Sunday, 12 July 2020

SINCE PEL'S CALL TO BUY BIG 4 GLOVE STOCKS A MONTH AGO, THIS HAS HAPPENED.....


The premise was a very simple one. In hindsight, it may seem obvious, but there were a lot of doubts and skepticism at the time. Everyone was calling a bubble in March, April, May.... and so on.

On 8 June 2020, we published a blog post - you can read it in its entirety, but our analysis essentially boiled down to several key insights:

1) If you really like glove stocks, buy the Big 4 - KOSSAN, HARTA, TOPGLOV, or SUPERMX. They offer the greatest profit potential, because they have all sorts of inherent fundamentals advantages.

2) Avoid hype - this means the penny stock companies that are just getting into the gloves game - and stick to the obvious plays. The Big 4 will actually make lots of money from selling gloves, because demand is set to exceed supply for quite a while until this imbalance is addressed. It sounds stupid simple, because it is....

3) The Big 4 will do better than the second tier glove players, many of whom have already enjoyed spectacular price gains. The Big 4's upside potential from both stock price and earnings perspectives are... to put it simply, greater.

So as of 10 July 2020, let's see whether we had just been talking cock, or if our insights made sense.

Chart 1 : Price Performance of the Big 4 counters since our blog post.


Chart 2 : Performance of the 'second-tier' glove counters since our blog post. For this comparison we'll use COMFORT, RUBEREX, and CAREPLS.


So it wasn't even a fair contest...

Chart 3 : For added measure, let's see how the other healthcare plays have fared. These are your hospital bedmakers, face mask manufacturers, glove mould companies, PPE providers etc. Note that our selection isn't comprehensive, but they are there to illustrate how the 'non-Big 4, non-second tier gloves' segment has performed.

These include companies that have just announced plans to enter the healthcare business, as well as those who do not currently count on healthcare as a major earnings contributor.


There are some important caveats for this huge outperformance though, and they are not very positive:

Global COVID-19 infections are still on the rise, with no peak in sight for countries like the USA and Brazil.

There are already second wave possibilities and sporadic community outbreaks, like in China in Hong Kong. In fact, the Hang Seng fell 2% after the news of new infections came out.

A persisting outbreak is not good for the long term health of the global economy. Neither is it good for stock markets, obviously.

At the same time, it's very possible that low interest rates and cheap liquidity are fueling a global stock market bubble. This will be debated for a long time, still.

As for the Big 4 counters, a few notable things have happened.

Analysts have steadily upgraded their fair value ratings for the Big 4. That in turned fueled spectacular rallies in the likes of SUPERMX and KOSSAN. HARTA had its own huge rally, but historically it had always commanded a higher valuation premium due to its high nitrile glove product mix.

Hell, just look at TOPGLOV now:

So what has happened within the past month is that the entire market is now contemplating much higher fair value possibilities. This in turned drove stock prices higher - way higher than in March or April.

We are not gloves perma-bulls. We are only here to highlight the facts, and all that has happened in just one month since our blog post.

Things may turn south quickly, and this post is not a rallying call to buy Big 4 gloves until they gain another 20%.

In our view, the very best stocks are both investible and tradeable. The Big 4 clearly meet this criteria, and we have already traded countless times in and out of this story.

The most important thing for traders or investors is that ideas make money. We're not too attached or have fallen completely in love with the sector; our preference is to zig when the market zags.

So we did what we always do :

Take profits lah!

Sunday, 21 June 2020

STOCK HIGHLIGHT : SCGM BHD - AN ALL-ROUNDER COVID-19 BENEFICIARY


1. Malaysia’s leading thermoform food and beverage packaging manufacturer that is set to benefit from more stringent hygienic standards in a post-COVID world.

2. New forays into face mask and face shield manufacturing offer attractive double digit margins, higher ASPs, and a positive addition to existing businesses.

MARGIN EXPANSION

3. The price of resin  (which makes up more than 50% of operating cost) are currently near 10-year lows. Lower costs means improved margins going forward.

4. For its F&B packaging products, SCGM has moved into producing higher-margin offerings, offsetting lower revenues with an improved bottom line.



COVID-19 BENEFICIARY

5. The company is well positioned to capitalise on the change in consumer trends (preference for standalone F&B packaging such as ready-to-eat trays, meat trays, salad bowls) and higher health standards (regular usage of face masks and face shields for day-to-day or work purposes) amid the COVID-19 pandemic.

6. Since February 2020, SCGM allocated RM1 million to purchase 5 ultrasonic sealing machines to make face shields and one new face mask machine.

Face shields production capacity : 21k pieces per day

Face mask production capacity : 50k pieces per day

7. The investment is reaping immediate rewards as the pandemic worsened globally; SCGM supplies to local hospitals and pharmacies. Sales from these ventures will be immediately recognised in the latest reporting quarter.

8. From 18 Feb to 31 March 2020 (just 1.5 months), the Company recorded sales of RM2.9 million from its face shields production.

