Jardine Strategic, the one that got away

Investment and emotions tend to get mixed, ultimately resulting in poor investment decisions. Our experience with Jardine Strategic is a case in point:

We sold the stock in June as the stock floated around new record highs, despite the generally weak market sentiment at the time. Our investment thesis was that market technicals were weak and we were more comfortable holding a larger cash position to capitalise on temporary weakness in the market.

The stock did slump temporarily thereafter, providing a short window of opportunity to re-enter (which we failed to do), and then rocketed out of reach.

What went wrong?

We unfortunately let our emotions get the better of us, and the urge to take profit on a stock in a slumping market was too tempting to resist. We failed to relook our investment thesis for the stock (which was a compelling buy despite being at a record high), and we ended up selling an extremely high-conviction stock idea. We also had no predetermined re-entry target price, which meant that we failed to load up when the stock declined.

A mistake which we will try not to repeat:

• Never sell higher conviction ideas; always start with the lowest conviction stocks

Even now, we would be hard-pressed to find a compelling alternative to one of the Jardine holding companies, which allow exposure (at a discount still) to their stable of blue-chip franchises. Would we buy the stock at this time? The stock is already one of the best-performing stocks in the STI YTD, and cliched investment mantras relating to chasing hot stocks spring to mind. Patience is a virtue when it comes to investments, and we may prefer to wait for the next crisis (which could be years later!) to time our entry into the stock.

Sold Jardine Strategic, market technicals unfavourable

We sold our shares in Jardine Strategic today (500 shares at US$21.22), despite the much anticipated sell-off in the stock market following huge losses on Wall St last Friday. Nonfarm payrolls were poorer that expected, renewing fears that the recovery in the US isn't going to plan. Also, a curious statement from Hungary's ruling party indicating that Hungary would go the way of Greece in terms of its debt problems further fuelled investor worries.

As we have described in a previous post, European debt problems are unlikely to simply disappear, and the likely result would be a sovereign default by one or more European economies. We have yet to see a selling climax, despite the sharp YTD falls in some markets.

While we reiterate that valuations are attractive for the stock market in general, we have to acknowledge the unfavourable market technicals - the Dow Jones and S&P 500 have both fallen below their 200 day moving averages, and the moving average now appears to be a resistance for both indices. With such bearish market technicals coupled with the fact that we have yet to see the market capitulate (or a failure/near-failure of one or two European banks), we have little choice but to err on the side of caution. With our sale of Jardine Strategic Holdings, we have raised the cash level of the portfolio to about 19%. We will also be looking to dispose of SGX to increase cash to about a quarter of the portfolio.

There is a good chance that we may be wrong in our reading of the market, which is why we will remain largely invested, but our larger cash holding will help us to buffer risks to the downside, and will be a useful source of ammunition should distressed opportunities appear.

Strong rebound in March 2010

The portfolio rebounded strongly in March, gaining 4.9% (net of an accrued performance fee of 20% based on a 6% annual targeted return), bringing NAV to $1.023, up 2.3% YTD. In comparison, the STI on a total return basis gained 5.2% in March, and is essentially flat YTD.

On a percentage basis, Best World was the strongest performer, with a 36.2% monthly return. The announcement of expansionary plans in the Phillipines was enough to incite trading in the stock. Renewed investor interest in Jardine Strategic Holdings sent the stock rising 21% for the month, a huge boost to the overall portfolio (JSH is our largest single position in the portfolio). As previously mentioned, we view the underlying businesses as highly attractive in their own right, and the parent holding company simply offers the opportunity to purchase the whole basket at a substantial discount to market value. Another notable performer was Wells Fargo, which gained 14% for the month (also a substantial holding for us). Worries over financial reform in the US appear to have subsided for the moment, and investors are beginning to focus on P/E multiples for bank valuations, instead of book value. Wells Fargo currently trades at a forward PE of 11.3X, which leaves much upside potential based on a PE multiple re-rating alone.

Noble was the chief laggard in the portfolio, as concerns over a director's share sale and uncertainty over the merger of subsidiary Gloucester Coal and Macarthur Coal weighed on stock performance. US coal giant Peabody recently made a takeover offer for Macarthur Coal on the condition that its proposed merger with Gloucester Coal does not go through. At stake for Noble is a near 25% stake in the consolidated Macarthur, which is poised to benefit from steel production in China. While uncertainty still lingers, a second refuted bid by Peabody suggests that Noble has the upper hand, but we will be watching developments closely over the next week or so (Macarthur shareholders vote for the Gloucester-Macarthur merger on 12 April).    

BEST WORLD 36.2%

JARDINE STRATEGIC 21.0%

Hotung Investment Holdings 18.3%

FRASER AND NEAVE 16.9%

WELLS FARGO 14.0%

KEPPELCORP 12.2%

GUOCOLEISURE 8.7%

Capitaland 6.9%

STI ETF 6.1%

CAMBRIDGE 4.5%

SPH 3.0%

CAPITAMALL 1.7%

BERKSHIRE HATH-B 1.3%

ASCENDAS I-TRUST 1.0%

SGX 0.3%

WBL Corp -2.8%

TAT HONG -3.3%

NOBLE GRP -3.5%


$6,000 of new money was added into the portfolio, resulting in the creation of 5865.10 new units on 31 March 2010.

