After going through a steady uptrend for a few months, the U.S. stocks have finally corrected in September. Luckily, the fall was around 10%, and interestingly, crude oil and gold have both retraced in harmony with the stock market. This is not a bad sign because the market had anticipated a healthy pullback earlier. The US Federal Reserve Chairman on 16th September 2020 stated it was planning to hold interest rates at nearly zero until at least 2024. This message shows that the US economy is far from recovery, but also exerts sense of comfort to the stock market.
In Malaysia, the Bank Negara has decided to keep Overnight Policy Rate (OPR) unchanged at 1.75%. It also indicated that the labour conditions, household spending and trade activity are improving. While the Malaysia Composite Index has corrected below 1500, it managed to climb back to this critical level in a few days.
As you can see, in either macro or domestic view, the market is finding new catalysts to move forward, whether it’s vaccine, positive economy data, recovering pandemic condition or any beneficial sectors. A new phenomenon though, is that you can see the market sentiment is now susceptible to the gloves sector performance. For instance, when there are good news for vaccine development, glove stock prices would tank and the whole market sentiment turns negative. To be more defensive, you may look at sectors and counters with lower valuation. Given a stabilised US stock market, I believe this strategy offers higher chances to win. Before we look into that, let us see if the US stock market is doing fine.
Disclaimer:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.
Based on the Dow Jones Industrial Average (DJIA) chart on 15th September 2020, the latest candles are still standing above the pink (MA50) and golden (MA200) line. It means the uptrend remains intact. Its immediate resistance is 28000 followed by 29000. Barring unforeseen circumstances, I believe the probability of breaking 30000 remains high.
Opportunities in the Bubbles
With high indexes – the higher the risk scenario and you may want to consider adopting a cautious strategy in stock selection. For instance,
Businesses with huge cash reserves
Such as Lotte Chemical Titan Holding Berhad (LCtitan), (code: 5284)
LCtitan is the largest integrated producer of olefins and polyolefins, and one of the largest polyolefins producers in Southeast Asia. Simply put, it produces resins, which is the raw material to produce plastic packaging, facemasks, shields, gloves and so on. The raw material of resins is naphtha, which has been going down due to the low crude oil price. On the other hand, the recent Hurricane Laura that made landfall in the US has caused disruption among the chemical plants, which led to price hike for chemical products such as PP and PE.
With lower material cost and higher selling price for LCtitan’s products, it paints a brighter picture for its coming quarter’s bottom line. In addition, the company has showed attractiveness in its balance sheet, valuation and cash flow. The followings are a few highlights:
1) LCtitan’s net asset per share stands at RM5.34, in comparison to its current price of RM1.85.
2) The company has zero debt and a net cash reserve of RM3.8 billion. This translated into cash per share of RM1.65, which is 90% of the price!
3) LCtitan has generated operating cash flow of 242 million in quarter 2 and 512 million as at 30th June 2020.
4) The company has a dividend policy of 50% of its profit, and has been paying yearly dividend since listed in 2017. If the company makes the profit as year 2019, its dividend would be 17 cents per share, which translates to a dividend yield of 9% based on current price.
5) Higher profits in the future is likely, given LCtitan’s operating rate has jumped 20% to 86% during the quarter with the completion of plant turnaround activities and subsequent ramping up of production.
6) Technically, LCtitan’s chart has showed that the candles moved above the MA50 line. It means mid to long term investors have started accumulating. At the time of writing, its price is RM1.85, which has gone up by only 10% from the recent low.
Conclusion
With the above example, it shows that opportunities are still around. Therefore, do not only look at the high indexes but instead, let us return to the company’s fundamentals.