9. At optimal production capacity, the new businesses can potentially generate > RM4 in sales PER MONTH. Remember that the capex outlay for the machines was a mere RM 1 million.


10. As at 9MFY20, exports accounted for 35% of total sales. The company can utilise its existing distribution network and key contacts in the US and Europe for its new healthcare venture, with demand still outstripping supply in emerging/developed nations where COVID-19 still has not peaked in terms of average daily confirmed cases and fatalities.

RESILIENT STOCK


11. Stock price performance:

April - 19 June 2020 : 71%

May - 19 June 2020 : 27%

June - 19 June 2020 : 1% (recovery to RM1.84 from a recent low of RM1.60)

Price performance last week, from trough to closing : 15%

12. Last close at RM1.84, suggestive of resilience amid broader market volatility and positive pre-earnings expectations.

Comparison with healthcare sector stocks since beginning of June:
less impacted than glovemakers' big fall recently


13. Target Price : RM2.20 (PublicInvest, Trading Buy rating), with the facemask/face shields ventures potentially being an upside rerating catalyst. 20% upside from current levels.

14. The new business contributions, and the prospect of improved margins, are set to be reflected in SCGM’s upcoming quarterly earnings, set to be released by 30 June 2020 (next 2 weeks).

15. PublicInvest’s 17x projected P/E is well within the historical average (FY18 : 16.2x) with the company rebounding from a net loss in FY19.

16. The earnings contribution from the new healthcare businesses have not yet been imputed in PublicInvest’s earnings projection for FY20-22, which is suggestive of further upside.

Sources:
PublicInvest Research Reports : 31 March 2020 and 1 April 2020
RHB Investment Bank ’20 Jewels 2020’ Research Report
Bursa Malaysia filings

Monday, 8 June 2020

HERE ARE THE REAL WINNERS IN THE GLOVES MANIA


From the Editor-In-Chief of the Pelham Blue Fund

It's a bubble. A feeding frenzy. An impending catastrophe.

In half-open coffeeshops all over the country, it's what everybody's talking about. A seemingly never-ending love for gloves, and any stock with a whiff of healthcare in them.

Suddenly, everybody's opening trading accounts. Everyone wants to try the trading gig, because easy money is here, and if we were to gauge the general sentiment, easy money is here to stay.

I kept hearing all sorts of anecdotal stories. A man throws his life savings into buying SUPERMX warrants. A banker gets distracted all the time during her meetings because she had to check the steady ticks of TOPGLOV stock in her mobile trading app.

And my personal favorite : a WFH friend in the oil and gas industry who goes on Zoom calls for a high-powered business meeting, with his four trading monitors just out of sight on his live video feed.

He has a soft spot for a low-tier glovemaker trading at 100 times earnings. I have a soft spot for calling him a dumbass.

Still, by luck or skill, this historic rally has minted some crazy rich Asians. One estimate pegs the total wealth creation caused by the increase in glove stocks at RM70 billion.

And that's just from the stocks. Some also bought the warrants, and hit jackpot.
Source : NagaWarrants Telegram

I have my own story. I wouldn't exactly say I came of age as a trader in this MCO/gloves market mania, but I have made enough from the rally to talk about this subject with some measure of conviction.

But funnily enough, I don't have much of a technicals viewpoint to offer here because the fundamentals perspective is far more interesting. I believe this hasn't been talked about enough, and it's time that we really pay attention to the numbers. 

So for a moment, let's cease the hyperbole. I'll try to cut through the bullshit for you. 

But why should you listen to me? Because I'll be honest : every day I vacillate between two completely opposite viewpoints: 'this fucking gloves rally is the biggest bubble since Dutch tulips' and 'this fucking gloves rally is a profit opportunity of a lifetime'.

I'm uncertain. I'm indecisive, for sure.

But here's the thing: it does not hinder my trading. I have already made profits in both huge rallies and in precipitous collapses in the sector. As a team, we have traded the sector far before the age of Covid (BC), and during. Mother share, warrants, all of them. All kinds.

Just some selections. Some are my personal victories, some are that of our team members. We are on the lookout for more opportunities like these.

  Our cumulative gains in selected glove stocks, February to June 2020

I have been obsessing over this gloves sector story for a while. Having read a truckload of research reports and their fantastical findings over the past few months, my first gut reaction was to be totally incredulous.

I was dismissive, although as per the norm, the negative attitude comes from a place of anti-learning. I just needed to take the time and think of the situation.

In truth, I couldn't make up my mind. Either it's a bust or a boom of a generation. Reading the financial news does not help in the slightest.

I have studied market manias. I have traded a few of them. But this is new to me.

My thinking about market manias can be summed up as follows:

Speculative manias fizzle out when the fundamentals (or lack thereof) catch up to lofty expectations.

But what was perceived to be speculative manias can suddenly turn into a legitimate value proposition if the fundamentals are actually supportive of the lofty expectations.

So is there such a thing as a fundamentals-driven mania?

