Businessman Investor

Touching base with the rational business psyche of stock market investors

Monday, October 17, 2011

Acquisition Moves and Exploitation of Market Misalignments

One of the chief reasons which have prompted our purchase of Chemrez shares was due to a market anomaly which I often exploit—particularly, companies selling below their equity or book value. 
This is Part 6 of a Series. Go to Part 5: Reporting Hedge Fund Performance

The following is a portion of a letter addressing my partners which states, clarifies, and addresses the operating principle behind that private investment partnership (i.e. hedge fund) I began. I would recommend that you start your reading at the beginning.

Our first move has been the acquisition of some shares in a corporation called Chemrez Technologies, Inc. (ticker symbol: COAT), a business which has positioned for growth by branching out from powder-coating operations to the lucrative business of biodiesel, oleochemicals, resins, and other specialty chemicals. We are generally confident on how well this business shall achieve considering the economic potential and long-term sustainability of biodiesel.

With yields ranging from 12% to 17% in the past three years (it’s noteworthy however, it performed poorly in 2006 with just around 4% ROE, but quite understandable since it was then yet to enter the lucrative biodiesel business), and being conservatively financed (having good levels of debt-to-equity ratio, being 0.11 and 0.06 for 2009 and 2008, respectively), it’s hard to ignore investment ideas such as this. Its revenue shall be driven by the government’s increasing mandate to use more biodiesel mixture in diesel and gasoline year after year.

Frankly, one of the chief reasons which have prompted our purchase of Chemrez shares was due to a market anomaly which I often exploit—particularly, companies selling below their equity or book value. As I’ve mentioned, we’re after excellent companies with a sustainable business and enduring potential. However, we don’t immediately buy into one just because it has already met this single criterion; in addition to that, what is also essential is the price tag being ridiculously cheap to a point the business is already being sold for free. In Chemrez’s case, I observed its equity value was around Php2.65 a share in 2009; in September 2010, it increased to Php2.80, and gladly at that level, we’re able to buy some shares for just Php2.40. Continue to Part 7: Astonishing Role of Capitalism in Passive Wealth Building


  1. Hi, stumbled upon your blog and did some browsing, very interesting and exciting for someone to try and replicate what goes on in Wallstreet here in the Philippines. Hoping you could take the time to answer some rookie questions. You said in this post that you started a hedge fund and purchased COAT. COAT with yield of 12-17% I would assume are ROE rates? My question is though from a fundamental perspective you have an increase in book value, etc, etc how can you realize/monetize on this gain? The stock price is thinly traded and it would be very difficult to realize appreciation of value because of the stock's liquidity. Just a question on how you plan to monetize on these 12%-17% returns.

  2. Hi there, I won't claim that I'm sure I can monetize from it eventually (since I'm a self-confessed someone who can't predict market price movements). Since the thing and luxury about being a long-term investor is your commitment to holding indefinitely (i.e. you aren't really interested on realizing gains/losses anytime soon). And that's what enables you to bank on very fundamental measures of value. This is a bit controversial, I know, but as how my usual mantra goes: I'd rather bank on some measure of underlying value than trade on very liquid but highly-premiumed stocks at the risk of permanent capital loss. Or in other words, I'd rather bank on a bargain than liquidity. It's very strange, I know, but these articles may help you:
    I do still encourage further questions to help enlighten ourselves =D Keep them coming.

  3. Thank you for you speedy reply. I agree totally from that the buy and hold forever mantra of Buffet is the way to go and value investing always trumps speculation. My question though is every fund manager, investor, capitalist, must eventually monetize the investment, cash is king and it does not matter much if paper values are high if you cannot monetize it. It has been said, something is only of value if someone else is willing to pay for it. Just trying to learn from you and understand the strategy, cause I would assume eventually gains should be realized in a tangible form i.e. cash.

    I agree with all your value investing nuggets, I just find them hard to really apply to wealth building in the Philippines given that our markets are not yet robust or mature enough at this point.

  4. Or if you would want tangible value for more direct liquidity/security (somewhat regular inflows; a fixed income sort), you may want to look at excellent companies giving high dividend yields at the price levels they are trading at. Of course, I've reiterated often that this may be misleading should the underlying company's financial soundness be doubtful (e.g. highly leveraged and disbursing dividends higher than net income coupled with waning cash inflows from operations), so it would only work in the long-run provided with very dependable company fundamentals. And may I note that the dividend yield approach have very compelling, real implications on your tangible rate of return. These other writings maybe of interest:

  5. Many thanks for your reply. Unfortunately, and I want to say this respectfully, I am not really receiving an answer to my what my concern really is. I understand all the value investing nuggets and concepts, what I am trying to get a better grasp of, from a Filipino fund manager, would be how he makes money (actual exited trades) trading illiquid securities i.e. COAT. It may meet the value investing requirements but actually converting this book value paper gain into cash or a real return in the Philippine markets is not really feasible right? At least in my rookie ignorant mind it cannot be done. Unless you have proven it? I am trying to see if true wealth can actually be created in the Philippines and if you are actually able to do it.

    Many thanks for the chat.

  6. hey, I understand your concern. With regards to successfully applying said strategy on illiquid securities, well, I don't want to claim it works per se. So far with Chemrez, sadly, it's still at a loss assuming it's bought at 2.40 (it's now trading at 2.30)--on a side note though, when I liquidated it in the partnership, COAT was trading higher at 2.40 then (around the range of 2.7 to 2.8) so it was a gain for the partnership. So yes, you may lose or gain (I'm not absolutely claiming it never fails). In FEU's case, for example (a very illiquid stock as well), I've bought it at 796 and it's now trading at 1k, and I'm still holding it. Overall, I've deployed this strategy (on both liquid and illiquid stocks) throughout my PSE investing tenure; should you want a more detailed results of my performance, please see:
    Personally, I use this strategy because it's what makes sense and works for me.

  7. Nice. I wish you more successful year ahead.:)



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