Tuesday, May 03, 2011

My Vital Investing Criterion: Under-Over Owned

Here, I am talking about fundamentals investing per se. We can look at absolute PER, we can look at PER as a percentage of earnings growth over 3 years, we can look at free cash flow per share, NTA, NAV, momentum investing, breakouts in all time highs or 52 week highs, share buybacks by company, insiders buying, ROA, ROE, earnings visibility, new flow, catalysts, etc... but for me, there is one more critical factor, which is harder to fathom but critical especially when you are doing investments of any kind.


Ask yourself next time you buy or sell, is the stock over or under owned. There will always be great fabulous stocks, its imperative to know if its under owned relative to their fundamentals, or it is already over-owned relative to its good fundamentals. A great stock, even on good valuations, may be already over owned ... which is plenty of potential sellers willing to throw to you. That may not be a bad thing if you think there will be a lot more fresh buyers coming in to take the stock from you.

Share prices will only move up when there are more people wanting to hold the shares. So, its imperative you know the balance of demand and supply. If its a stock which not many are talking about, you know its under owned, and if you think there are probably good catalysts coming soon, it would be a good move to buy.

A good stock that has already gone up 30% in two weeks may require more study. After that kind of move, will there be sufficient new buyers to move it another 20%?

Even good stocks on fair valuation will have periods when they are over owned. You have to be circumspect with the upcoming catalysts quarterly earnings, newsflow ... whether there are sufficient buyers coming on board in the future. Naturally, if a stock is really good, and longer term performance is sustained, you can ride out these over owned periods, then you will missed on better timing to enter the stock, but its OK if you give up on the timing part.

How to assess under owned or over owned, a lot of it is in the news, a lot more can be glean from looking at volume traded over the past few months and put that next to their newsflow. Buying in semi speculative stocks come in progression: insiders, collection by individuals, collection by small funds, big funds move in, small fries join in when volume hits first page, distribution, small fries wondering what went wrong, funds move again, distribution.


Buying in steadier fundamentals driven stocks: insiders accumulation, newsflow, funds accumulation, newsflow, more funds buying, too many funds long the stock, not enough buyers to take the sellers, correction, insiders buying, funds accumulating, newsflow etc...

So, for better presentation, examples of over owned speculative counters: HWGB, Ramunia, ...
Over owned fundamentals driven ones: timber related counters, Dialog, Kencana ...

Under owned ones ... you have to figure them out yourselves.


Zen Chai said...

Dear Dali,

what happened to EAH ? from 0.51 to 0.41 since your call to buy last week ?

should we hold ? or cut loss ?

please advice.


Jeff said...

Dali did not ask anybody to buy la. He said watch not buy. Mkt who can predict otherwise he's the financial god.

Pray la Eah come back. Any other counter buy that day also lose. Its just one of those days......