As I've said, I'm trying to cut through the bullshit and hyperbole. To do this, I had to forcibly let go of all perceived biases.

I'm giving this mania a chance to make sense, at least on a personal level, to me.

IT IS WHAT IT IS : A COMMODITY


Let's go back in time for an imperfect, but useful, historical analogue.

In 1973, the Organisation of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo on the United States for its support of Israel during the Yom Kippur War. 

This was economic weaponisation. OAPEC effectively introduced a supply shock into the world by cutting off US access to its oil. There was not much in the way of substitutes at the time. As the dominant oil supplier, the Arabs get to throw their weight around.

The effect? Miles and miles of long lines at US gas stations. Oil prices shot up 400% in six months (this was back when they were trading at the single-digit per barrel range).

So why is the comparison to the oil embargo that happened 47 years ago appropriate to what is happening now?

It's because gloves are a commodity. And commodities respond to supply-demand dynamics. 

Covid-19 has triggered a demand shock for gloves on a truly global scale, the kind of which will be talked about... well, 47 years from now.

Maybank IB report on TOPGLOV, 29 May 2020

Prices are shooting up, and by all accounts, demand for gloves has exploded exponentially.

Economics 101 applies here. Supply rises to catch up with demand. Eventually you will have equilibrum, and then we get more supply than demand. Prices go down. 

That commodity's selling price determines the seller's margins and ultimately profitability. Basic stuff. 

We know that supply and demand dynamics are cyclical. So should we scream 'bubble' every time we are in an upcycle?

The gloves sector is merely at the beginning of this phase, and there is a considerable amount of time until the dynamic balances itself. You can plausibly invest in the sector and exit with massive double digit gains within two years. That would be a big score.

But the really big score actually lies in the Big 4 - TOPGLOV, KOSSAN, HARTA, and SUPERMX. As a collective, they have enough scale, and enough of a protective moat, to dominate the bulk of future revenues in this sector over the next two years.

Even with current valuations, these are the stocks going up that can stay up. Because the fundamental justification for it is there.

Why specifically two years? It's because (no) thanks to Covid-19, tens of billions (of pieces) in future gloves demand has been brought forward into the present, today. Most of this year, and next year, is where we will see the bumper earnings.

If you can plausibly time the upcycle, would you invest in the relevant companies? At what point does the mania gets reclassified as an upcyle?


When in doubt, always go back to the fundamentals.


THE 100 TIMES EARNINGS PROBLEM


Maybank IB report on TOPGLOV, 29 May 2020.TP:RM20.

We become truly uncomfortable when a game-changer catalyst upends our established world views, none more so in the subject of stock price valuation.

When prices get ahead of our expectations, and our perception of how much certain stocks should be worth, we tend to retreat into dogma. The typical way to cling on to our own set of values is to denounce, reject, and ridicule all contrary views. 

So let's entertain some of these farfetched notions related to glove counters right now.

Why would you buy a stock that currently trades at 50-100 times their historical earnings multiples?

The headline figures are as described: it's historical. If the world's largest glovemakers - already insanely profitable in normal times - are expected to double their annual profits due to the demand shock, those uncomfortable P/Es would undoubtedly come down. The 'E' catches up with the lofty 'P'.

I don't understand the loopy logic that one can only invest in a stock once the P/E comes down. By this time you would have totally missed out on the price gains, but you still say that's the point where people can come in and invest?

In effect, this explains the seemingly insane (at first glance) target prices for TOPGLOV by Credit Suisse (RM23) and Maybank (RM20), but they are not insane.

Their respective analysts simply imputed future earnings potential into their target prices. And when earnings catch up with the price, the P/E would come down to... well, merely the historical averages for the sector. About 30 times earnings, to be specific.

Again, it's not exactly fairytale stuff. In a world where all major glovemakers are expected to nearly double their earnings, the 'P' would be more than justified at current levels. And as you may have seen from recent target price upgrades for the Big 4, there's some ways to go.

What we have a two-year hypergrowth situation. Or to put it another way, glovemakers are currently  fetching valuations normally reserved for tech companies, most of which will continue to trade at 50 times P/Es for the next 20 years (like dangling a carrot in front of a treadmill... you can chase but you'll never get it).

Another example. IHH Healthcare Bhd rather famously traded at 50 times earnings for more than half a decade since listing. One explanation is that investors are clearly convinced of its growth prospects, and thus bought into the stock at current levels in anticipation of future earnings catching up.

So is anyone calling it out for being a bubble?

IHH Healthcare Bhd financial summary. CIMB Report, March 24 2020


My point is : why should glovemakers treated any differently? They didn't trigger their own ridiculous price rallies. Supply and demand dynamics did.

How about the argument that retail investors are the only ones nutty enough to chase SUPERMX at RM8, when it was trading at RM1.70 in February?

Our industry sources tell us that even in recent weeks, investment banks are still holding regular conference calls with institutional investors and fund managers to discuss... glove stocks as a buying opportunity. 

These folks, with their billions of dollars in deployable cash, can only invest in the Big 4, because these are the only counters big enough to accumulate in size, and big enough to make their money work for them.