Jardine Strategic looking to buy back shares

Jardine Strategic, our largest holding in the portfolio yesterday announced its 2009 full-year results. No surprises in terms of profit, as the major subsidiaries have all reported earlier. With about 621 million shares outstanding (after adjusting for crossholdings in Jardine Matheson), total reported shareholder equity of US11,743 million means NAV per share is US$18.91, which means that the stock is currently trading at a discount to book. Reported NAV based on market value of underlying holdings is much higher, at US$32.64, almost twice the last traded price. We continue to view Jardine Strategic Holdings as a cheaper alternative to get exposure to a great pool of businesses, rather than to purchase the individual companies. 

What is interesting from the latest announcement is that Jardine Strategic is looking to buy back shares to reduce capital. The company is looking to spend up to US$250 million to repurchase 13.9 million shares in a buyback tender offer, pricing each share between US$18 and US$19. While this seems a paltry amount compared to outstanding shares of 1,107,130,421 (last reported), it must be noted that about 81% of the company's shares are locked up in Jardine Matheson, which will not be tendering any shares. This leaves about 210 million shares left to participate in the offer. Assuming all holders participate and a pro-rata offer results, this will result in a 6.6% decrease in free-float, leaving free-float at about 18%. This could have some negative implications on the weighting of the stock in the STI, and other major market indices which consider free-float as a key criteria. While the offer price appears tempting, it is unlikely that we will be able to sell our entire holding of 500 shares in the indicative US$18-19 range, and given that NAV is about US$18.91 a share, we will choose to keep our entire holding in the company, and benefit from the reduction in the number of outstanding shares.

Portfolio flat in February

Our portfolio dipped marginally by 0.3% in February, bringing year-to-date performance (as at end February 2010) to -2.5%. On an NAV basis, the portfolio ended Feb 2010 at $0.975. In comparison, the STI (total return) gained 0.3% in February, but has declined 5% on a year-to-date basis.

Noble Group was the strongest performer, returning 10.1% as sentiment improved on commodity plays while Berkshire Hathaway benefited from the increased liquidity following a 50 for 1 share split. Tat Hong was the worst performer, losing 8.6% as investors discounted a weaker outlook for crane demand and increased costs for the construction sector after announcements of increases in foreign worker levies in the 2010 Singapore budget.

Stock Feb'10 Returns (%) in SGD


NOBLE GRP 10.1%

TAT HONG W130802 9.1%

BERKSHIRE HATH-B 4.8%

CAPITAMALL 4.7%

FRASER AND NEAVE 2.4%

KEPPELCORP 0.5%

SPH 0.3%

JOHNSON & JOHNSON 0.2%

BEST WORLD 0.0%

WBL Corp -0.2%

STI ETF -0.4%

ASCENDAS I-TRUST -0.5%

GUOCOLEISURE -1.6%

Capitaland -2.1%

JARDINE STRATEGIC -3.1%

CAMBRIDGE -3.3%

SGX -3.5%

WELLS FARGO -3.9%

TAT HONG -8.6%

Portfolio down 2.2% in January; commodity price impact on Noble's earnings

Equities generally had a rather poor January, leading to a 2.2% decline in the portfolio for the month. Assuming the portfolio started 2010 at $1.000, each unit ended the month at $0.979. Still, this was significantly better than the 6% decline in the Straits Times Index, or the MSCI World's 4.3% decline.

BERKSHIRE HATH-B	+16.5%
WELLS FARGO	+5.5%
SPH	+3.5%
CAMBRIDGE	+2.2%
KEPPELCORP	+1.7%

CAPITAMALL	-6.1%
TAT HONG	-6.2%
GUOCOLEISURE	-7.9%
CAPITAMALLS ASIA	-8.7%
NOBLE GRP	-11.4%

Berkshire Hathaway was the outstanding performer, jumping 16.5% as investors piled into the stock in anticipation of its addition into the S&P 500 (replacing Burlington Northern). Wells Fargo turned in a respectable performance (+5.5%) while SPH also gained on better-than-expected profits.

Noble Group was the worst performer, falling 11.4% as commodity prices wavered. Noble's dependence on commodity prices is often overestimated by most investors, who choose to lump the company together with other commodity producers who suffer a large hit to earnings when commodity prices decline. Noble's business model involves hedging inventory as it is passed along the supply chain, which involves little exposure to commodity prices. 

Noble's earnings hardly fluttered as commodity prices went from boom to bust in the 2008-2009 crisis, indicating a relatively low dependence on an appreciation in commodity prices. High prices require Noble to post more collateral to hedge, a drain on cash resources, which means that Noble would prefer lower, or at least less volatile commodity prices.

Despite the sharp declines, the stock is not terribly cheap as the market attempts to factor in strong future earnings growth (Richard Elman has been quoted as targeting US$1 billion in profit sometime over the next few years). The company has excellent management and is extremely focused on shareholder value, which has resulted in the stock being the best performer on the STI in 2009. As one of the few companies in the STI with truly strong earnings growth potential, we will want to accumulate more Noble shares, but will wait patiently for a better entry level to add to our existing position.

Initial Portfolio Holdings

On 31 December 2009, we held stocks worth $104,789.07, along with cash of $4,879.03.