How to Read the News from Companies

Let’s say you have plan to buy a house. If a property agent come to see you and offer a house at the price of Rp400 million, while you know that the market price of the house is only Rp300 million, will you take the offer? Of course not. But how if the agent said because there are certain reason such as the strategic location, building quality, etc, then the house will worth Rp500 million in one next year. Therefore, if you buy the house at the price of Rp400 million, then you will get profit of Rp100 million. How’s that? Then you probably started to be tempted to buy the house, although the price is more expensive than it should be.

Pay attention to the bolded words: If you buy the house at the price of Rp400 million, then you have definitely release Rp100 million (because you buy it at the higher price of Rp100 million from the market price), but the fund will not necessarily return, and you won’t necessarily get the profit of Rp100 million as promised, because we never know whether in the next year, the house price will really reach Rp500 million or not. It could be the increase in price is not even up to Rp400 million, isn’t it? So, your Rp100 million of fund is actually at stake here.

In stock market, this practice happened frequently: You get recommendation to purchase a stock at the price that is actually higher than the fair price, because the company’s performance is said to be improved in the future, so that high price seems reasonable. In here, the risk that you bear is even greater, because the fund of Rp400 million of yours will not only unlikely to increase to be Rp500 million as promised, but can even decrease. Because it’s different with the property price that is unlikely to decline, the stock price can drop anytime.

Have you ever heard about news like this; Company A won the bid worth of Rp1 trillion, Company B will acquire a coal mining company in Africa, Company C targets an increase in net income amounted to 200% on 2011, Company D will receive additional profit from the new project, and such. I believe the answer is not just once, but often. Yes, when a company has poor or unremarkable performance, then there is no other way for the company to make it looks better, unless by releasing all sorts of promises to the investors.

Try to take a look at the company that has solid performance like Unilever (UNVR). Have they ever said all sorts news to the public regarding their performance in the future? They don’t have to do that, because without even saying, everybody knows they have excellent performance and have very bright prospect.

The modus of this practice is actually simple and typical, it’s always the same; the performance (that is said to be good) in the future is used to evaluate the reasonable price of the stock today. For example, Company A recorded EPS of Rp5 per share on First half 2010, while its stock price was Rp200. It means that the Annualized PER was 20 times, aka pretty expensive (the average of PER in IDX is 10 - 12 times). So, after the Company A is rumored to won a certain project worth some trillion of Rupiah, the net income is predicted to be soar, so its EPS on full year 2010 (half year away from now) will reach Rp20 per share. If using the EPS number of Rp20, then the stock price of Rp200 will generate 10 times of PER, aka pretty cheap.

Usually, after the analysis using that ‘dreamy’ data is released or distributed in the market, then the stock of Company A will rise, probably 5 or 10% or even 20% if the analysis is convincing, before then fall back.

For example is Bakrie Telecom (BTEL), which sometimes ago rumored to do the synergy of Esia and Telkom’s Flexi, which was predicted to give great benefit to BTEL. BTEL was also rumored would get additional income from Bakrie Connectivity. Consequently, different from other B7’ members that slumped due to the Bank Capital case, BTEL succeeded to increase from position of 140 to 170 (in average), before now it moves stagnantly in position of 150 (in average). Why did BTEL move down back? It was because the fundamental wasn’t strong enough, where its performance on first quarter 2010 was considered poor (when this article was written, BTEL released its financial statement of the first half 2010, and the result is poor). BTEL might just increase and not fall back if its performance on the first half 2010 shows significant improvement.

Then how do we react to such information?

There’s actually no need to response negatively regarding the information released by the company related to its performance improvement in the future. That information indeed can be a chance for those who can play in the short-term, because the stock in question is usually really went up, right? Although it’s temporary. Take an example of BTEL. When BTEL was on the position of 141, the company announced that they would do the synergy of Esia-Flexi, and then the stock rose, until two weeks later and reached position of 172. If you go in at the price of 141 and then go out at the price of 172, then you will get gain of 22% only in two weeks.

But surely you do need to observe, which is the convincing information, and which isn’t. Because, not all information released by the company can jack up the stock price. Sometimes the stock price has already high when the news is released. That is why, for the short-term traders, an ability to assess the level of significance of an information (whether it’s reasonable or not), become an absolute requirement, so that you will be able to achieve great gain in a short time.

Note: as mentioned above, an increase of certain stock due to such information (if the rumor sounds convincing) is usually temporary. The stock will immediately fall back after the rumor forgotten over time, particularly if the fundamental is weak (shown in the latest financial statement). And usually it will only last until 1 or 2 months, or shorter. Besides BTEL, another quite phenomenal example is BHIT. So, don’t ever use the news such as: ‘The company targets net income of some hundreds billion on 2011 after acquire oil field in the Arctic Pole’, as your guidance to purchase the stock and hold it until 2011. Trust me, it’s just a waste of time, and probably your money too.

But if you are a long-term investor, then you don’t need to pay attention to such news released by the companies. You just need to observe the fundamental of the stock you purchase based on the latest financial statement and the technical as well if necessary. If the stock you collect turned out drop due to the certain bad news, such as ‘stock A fall because the CPO price drops’, then the stock is not included in the list of long-term stocks, or the price has already overpriced.

Original article was written on August 10, 2010.