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Investment Opportunity from ‘Value Gap’ – 2

In previous articles we have discussed that the best time to buy shares of Berkshire Hathaway is when the price dropped so deep in a given year until its value gap becomes positive (you can read the previous article here). And now, this year of 2015 is the first time that Jakarta Composite Index (JCI) dropped significantly since 2008, that in year to date (until September, 10) the stock index has dropped 16.1% (While in 2013, the stock index fell only 1%). So, although some stocks may still rise, but most other stocks fell significantly compared to their position at the beginning of the year, even if the equity value of the company is actually still rising. In this condition, some stocks then create a positive ‘value gap’.

The following is a data of increase/decrease in the value of equity of the fifteen most liquid companies on the Indonesia Stock Exchange throughout the first semester 2015 (between December 31, 2014, until June 30, 2015), compared with the movement of share price throughout 2015 (between December 31, 2014 until September 10, 2015). Figures in percent, the data is sorted by value gap, from largest to smallest. Note that several companies posted a negative growth of equity because of dividend, not because the they suffer losses. All the fifteen companies mentioned below posted net earnings in the first half of 2015, although most of them are down compared to the same period of previous year.

Companies Equity Market Price Value Gap
PGN (1.3) (58.6) 57.3
Alam Sutera Realty 5.2 (37.9) 43.1
Pakuwon Jati 8.7 (29.5) 38.2
Semen Indonesia 0.2 (36.4) 36.6
Adhi Karya (1.4) (36.6) 35.3
Gudang Garam 2.6 (31.2) 33.8
Indofood 0.8 (26.5) 27.3
Bank BNI (0.1) (26.5) 26.4
Bank Mandiri 4.5 (20.2) 24.7
Bank BRI 4.6 (17.1) 21.7
Astra International 2.8 (18.5) 21.3
Bank BCA 8.0 (9.1) 17.1
Kalbe Farma 2.0 (15.0) 17.0
Indocement (11.0) (25.5) 14.5
Telkom (1.9) (3.5) 1.6

Now, based on the data above, and by using the assumption that fifteen companies above will eventually continue to grow in the long term, what is the most attractive stock to buy? Perusahaan Gas Negara (PGAS), of course! If you look at the data of value gap of Berkshire Hathaway in the previous article, the biggest value gap occured in 1974, ie 54.2%, but currently the value gap of PGAS is even greater, namely 57.3%. This means that if PGAS is once again able grow significantly in the future years (in term of equity), then the share price will also rise, and might produce profit of 100% or more after one or two years.

However, there are some things you should consider. First, PGAS has an excellent track record in the past where their equity continues to grow over 25% annually, does not include the dividends (PGAS pay dividends of about 45 – 55% of its annual net earnings), which causes the stock valued highly by investor, with PBV of about 4 – 5 times in last several years. So although the shares has down significantly this year, then we can not necessarily say that it is already undervalued. During this year, PGAS also posted a relatively poor performance that can be seen from its equity value which fell 1.3%, and the company usually needs at least one year to recover.

But what is clear that the valuation of PGAS at this time is 57.3% lower than the valuation at the end of 2014. If you buy PGAS at the current price and in the future it climb up to back to its valuation at the end of 2014, then you will obtain a gain of about 140%. However, PGAS can only rise, both in equity and stock price, if the company is like Berkshire Hathaway, which quickly returned to record a good performance when the economy recovers. Some companies often fell apart when the national economy in crisis, and unable to make a come back when favorable conditions return. But if you look at PGAS management’ style which is conservative and pruden, I believe that the company will be able to make a good or even better performance when the economy recovers later.

Besides PGAS, you could find several other stocks with huge value gap, like Alam Sutera Realty (ASRI), Pakuwon Jati (PWON), and Semen Indonesia (SMGR). For SMGR, if not because of significant increase in its share price in the last two weeks, its value gap might be greater than PGAS. The stock that have the smallest value gap is Telkom (TLKM), that despite its equity fell 1.9%, but its share price fell only 3.5%. But for some reason, as far as my research, TLKM is one of favorite stocks of fund managers in the country (and that’s why I don’t invest in mutual funds).

One more thing. In term of equity growth, until the first half of 2015, there were only two companies in the table above that had a quite good growth (above 8%), namely PWON and Bank BCA (BBCA), and it may indicate one thing: Although 2015 was a difficult year are, but in fact the property and banking sectors are still able to show significant growth in net asset value. And if you learn more, not only PWON and BBCA, but the majority of companies in the property and banking sectors, both large companies or second liners, are the best performer for 2015 so far (in terms of financial performance/fundamental, not the performance of share price). For the property sector, it is quite clear that the industry is still on the game, and it also explains why several large companies from other sectors went into the property these days. You could find more information using the Google.

Okay, I think that's enough. Any comments?

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