Beware of SHORT-TERMISM

The one thing which I noticed about the market is that how 'short-termed many investors are" and many are trend followers. Even some of the most senior and experienced investors, pretty many of them are short term in nature. However, on the contrary, many great investors - they are looking much longer term in nature - from Peter Lynch to John Bogle who created Vanguard to Warren Buffett.

These are the fund managers and investors whom would look into potential undervalued stocks, identify the opportunities early, understands stocks as business and invest early.

The thing about business is that it is never short term - entrepreneurs have to stay through thick and thin - build the business, continue to invest and reinvest - enhancing their processes, brands, customers acquisitions etc. These however are seldom practised among many stocks investors. The excitement of getting in and out are much much more exhilarating.

Why am I saying this?

For a while, I have been looking at "Latitude Tree" for example. It was trading around RM0.60 for quite a while. One would know that with the return in pick-up for US real estate, and with Latitude selling 90% of its furniture to US, it will not have stayed at around 3x PE and market cap during then of RM60 million. US still has young population, and one should know that usually younger populated country like US will have strong demand for properties, despite the setback in and resulting crash in its property market back in 2008 - 2009. Young families will one day definitely be buying its own home although they may be renting for the short term. Today, with the properties market picking back up in US, Latitude is now trading at RM2.20 - almost 3x higher than the RM0.60 back in 2011. And I am seeing much higher volume today than those days when hardly any transactions happened.

Now, on Malaysian economy - what is at danger point? One can notice that at this stage, Bank Negara, government, commercial banks are tightening lending especially towards properties, automotive purchases.

We know that Malaysia is now having one of the highest household debt to GDP among Asian countries. Surely, all the banks are going to go slow on lending especially to consumers going forward. We now have a very low NPL of 1.2%. How much lower can it go?

On the Malaysian property end, you can read many stories of how dangerous it can be moving forward with extended lending for the last few years and ease of getting credit for many consumers. Of course there are some of those who do not think there is a bubble. We do not know who is right and who is wrong. But why buy at the high? And hope to sell higher. Shouldn't one be buying low and sell high , which is a safer route?

A stock should be looked at like a business. If you would invest into a business that is worth RM100 million today and in 5 years down the road, you are confident that it would be worth in your opinion RM500 million, would you invest? What if I tell you that you are not allowed to sell and in fact, you are not able to sell because it is not a publicly traded company. Would you invest? Yes, one may say but this is not what I see in the stock market behaviour today. Many are more concerned over what is the performance in the next quarter, more worryingly next week or next month. Many investors look at today, and discount the investment that a business owner or manager has to put in.

Businesses are never short term. It definitely has its ups and downs. The problem with many investors is that with his / her investment, they expect return next month. Then they move to a new stock. But to find a good company or business that you are confident with is very difficult. The keyword here is "you are confident with" which means a lot of time are to be spent on studying the company, knowing the business to some extent, be faithful and be patient.

However, that is not what I see and many are just falling into the speculation trap.

What's with the furniture business?

Over the last few days, I have looked (and looked again) at several companies, namely Latitude Tree, Lii Hen, Classic Scenic and Homeritz. Each and every one of the above has its own uniqueness and differences. Latitude's main customers are in United States with about 93% of its business derives from there. Lii Hen's customer base is very much US as well, but its main manufacturing is still in Malaysia. Latitude has very much moved to Vietnam taking opportunity of the low costs.

Classic Scenic on the other hand is a picture frame manufacturer, doing very well to maintain its margin as well as growth. Homeritz, which was the latest to get listed in much more in the upholstery business. It has been on the profit track record over the last 5 years, but the trend was not that consistent.

Among the four, Classic Scenic is probably the most consistent, but in terms of revenue it is probably the smallest. Market capitalisation though it is the highest - about RM131 million. The consistency as well as the dividend payment probably reward the company much more than its other peers. It is now trading around 10x its trailing 12 months income.

Now, what is pretty surprising is that besides Classic Scenic, the rest are trading at their low single digit PEs. Both Latitude Tree and Lii Hen are around 4x, while Homeritz at around 5x. See all below.

Homeritz stock details

Latitude Tree as I have previously written about and invested myself, is still trading at around market capitalisation of RM83.6 million  while its book value is higher than RM200 million. The Price / Book is 0.4x.

Latitude Tree's stock details

These are companies which provides dividends, and all of them provides dividend yield of more than 4%. All of them have pretty good cashflows, they have low receivables to turnover. Debt are very manageable. Despite the competitiveness, the business cannot go much lower anymore as both US and Europe are picking themselves up. The exchange rate is not to the favour of the export led furniture industry. If you notice though, the business is seeing pick up especially for both Latitude and Lii Hen where their market are very much United States. You can read all kinds of report on the US housing market, they are making a return, slowly but surely. It will definitely be positive for companies which have direct and indirect exposure to the industry.

Stock details of Lii Hen

All in all, we can have our apprehensiveness, but what is with the low valuation? The business is pretty cyclical within the year (due to seasonality where close to Christmas period is usually better) as well as over the years (due to costs, demand and fluctuations of exchange rates). But I am hoping to take opportunity by catching the lows. Seldom do I time the market, but in this case, I am just looking at the valuation and hoping for the pick up in sales and margins.