Chasing is still chasing, whether you're a retail day trader with a cash upfront account or a billion-dollar international hedge fund. That target of that chase is yields.

The world is in the midst of a painful recession. There is intensifying demand for (bubble-proof) stocks that can deliver on the scarcity premium : the fortunate ones who would deliver world-beating returns in a Covid-19-driven downturn.

Malaysia contribute nearly two thirds of the world's global gloves sales. The world is desperate to get ahold of them.

The Big 4 are offering yield opportunities quite unlike any other non-healthcare stock in the world right now.


Why shouldn't investors be desperate to get ahold of glove stocks?

The Big 4's performance in May 2020 up to the early days of June

HOW ABOUT THE OTHERS?

Let's talk a bit about the alternative choices.

My preference for the Big 4, instead of the second tier players like COMFORT, RUBEREX, and CAREPLS, comes down to several factors.

1) The investor base is primarily retail driven, hence they are much more vulnerable to sharp price swings.

2) There has been tremendous hype and chatter over these counters when they were 100% up in April. After another 100%+ increase in the stock prices, that chatter has not just died down, it has in fact intensified.

3) Their profit growth prospects are admittedly tremendous, but mainly due to the fact that all of them are starting from a very low base. They are nowhere near in terms of the Big 4's sheer scale of operations.



There are other risks inherent in the second-tier players, namely that if they command 100 times earnings multiples right now, it is less certain that their earnings growth will bring back those P/Es to more reasonable levels.

Some have just established new production lines. Some have just raised cash. Some have just begun being hyped by rich uncles. Emphasis on 'just', because in the game of gloves, timing is everything.

From a purely economies of scale basis, the second tier players will always be second best to the Big 4. They will always be playing catch up. Their overall production volumes will remain tiny, compared to say, what HARTA alone produces in any given month.

Making gloves is not that hard, but there are certain nuances in the business that will get the dominant players farther ahead.The little things do add up.

The Big 4 specifically possesses inherent advantages that will ensure the bulk of the business (glove orders) flow to them. It's a kind of protective moat that I would put a premium on.

What are they? Let me take a deep breath here...

You need really solid QCs. You can't run afoul of the US FDA standards, otherwise you'll end up with 100 containers of unusable gloves. You need an established global sales network. You should ideally have loyal and repeat customers who have kept coming back. You need to be experienced and credible enough to have done direct negotiations with foreign governments and their health ministries. You simply cannot deliver a batch of shoddy gloves when frontliners around the world need them to protect their lives. Your history of success supplements your reputation. Trust, quality of product, and delivery, are not expected to be an issue.

I don't mean to knock off the non-Big 4 names. It's just that their share of the spoils, even on a cumulative basis, will be much smaller compared to say, what SUPERMX will be getting in the coming years.

The overheating and speculative elements are far more acute in the non-Big 4 healthcare stocks, because there is slightly less assurance that their bumper earnings will materialise as hoped.

 This is NOT an issue for the big fellas.

FUTURE GLOVE MONEY, TODAY

Another piece of the puzzle : how do we account for these future sales and ensure that they actually translate to real orders, and real earnings?

Two words : spot orders. 

The Big 4's protective moat is evidenced by the customers' intent to acquire their product, no matter the price. Customers know that these guys can deliver; they just need to pay up.

For the first time, glovemakers have real leeway to adjust pricing, in a business that is notoriously thin in margins. Average selling prices are shooting up, again justified by the demand shock.

In a real demonstration of the extent of this demand shock, the sellers are dictating not only the prices, but also the terms. 

To lock in their orders, customers are now required to pay advance deposits.

In other words, the Big 4 are actualising part of future sales, today. In real money. That earnings bump is assured.

Based on one estimate, spot prices have gone up from $25 in pre-Covid times to $100 presently. That's a 300% increase. Exponential.

TOPGLOV sales orders and spot prices, from Credit Suisse's report on 3 June 2020. TP: RM23.


Lead times have quadrupled. Instead of 35-40 days to wait for your bulk order, it now takes up to a year!

40 days to 365? That's an 800% increase. Exponential.

TOPGLOV has an annual production capacity of 78.7 billion pieces, from 700 production lines. And you say that their backlog runs up to a whole year?

Or how about new orders doubling within months? 100% growth, you say?

And of course, the Big 4 have the capacity to take the billions in additional orders, and even then the demand shock does not let up.

 SUPERMX order book increase, from CGS-CIMB's report on June 2 2020. TP: RM9.80

 Net profits can rise 79% within a year and it would still be cheap relative to the sector average?

From the same CGS-CIMB report

As a trader, I'm not dogmatic in my views. I get things wrong every single day.

But pervasive skepticism - in the face of actual, solid fundamentals - could be a big buy signal. The real question is : what price are you willing to pay for exponential growth?

I would be slightly more surprised if a stock like say, SUPERMX, collapses to RM2 at any point over the next two years. Less surprised if it hits RM11.50, for the reasons described above.

