Tuesday, August 9, 2016

Stock Incubator

Started in 2010 decided to put aside a portion of money from my trading capital to buy a stock, which I deemed could provide multi-fold return in the future, under observation.  Once certain conditions are met, the stock will be transferred to my long-term investment portfolio.  As such a move is relatively higher risk than the usual investment, only a small portion of capital is allocated to it (amount of money that I could afford to lose if things turn sour).  This is what I termed as calculated risk.  After all, nothing is risk free in this world (money don't just drop down from the sky for you).  One just have to take risk, calculated risk to be exact, if you want the return in any investment.

The first stock under this category was SembMar which I eventually shifted to the long-term investment portfolio in 2011.  SembMar was chosen then because it was a blue chip and on the path of recovery from the fallout of 2008 GFC.  It also gave consistent dividend annually and then my thought was while waiting for the objective return, collect dividend along the way isn't such a bad idea too.  Furthermore, it was the first time I bought stock under such objective and hence, getting an established company could reduce a lot of unknowns going forward.  Then in 2011 when the offshore & marine sector was getting hot up with contracts kept rolling in for SembMar, I decided to upgrade it to the long-term investment portfolio.  The rest was history and I have divested SembMar in 2015 (refer here and here for detail of divestment).

After shifting SemMar to the long-term investment portfolio in 2011, I wanted something different for the next stock.  It will be not much different from my long-term investment portfolio if I just hunt for beaten down blue chips or established companies, thus I decided to look for a theme for such investment.  The concept of incubator struck me in 2012.  Incubator as in those business incubator for start-ups in their early phase.  As known start-ups are high risk as most of them failed or never really make it big and only selectively few that managed to eventually grow into the big and established company.  Once you get it correct, the return is huge !  As such, I decided to give a name to this section of my investment (hunting for the next potential gem) -- Stock Incubator.

Under stock incubator investment, I will focus only on small and medium size companies that are in their growth stage.  It took quite a while for me to find my next target and around 2013 after shortlisting a few candidates, I decided to go with Swiber.  Yes, the troubling company now which is under judicial management.  Then Swiber was a different story, it was considered by many as one of the potential, its order books going forward was healthy for a SME and its operation expanding from SE Asia to Middle East, things were rosy.  The company then already having debt but not that high so I wasn't overly concern about that.  Like any start-ups with little cash and operated on borrowing money or money from investors with a promising story, that the characteristic of Swiber then.

However, somewhere in the middle of 2014, I starting to get uncomfortable with Swiber as the debt level was rising fast as company borrowing more to cater for more contracts.  In a way the company was getting aggressive in winning contracts but those contracts failed to translate to good profit margin.  I managed to cut loss before it fell below $0.50, a cut-loss price level for me.  Yes, I do set a cut-loss price level so as to reduce the risk.  This happened before the oil crisis getting out of the hand later that year and stock prices of all oil related companies crushing like nobody business.  In a way I was saved by my instinct and the strict rules that I've set on Swiber if not I could be one of the many retail shareholders that probably feeling the pain now.

After the experiences from SembMar and Swiber especially the later since I exited with a loss, I put in more rules and guidelines for my next hunt for the potential gem.  The next was Nordic Group (refer here for the full story).  The differences between Swiber and Nordic Group were :-

1. Swiber then was a widely regard potential by many but Nordic Group was pretty much ignored by many; daily volume of Nordic Group then seldom hit more than 200,000 shares.  A general consensus one doesn't mean will make it big and an often quiet one could sometime spring you the surprise.

2. Swiber then was with debt but Nordic Group was in a net cash position.

3. Swiber's management which I felt was overly aggressive in growing its business but the management of Nordic Group was on a pace which I am comfortable with.

In order not to like SembMar which easily upgrade to my long-term investment portfolio, I put in more stringent conditions for Nordic Group to meet before I could consider it in my long-term investment portfolio.  The only thing I retain from Swiber's experience is the cut-loss price level.  The cut-loss price level for Nordic Group still in force now despite at the price of $0.26 (as of 8th August 2016), I have an unrealized profit of 149.77% (with reference to holding price of $0.1037/share) and a dividend return of 14.67% so far.

Thing is looking rosy now for Nordic Group given that I am commanding such a big unrealized profit level but I'm not counting chicken before they are hatched yet.  Nothing is absolutely in this world.  With the mentality of a start-up, I am prepared for it to fail again.  The important is learn from the mistake, keep on trying with the spirit of start-up and one day I should finally find that gem and have one that eventually graduate from the stock incubator.

Stock Incubator

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