should be concerned by Midas aggressive stance in transferring majority of its risks to its equity holders amid planned expansions of more Aluminium production plants throughout China. While we celebrate Midas welcoming surge in its revenue, we must still be mindful that such results may not signify that Midas is doing well in successfully generating substantial revenue with the assets it has on hand. One could see from its balance sheet that Midas is holding too much Cash and Shareholder must take note of what Midas may be doing with these excessive warchest at its disposal. The slight decrease of Operating Margin is again due to the increase in cost of good sold and is regarded as a conservative decline considering the effect of the firm's expansion strategy and its huge number of contracts on hand.


Comments on Value: Price-to-book Ratio lowered down to 1.6 from 2.2 previous year indicating that the company is more valuable as compared to last year's book ratio at its current market price. Reduction of ROE may stir some concern among value investors although percentage of returns still remains marginally above the warning sign of below 10%. The price of Midas share will continue to be affected by news concerning uprising in the Middle East due to Midas vested interest and also adverse news related to China railway minister's share purchasing scandal. These will continue to incite fear on shareholders to further sell on any unwelcoming release of information although its highly speculated that it should not significantly affect Midas current projects. Price of range between 0.72-0.78 is still relatively a value buy as it remains at 52 weeks low.

Verdict: If the news remain intact concerning the already battered stock. Investors should ride the winds of change and expect the shares to hit 0.80 or higher in the month of March follow by reports of higher yoy revenues growth, increased net profits and more contracts. Price target ($1.25 before 2012).

Declaration: Analysis was based on my own opinion and done without any comparison to its industry peers and also on the basis that I'm a shareholder of Midas Holdings. I hold no responsibility for any loss incurred by anyone as a result of my proposed target price and analysis of this company.

Analysis of MIDAS Holding

Analysis of MIDAS Holding 2010 Annualised Financial Statement 25/02/2011 Stay tune! 2300 GMT + 0800