My personal view : the biggest profit opportunities are in companies that you can both trade and invest in.

The fundamental justification is there. I'm neither worried nor confused. You shouldn't be, too.

 

Monday, 1 June 2020

ANNOUNCEMENT : KEY CHANGES TO THE VIP TELEGRAM GROUP


Update, 5PM, 4 June 2020: The Pelham Blue Fund VIP Telegram Group is now closed to new subscribers.

From the Editor-in-Chief of The Pelham Blue Fund



To our Subscribers, and those who are interested to join, 

Let me get out the clichés first, though we are completely genuine in our sentiments : we continue to be humbled, astonished, and grateful for your support.

If you are reading this, you probably like us enough to follow us on Twitter, or follow our Facebook, or browse our blog from time to time. It still blows our minds that people are interested in what we do, having languished for years with a combined blog and social media audience of maybe around 15 people in the beginning.

I'm just a trader trying to make ends meet. I don't even dare to call myself a professional one, as the guru label brings me great distaste. But I know by now that we are extremely competent at what we do.

Our ideas hold real value. And I am confident enough to say that whoever subscribes to our services - especially at current prices - are getting an absolute bargain.

Our record speaks for itself. Our VIP members have witnessed us undertake trades that yielded 100%, in real time. Others yielded five figure profits in mere minutes. These are not flukes; sometimes we lose money on our trades, but the gains more than make up for them.

It is not just us who benefits. I have personally seen members make multiples of what they pay to subscribe. One was 20 times our fee. Another was 50 times. We dispense advice and make money (from our own calls, of course) fairly consistently.

I know exactly how much our ideas are worth, because we trade each and every one of them. I am confident that our members can also see that what we provide is completely unlike any Telegram or educational service that are available elsewhere.

There are no dodgy promotions. No weird penny stock pitches. No bullshit. Just pure trading. If you want guidance on trading, you have come to the right place.

The changes that we are instituting here is not about money. In fact, we are actively turning down new members and membership opportunities, for reasons that I will go into shortly.

It makes my day, on a deeply personal level, to see our VIP members make real money from trading - and all the better if it was the result of our specific trading guidance, rather than just following our trading calls.

While we are extremely grateful for our public presence, and this amazing community of our thoughtful VIP members and social media followers, we do not harbour aspirations of empire.

At the risk of sounding pretentious and self-absorbed, the money is not the reason I do all this. What I value most is knowledge, and independent thought. Trading is the culmination of this.

Most people look at money as the end outcome to trading. I look at it in the complete opposite way. It is money that is the means to an end. And that end is knowledge accumulation. 

My idea of wealth is in the things I get to know, discover, and learn, not the amount of money I have at the end of the day. What we learn, we share with you. That's what this Group is all about.

What I want to achieve - aside from sharing that knowledge with likeminded members of this Group - is to find ways not just to maintain our performance, but also the quality of our trading guidance.

OUR PRINCIPLES

But of course, this blog is all about money-making. Which is where we go back to our core principles.

In this line of work, the most money is made by maximising current resources to generate the most optimal output. For me it's three things - time, capital, and ideas.

With an ever larger number of subscribers, our capacity to dispense thoughtful advice diminishes. Out of respect to all our subscribers, we never miss a single question asked, unless if we had genuinely overlooked it.

It takes up a fair amount of our time and resources, on top of the personal trading, market research, and other things that we are working on simultaneously. All day, all night, all the time.

If the group grows to 10 times its current capacity, we will simply be unable to cope. Our chat group will be overloaded with chatter. Members may miss out on our replies (the way I sometimes miss out on the questions).

This is simply not what I want or desire out of this venture.

I have neither the time nor the inclination to grow this part of my business exponentially. We have mostly ceased our marketing efforts and let our results - and especially our members' results - speak for themselves.

We are done with trying to prove our capability as traders; aside from our VIP members, we have no one else to convince going forward.

CHANGES TO THE VIP TELEGRAM STRUCTURE

At the same time, we are also facing some growing pains. We have recently discovered that many of our calls get leaked from the private Telegram Channel and Group and forwarded to others, diminishing the trade's potential in some cases.

In this regard, we count ourselves lucky that many of our insights have a finite shelf life. That day trading idea would be fully realised by the time word gets out, allowing us and our members to exit the trade before it gets flooded by new entrants.

While leaks - and to our dismay, non-paying individuals who continue to benefit from our trading ideas - are not something we can avoid, it is the consequence of having a growing profile.

What we can do, however, is to continue providing guidance and maintain the quality of our trading advice to our VIP members who have spent hard-earned funds for this access.

To ensure that we have adequate time and resources to address our members' queries and provide guidance that is worth the paying fee, we will limit the number of one-year VIP subscribers in the VIP Group to 300 members at all times. This total does not include our Lifetime members.

We are not there yet, which means some slots are still available for those who are keen to join us.

