DD and NOW: Are These Stocks Worth To Wait?
This message came from a reader sent through e-mail. She's asking a review on DD and NOW and whether if it's worth holding on or time to let go.
Hi Mark, Hello. I am a follower of your blog and I always check up on it for new posts. I just want to request for some reviews about DD and NOW. Are those units worth to wait? Sobrang luge na po ako, and I am losing my faith sa dalawang yon. Natetempt na kong ibenta kahit luge na ko. I know this is not the right attitude, haha, but I just want to ask help about those two para naman maintindihan ko if worth it ba un or hindi. To be honest, frustrated trader ako. Haha. Sobrang gusto ko matuto about stocks kaya I keep reading on your blog pero minsan hindi ko maintindihan. Sorry. 🙁 Anyways, I am trying again now to know more. I am starting in your e-book of Value Investing. This is my second time around to read it. Hehe. Sorry ang weak. Thank you in advance and hopefully you'll respond here. Thank you and regards.
These kind of situations are common to the average investors - they buy stocks with little to no knowledge of its charts and fundamentals. The only thing that motivated them to buy is the continuous upward movement of the price. When prices start to drop, these people lose money and wonder what happened wrong. It's heartbreaking.
Anyway, let me share my insights into this two stock requests. I'll make it very easy to understand.
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2 Reasons Why I Think Double Dragon Properties Corporation (DD) Is Overvalued
I recently made an analysis of DD here using FY2016's cash flow and balance sheet. This time, I've updated my estimates using the recent 1Q17 filing and ended up with a lower intrinsic value than before. In comparison, doing the same DCF analysis using the average free cash flow for the same period gives a much smaller figure.
There are two reasons I think why DD became so overvalued. One is because investors paid so much in its estimated future earnings without paying attention to the real equity of the business. The second reason is that investors paid enormous trust on the company's management (Injap and Caktiong). These two factors may have contributed to its very high premium price.
Potential investors should scrutinize the company's earnings. If you look deeply, you'll find very interesting stuff. Such a case is shown on DD's 1Q17 filings. According to it, DD successfully offered 100 million preferred shares amounting to P10 billion last April 2016. Since June 2016 to March 2017, DD paid dividends amounting to P6.57 and P0.05 to preferred and common shareholders respectively for a total of P6.62 per share.
Now look at DD's earnings for the FY2016. That's only P0.2622 per share. In my opinion, it seems that DD is just returning the capital it borrowed from its shareholders. This is how DD expands - by taking on more debt aggressively. They are aggressively trying to meet their goals (Citymalls expansion) without paying attention to how much excess cash they can generate to pay down their old debts.
Betting On NOW Corporation (NOW)
Description (in Mil of PHP)
Cash from operating activities
Free cash flow
Tab.1 NOW's FCF (source: PSE Edge)
NOW drained their cash at an average of P30 to P40 million pesos for the last 3 to 5 years. Not only that, there hasn't been any significant increase in its book value that can justify its price upsurge last April 2016.
There's a lot of speculation on NOW's wireless broadband services. I think this is the reason why investors rode the bandwagon. The reason I'm skeptical about it is because in my opinion, technology companies are harder to predict because the industry is dynamic and rapidly changing. Competition is fierce and if it doesn't do a good job in innovation, the company will just be left behind.
When the stock rose, few paid attention to its intrinsic value because everyone is buying and making money. At this rate, who cares about the value anyway?
At present, I think NOW is slowly correcting to what it's really worth so it might take some time for it to go back to its highs.
Buy Or Bye?
I pay a lot of emphasis on the cheapness of a stock. As long as the assets are selling at a cheap price, I'll be willing to bet on it. If a stock I bought proves to be a value trap, I re-assess and cut my losses. There's nothing bad about cutting losses. It's a part of the game we play.
DD and NOW are highly overvalued stocks and they don't pass my set of filters. Both are a "BYE" for me.
On a positive note, these stocks are volatile so there might be an opportunity here in the short-term perspective but that's not how I recommend you play this game. Only bet on things that you're at least 80% sure of. To me, DD and NOW is just well below this mark.
Long-term investors bet on future earnings whether it can deliver as expected or not. Value is created if these earnings are used wisely to generate more earnings. If value is created, stock price tend to follow. If this thought process is followed religiously, investors who bought DD and NOW when both were still trading below intrinsic value are the most happiest investors today.
As an advice, always focus on the intrinsic value of the stock - it's future earnings and net worth. If it can't be helped, use charts to determine possible entries. Although I don't use charts in my buy and sell decisions, I believe it will be of great help if you can combine it in a Value Investing strategy.
That's all that there is to say with these two stocks. If you have some thoughts you would like to share, feel free to post it in the comments section below.
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