If one has fear as what happened to companies like Kimble and Kenmark, I think the balance sheet as well as their cashflows would have buried that fear. And they are audited by renown auditors - Latitude by EY, Classic by KPMG, Homeritz by Crowe Horwath, while maybe the auditor - John Lim and Associates - which I am not too comfortable is the one hired by Lii Hen.

If one has fear over timber industry, I can understand as it is susceptible to boycotts over Malaysian timber once a while, but for furniture, I do not see that.

I do not want to expose myself too much with this industry but their valuations are way too ridiculous for me to stay away from.

A relook at Latitude Tree

I know many would not be interested in this particular stock, but I am just looking at the company - Latitude Tree. It is in the furniture industry with 95% market to United States. Nothing fantastic, but the company has been consistently doing good with some ups and downs but seldom in the red. As in my previous article, if the US housing market is making a comeback, Latitude may be doing well. US Housing market is definitely doing a comeback or at least a revival. Warren Buffett is betting big on the revival and he is positioning himself well for the pickup in the housing market.

Now back to Latitude Tree. Some may be afraid of the previous Kenmark (another Taiwanese owned) news where the company just went under, with possibly some major write-offs in receivables as well as its inability to pay its debt. Look below, Latitude is different. Its receivables are very manageable - below 10% of its total revenue.

Its debt position is also very manageable with its debt to equity less than 0.5x. The bulk of the debt are short term, dangerous if it overuse them but I do not think so as it looks more like a position for its manufacturing concern with trust receipts loaded. This means it is borrowing more for buying raw materials - seems like.

Additionally, I have checked out this company. The management does seem to be very careful in terms of its actions over the years. More recently, it announced a 3 sen dividends (up from previous year of 2 sen), hence providing 4.9% dividend yield at current price. I do not think it is a Kenmark and it uses EY as its auditor which provides the additional comfort.

To top it off, the company is trading at less than 4.2x PE with potential better numbers in near to medium term future due to its market. Price / NTA does not look shabby either i.e. less than 30%.

Latitude Tree: If you continue to believe in US housing comeback

There is nothing fantastic about Latitude Tree except that it is a proven value stock. This furniture maker, with 95% of its market in the United States has a long proven history and yet it's stock price continue to be low. For example, the latest market value at the time of writing is RM62.7 million while its net asset alone is RM196 million - a 68% discount!

10 years Financials of Latitude Tree

In fact, I suspect the actual asset value could be worth more as some of its property assets were bought and valued during 2002. Land prices increased substantially since 2008 for both Vietnam and Malaysia. And Latitude Tree has massive land size in these two countries. I would suspect its properties in Vietnam alone would have been valued much more today as most of them were bought in 2002.

Besides properties, let's look at the the real deal - how sustainable is the business. There are not many small cap companies which I can highlight a 10-year financials, but for this one I feel obligated to do so. Why? Look at the trend.

For most part, it does not have a significant steady trend except Revenue, which has been on the steady rise - since 2002. Another positive trend - 2010 onwards, its operations in Vietnam has brought on much more revenue and profitability (ratio of 2.5:1) than Malaysia. This is mainly due to labour costs. Hence, Vietnam has become more important than Malaysia since.

It is however difficult to predict its profitability trend. One thing you notice is that for all the 10 years, it is profitable no matter how difficult certain years can be. As wood being the main raw material, is a commodity, its profitability can be affected by the fluctuation of raw material prices during the short period.

Its business is also seriously affected by the slow down in US housing market from 2008 until now. On top of that, US currency depreciation has also affected Latitude Tree badly. This is especially so for the last 2 quarters (1st and 2nd quarter 2012) results which are not shown here.


Despite the above, let's look at Latitude Tree as a company in a industry that is competitive.

1. Where some its competitors has failed, Latitude Tree managed to prove otherwise. It managed to successfully adapt to the costs challenges in the industry by its ability to move to a lower costs country - Vietnam and be successful. It is always challenge when you move your base as quality and many other operational factors may affect business.
2. The challenges that it faces because of United States as its only market does not too severely affect the company. Yes, profits dropped but it still managed to register profits despite all the setback. 
3. This is added by the weakening of US Dollar by as much as >15% since end of 2010. Believe me, unless the dollar position are hedged, it will affect any exporters from Malaysia or Vietnam quite substantially. During the period of significant Dollar decline, exporters could be caught in situation where they provided quotations a month or two prior to the order and by then, Dollar already declined by 5% to 10%. These are also seen in the rubber gloves industry.

Now, all the bad news are or should already be in for Latitude Tree...I think. The question is for how long more, they will face challenges like this? US housing market has yet to pick up from its latest statistics although the labour market has shown signs of improvement. Will it pick up back? For sure, the housing market being such a significant contributor to the economy will not slump forever for such a big market like United States.

Another question, will US Dollar fall further? How much more will it drop?

These are questions that Latitude Tree cannot answer. What it manages to do is to pull through the tough times as it has proven in the past.

And the company is trading at a price which is much lower than its book value! This could be attractive enough.

Serious Investing!