From this limitation, we expect a natural rate of attrition: in each month, there will be subscribers who opt to exit after their first year (or second) anniversary is up, which opens a slot for a new subscriber to join.

If you are keen to subscribe for the one-year option but slots are currently unavailable, you will be put into a waiting list. Subscriptions will be on a first come, first serve basis, and we will be in touch to offer you the next opening.

The only option that will be available at all times is Lifetime membership.

Indeed, the closest comparison for this structure is essentially a university semester. It reflects the limitation of our resources, and our priority to maintain high standards.

The VIP Telegram service should be seen as an educational platform, not a quick gateway to riches, because there is no such thing.

For our 300 subscribing members under the one-year option, we will be able to allocate enough of our capabilities to assist each and every one of you with trading guidance.

This is our commitment, and my personal promise.

THE 1+1 SUBSCRIPTION, AND BEYOND

Aside from Lifetime members, all new and existing subscribers are entitled to a maximum subscription period of two years. This includes the 1+1 subscribers or the few who (very astutely) paid for the two-year subscription when it was still offered.

At the same time, we will honour all existing obligations to our current subscribers, with no adjustments that would be detrimental to them. There are no changes to the subscription periods, or the level of service we currently offer. The pricing that you get is as stated in the email correspondence that you get.

In the current structure, 1+1 means the one-year option, plus the one year extension. This will continue.

After the second year is up, subscribers have the option of converting to Lifetime membership, or to conclude their subscription and exit.

As per our current policy, subscribers may also opt to convert to Lifetime membership after their one-year subscription is up. This does not change.

However, we note that the change in pricing for all subscription options - which affects new subscribers only - is subject to our complete discretion. What this means essentially is one thing: prices will change in the future.

As is always the case, those who subscribe to our services early, or convert to lifetime membership early, will always benefit more than those who subscribe later, purely on the basis of pricing.

For full disclosure, please refer to our Terms & Conditions.

CHANGES TO LIFETIME MEMBERSHIP

I am also instituting a key change in our criteria for Lifetime membership.

From now on, acceptance to the Lifetime membership is at our complete discretion. I will personally vet applicants and their motives, intentions, and reasons for conversion.

We do not want our ideas to become a hub for some syndicate, insider trader or illegal money-making operation, hence the need for this. There are other chat groups or websites for that. Those who do not ascribe to our values and conditions are advised to look elsewhere.

We reserve the right to reject applications for Lifetime membership.

TO SUM IT UP

Here's the TL;DR version.

1) VIP Group limit : 300 members for the one-year subscribers' portion.

2) If no slots are available, there will be a waiting list.

3) Lifetime membership approvals is at our complete discretion.

4) We will honour all existing obligations  to our current subscribers, at no detriment to them, with no change in service provided.


Thanks for reading, and for being part of this investment journey with us.


Thursday, 28 May 2020

CATCH THE KNIFE THREE TIMES : OUR LITTLE ADVENTURE WITH GREEN PACKET [TRADE OF THE WEEK #36]




Outcome
Gross Profits, Combined : RM30,975
Duration : Four days


To be a very good trader, there's no avoiding this moment. We need to prove that our abilities are down to skill, not luck.

One specific ability is to capture winning trades at the very moment a stock or warrant collapses. When there is peak fear, or massive dumping of shares at any price, we must go in if the circumstances are just right.

Being a contrarian is not in the saying; it's the doing. And this is what we consider to be the highest of high stakes trading, which means that if I can't execute this skill properly, we would never get ahead of the competition.

To most of us who are familiar with trading business, we call it 'catching the knife'. It's the thing that happens when a stock suddenly takes a precipitous, nauseating dive; do you go in? If so, when? And at what price? And how do you know that it's not going to drop another 20%?

No amount of fundamentals research can equip us for this. It's just the market offering a quote, and us contemplating whether to take it. This is trading at its most pure.

To carry out this mission, we have to rely on our historical understanding of price volatility, on sentiment, and how the herd behaves.

If there are mental maths to fiddle with, we have to do it quickly in our heads, because the whole idea-to-execution phase can take seconds. A small timeframe, but for big money.

It's the holy grail of price-volume analysis; we are supposed to be able to trade just by looking at how prices behave in real time.

If we were to truly simplify this technique, we'd simply call it : sensing fear, to make money. That's pretty much what catching the knife is all about.

Most people think they can do it; most get hurt. We spent years honing this skill. We had some deep cuts too.

To prove that this piece of skill is not a fluke, we didn't do it once. We did it three times; still want to call it luck?


THE BACKGROUND

Green Packet Bhd has been busy reinventing itself. From its past as a P1 WiMax provider, through some financially troubled times, shareholding and management changes, and the whole lot, it is back and it is in great form.

Its platform, Kiple, promises to be a one-stop shop for every company's e-solutions needs. It's also been tailored to meet exacting specifications brought about by COVID-19 and the ensuing Movement Control Order.

Oh, and it's been on a relentless marketing blitz. You couldn't have missed it. We have read about 5 articles in one week; some we couldn't figure out if they were impartial business stories or straight-up advertorials. Am not even sure if anyone cares, as long as the right names were mentioned...


Wait ah, zoom in a bit.... and boom!


Hit us in the face like a ton of bricks, this one.

It's fair to say that so many things are happening here, making for a compelling story no doubt, and we are keen to see if all this talk translates to earnings over the next few quarters.

If it doesn't... well, there's nothing new there.

But in the meantime, with new retail traders nowadays scurrying about like termites out of hollowed woodwork, the market does what it does best: go totally nuts over the stock. We are also humble bugs; this is a stock that we can trade.

So we answered the following question, which we assume is about trading the stock.

READYYYYY

Now for GPACKET's stock and warrant, which tend to do very weird things that we will briefly touch on right now.

These are the terms of GPACKET-WB, the associated company warrant.


The mother share - GPACKET's stock - had shot up like crazy in mid-May as KipleMania took hold. This left a gaping chasm between the mother share and its warrant, or at least the price in which the warrant is supposed to be trading.

Theoretically, the warrant can get you a free lunch. This was something we discussed in the VIP Group, as our members offer their views:




The basic arbitrage idea is this:

1) Buy GPACKET-WB

2) Convert immediately by paying 40 sen per share

3) Once paid, you get GPACKET shares that was paid for below the market price. This was during a time when GPACKET was trading at RM1.20 in the open markets, while the total conversion cost (warrant price + exercise price) was just 80 sen or so!

4) Once you get GPACKET shares, sell them in the open market and get that price difference as pure fat profits. Literally green packets of duit raya!

But this is where you need to hold your e-horses and do some temperature checks.

Even if you call up your broker and sweet talk them into expediting the warrant conversion for you, the conversion period (the time between confirmation of conversion and receipt of newly quoted shares) can take anywhere between 10 days and two weeks.

The warrant conversion process, as kindly shared by a VIP member


Two weeks of constipation, lost sleep, and over-active perspiration for the promise of free profits? Some may take it, but we wouldn't.

We know enough about the stock to understand that it's being hyped over the moon, hence we do not trust the price movements. But that does not mean we can't trade it.

THE STORY OF THE FOUR TRADES

So what we ended up doing were four very distinct trades, at different phases of the price moves.

1) TRADE 1, 15 May - GPACKET, trend trade

2) TRADE 2, 15 May - GPACKET-WB, catch the knife

3) TRADE 3, 19 May - GPACKET-WB, catch the knife

4) TRADE 4, 20 May - GPACKET, catch the knife

You may have to squint a bit at this chart, but these were the exact points where we bought and sold GPACKET, for Trades 1 & 4.

5-minute chart, GPACKET

As for GPACKET-WB, Trades 2 & 3 look like this. Note that we made good profits on the warrant precisely because we were able to 'catch' it near the intraday lows at the time of entry.

5-minute chart, GPACKET-WB


TRADE 1, 15 May 2020, GPACKET

Very simple trend trade where the five-minute chart clearly indicates a stepladder pattern. From the way the stock behaved, the way it easily broke past the RM1 barrier from the day before, and the constant buying interest during the morning session, we deduced it was worth a shot.

It didn't take long for the target to be hit. We conservatively took profits before the midday market break, at 1.19. This was a textbook trade, and we achieved modest profits.

In the afternoon session, the stock actually hit RM1.27, or its daily limit up level. We didn't stick around for the fun and games; GPACKET then collapsed to RM1.10 before rebounding to close at RM1.20.

It was crazy volatility, and one that we were not surprised to see. This stock was moving all over the place.

We personally wouldn't be able to stomach these big moves. As you may know, GPACKET eventually moved to as high as RM1.65 in the next couple of days. And just as quickly, it collapsed to 90 sen in the subsequent couple of days.

If we had stuck around, we'd have lost our shirts. But we figured that many would have been stuck at the peaks, purely due to chasing this thing all the way to the top.

Almost immediately, we considered ways to utilise the knife-catching angle. It's called that because it's not for the fainthearted, and those who screw it up get cut. Real bad.

TRADE 2, 15 May 2020, GPACKET-WB

Recall that there was a ridiculous valuation gap between the warrant and the mother. GPACKET was heading up to RM1.20 by midday.

Conventional thinking would suggest that GPACKET-WB was massively, gobsmackingly, undervalued - hell, it was at 52 sen!

If uncle pays 40 sen to convert, the total cost is only 92 sen woi! Surely can sell back at RM1.20, pocketing the 28 sen per share profit!

Right? No, we don't think so. Our comment stands, to this day.



Here's an easier way to think about this conundrum.

It's not the mother share rising and the warrant needing to catch up. Look at it in reverse.

Our thinking : precisely because the warrant refuses to rally up and narrow this ridiculous gap, the following are not just plausible, they are likely.

1) The warrant's movement indicates that it's the mother share that is destined for a price decline.

2) The warrant's movement is clearly controlled by somebody or other high volume players.

3) Don't trust the prices... healthy skepticism is how you don't end up losing your shirt. Or lose your shit.

You may have noticed this very clean, very controlled price move. Look at the rising movement in the 5-minute chart for GPACKET-WB... before all hell broke loose!


From 9:20AM to 3:10PM, GPACKET rose 27%.

Then, in a span of five minutes, it fell 23%. 3:10PM to 3:15PM.

So why does this happen? We won't mince words here : the market was being suckered into chasing the warrant due to that 'premium narrowing' angle. During this price ascent, the big players had a field day selling into the rally. DISCLAIMER : Pel is not one of those big players ya *halo emoji*

And of course, when the price collapses, everyone rushes for the exit. This provided us with the first knife catching opportunity.

With a price collapse of such magnitude, we figured that we only had to get in near the day's lows, which marks a complete wipeout of the previous rally. When something falls by this much, this fast, there was a good chance for a temporary price recovery.

The second critical aspect is instinct. By looking at the feverish selling, we were able to reasonably estimate when the panic selling is overdone. That's when we bought a thousand lots.

It felt like eternity, but it only lasted 56 seconds. We made RM4,000 in profits.  Boom.


TRADE 3, 19 May 2020, GPACKET-WB

On this day, GPACKET went ballistic (again). It peaked at RM1.65, then spent the next 40 minutes falling to RM1.20 at the low end of the price move.

That's a 27% decline in just over half an hour.

Obviously the reaction is predictable : people running for the exits again! And with this script repeating itself, GPACKET-WB falls from 46 sen to 30.5 sen.

This was another peak fear phase, and we sensed that RM1.20 might be the end of it for the mother share.

The swiftness in the warrant selldown was suggestive of another panic phase - the selling was noticeably quick and noticeably indiscriminate. There was a finite time window to catch it and aim for a recovery.

As is usually the case in knife catching, the preference would have been to buy into it at the bottom of the selldown, for example an obvious support point such as 30 sen in this case.

There was ample buying between 30.5 and 32 sen levels to confirm the existence of buying support, and we happily pulled the trigger just above.


For a 16-minute trade, this one reaped tremendous rewards. Again.


TRADE 4, 20 May 2020, GPACKET

We don't really plan these things out. This would be the fourth trade in a span of five days, but there is just no way to pre-plan something like this.

If there's opportunity, we capture lah.

It's like being a market maker of last resort. If there's a selling demand to be met, we'd come in and provide our services. This practice needs to be precise; a single wrong move and we'll end up holding the bag as the rest of the sellers run for cover.

In the worst case scenario, it might be us who turns into the panicky one. We have been the suckers, many times before.

Here's a closer look at T4.

5-minute chart, GPACKET

Again, the stage was set for a selldown. A big clue here is the long green candle on the left side (9:00 AM, Wednesday). GPACKET's stock actually showed some promise there, having jumped from RM1.04 to RM1.10.

But alas, it was not to be. False breakout.

The failure to rally by 9:05AM was as clear a sign as any  that this thing was heading down. And sure enough, in the next 15 minutes the stock went under, breaching the all-important RM1 support point.

Our thinking was that the real buying opportunity is not just below RM1; it's near the bottom of whatever new low this stock is heading towards.

It begs the question; if we can't see the bottom, how to know when to jump in?

The answer lies in subjectively interpreting the real-time price moves, and taking calculated risks. To simplify things, we were accepting the possibility of two potential outcomes:

1) That 90 sen may prove to be the bottom

2) That it may even head lower, perhaps to 80 sen.

Because this is a world of imperfect information, we decided to jump in anyway around the 90 sen mark. A move against us is probably not enough to do lasting damage, except for a temporary ego bruise.

Price-volume analysis. Decide. Pull the trigger.

The key here is fully accepting all possible losses.

As we contemplated GPACKET's potential recovery, mainly by browsing Lazada for frivolous items to buy,  some little clues start emerging.

At around this time, GPACKET-WB stabilized near its own intraday lows. For a warrant that's well known for massive liqudity, there was huge buying support there.

The much less liquid GPACKET was doing pretty much the same; the market essentially is taking its cues from the warrant's movement too. If felt like longer, but the move from 90.5 sen to 96 sen took just five minutes.

The most important thing here, as it would be in all knife catching situations, is this:

The best entry point determines the highest profitability.

This is not dollar cost averaging. This is not playing it safe. This is about sensing peak fear, assessing the price-volume characteristics of the stock (or warrant) at this peak fear phase, taking calculated risks, and making the trade.

Pulling the trigger was the hard part. The rest of the day was pleasant. The stock recovered to above RM1 levels, and the position was disposed one it becomes apparent that there was a strong selling resistane at RM1.04 levels.

And oh, the position was a fairly large one. So exiting this came naturally; a general rule is that if the position is big enough to lose sleep over, any excuse to take profit must be considered.

The move was worth a 7% gain, and a five figure profit.

Four trades. RM30,000 in earnings. 

Not bad lor...

More Tales By The Pelham Blue Fund