What If The Company Controls Its Stock Price?

Some time ago I received a question from a friend (damn I have a lot of friends, thanks to this blog) which sounds like this, "Dear Sir, there are several companies on the Indonesia Stock Exchange which had a consistent growth performance, the share price is low, and the management apply the good corporate governance. But still the shares are illiquid and hard to move, one of which may Mandala Multifinance (MFIN) that you recommend.'

'On the other hand, there are also companies with not-too-good financial performance, the share prices are expensive, and management is also less good. But its shares are liquid, and also able to rise because the company, or in this case its investor relations, diligently holding the roadshows or something else to promote its shares to investors, and they are also controlling the share price in the market to continue to rise.'

'From here I got a point that it is useless to buy shares of companies who only focus on operational activities, but do not care whether its share price would go up nor down and never trying to control it, and also rarely promote its shares to investors. Because, no matter how good the fundamentals/financial performance of a company but the investors still do not want to buy the shares, then the price will not go up, will it? But how does an investor will buy a stock if they did not know about the fundamentals, because the company is rarely promote it?'

Well, although the question makes sense, and I have once received a complaint from a friend who refused to buy stocks that I recommend because he said, 'I see the company’s management did not care if the shares would go up or down', but there are at least two points we can immediately see that they are irrelevant.

First, it is said that there are some companies on the Stock Exchange which had a consistent growth performance, the share price is low, and the management apply the good corporate governance, but still the shares are illiquid and hard to move. One example might be MFIN. For years, MFIN had never had a roadshow nor held promotion to investors. What they are doing is only to run the motorcycle financing business, and they never try to control the price of their shares in the stock market.

The question is, is it true that the share price of MFIN is never going anywhere? Well, you can see for yourself. When this article was written, MFIN was in a position of Rp950 per share, or 27.5% higher than its position a year ago. So how could you say that this MFIN is never going up?

However, I understand by the term 'the shares are hard to move' referred by my friend. In the long term, ie one year or more, MFIN is constantly rising and it was in line with the increase in the real value of the company. But in the shorter term, say a few months, then the shares are indeed seems hard to move. If you buy MFIN at the price of 710 in April 2013, then in March 2014, or eleven months later, your shares would still traded at the price of 700, or down 10 points instead of rise. For some investors, especially those who are beginners, there is nothing that more tiring than waiting for a stock for months (let alone months, some people cannot even hold their fingers for just a week!), but still the share price did not going anywhere. It feels like standing in a long line in McDonalds when you’re extremely hungry, don’t you say?

But the point is, even though the share prices of certain companies seem unchanged after a long time, but the prices will eventually follow the company's fundamentals. If the real value of company’s net assets/equity increases, then the share price will also increase. If the company suffered a loss so that its equity down, then the shares will go down. Over the years I never, once again never, met a company that makes large net income for two or three years in a row so that the value of its equity rose sharply, but the share prices still did not go anywhere during the period. If you find and buy stocks that you think were good, but after waiting for more than a year it was still not going anywhere (while on the other hand the Jakarta Composite Index/JCI moving normally and not experiencing a downturn), then try to evaluate your decision: Is your stock that good?

Okay, but MFIN’ trading volume is still not liquid, right? Well, that's only because the share price is not yet high. Now look at Lippo Cikarang (LPCK) (this is my favorite stock in the property sector). In early 2011, when the property sector was about to booming, LPCK was still traded at the level of Rp400’s per share, with trading value of Rp100 million or US$ 10,000 per day, and often less than that. But now? LPCK’ trading value reached tens of billions of Rupiah (millions of US$) per day already, alias quite liquid, because on the other side, its share price is much higher than in 2011 (more than Rp10,000 per share).

If you want a more extreme example, Astra International was not liquid at all in the years of 1998 – 1999, when the company is in a bad shape by suffering a capital deficiency. But today, how much is the daily trading value of ASII? More than US$ 25 million!

So once again, if a company has a good financial performance and continue to grow from year to year, you do not have to worry: The stock will eventually rise and also becoming liquid. There are some exceptions indeed, such as the stocks of HM Sampoerna (HMSP) and Multi Bintang Indonesia (MLBI), which although they continued to rise in the long term because of their excellent fundamentals, but their trading values are still low until today. However, based on experience, it should not be a problem. If you could gradually buy a stock (gradually because of its tight liquidity), then you should be able to sell it gradually too. Back to the example of MFIN, if the shares were not liquid at all then I will not buy it (MFIN trading value is more than US$ 10,000 per day, and it is barely enough). There is one stock that I like, namely Siantar Top (STTP), but I never bought it despite the fact that this STTP has risen more than 10-fold in the last 5 years because, with the trading value of less than US$ 1,000 per day, then how could I buy it?

That is first. Secondly, if there is a question, how an investor will know about a stock if the company is rarely promote it? My answer is this: Although MFIN management never promote the stock to the public except in a manner required by the authorities (by holding public expose), but I still know about the stock, do not I? A company did not need to do any promotion so that investors will buy its shares. Because if a company had excellent fundamentals, investors will surely know by themselves, so that the stock will go up by itself.

Because a real investor would not read newspapers or look at the advertising/promotion of the company, or join their roadshows to buy their shares, but they only read and read the company's financial statements and annual reports. So if there is a good stock, they will find out. The proof? Just take a look at LPCK and MFIN earlier. Because of their good financial performance, the shares continue to rise in the long run although the companies rarely or never concerned about the price of their shares in the market. Moreover, the three biggest companies on the Stock Exchange (in terms of market cap), ie Bank BCA (BBCA), Unilever Indonesia (UNVR) and ASII, they are almost never held a roadshow or the like (or never at all?). Nonetheless, since the company has good fundamentals and reputation, their shares are very liquid and keep gaining in the long term. Plus, all three companies never try to control the price of their share prices in the market. All they do is to buy the shares back in certain conditions (eg crisis), where the stocks were fell.

Conversely, when a company has poor fundamentals, then no matter how much the management conduct the roadshows, or how good the investor relations in exposing 'the prospect of the company' to prospective investors, but the stock will still drop. Bumi Resources (BUMI) can be regarded as the most promoted public company in Indonesia, where the company is diligently held roadshows at home and abroad, analyst meetings, press conferences bla bla bla, so that investors would be interested in buying the shares. But because the company continued to lose money in the last few years, then how about the stock? You can see for yourself.

However, I still appreciate companies who give a little attention to the price of their shares in the market. If we use the example of Warren’s investment company, Berkshire Hathaway, the company has a policy to buy back its own shares in the market, if the price has dropped to a certain level that is considered to be much lower than its intrinsic value. And when the buy back is done, the price decline will eventually stop and then slowly but surely rebound.

But that's all a company needs to do. They do not need to control their share prices in the market. And indeed Berkshire never try to control the price of its shares in the Wall Street.

While on the Indonesia Stock Exchange, there are many companies that although they have never tried to control the price of its shares on the market, but they are always ready to buy back their shares if the price was drop. For example Semen Baturaja (SMBR), where the management since has set cash of maximum Rp100 billion (about US$ 9 million), to purchase its own shares on the market at any time if the stock down to, say, lower than Rp300 per share. At the height of the global crisis in 2008, the Government of Indonesia in its capacity as the controlling shareholder of state-owned enterprises, also deliberately disbursed Rp4 trillion (about US$ 350 million) to buy stocks such as BBRI, BMRI, SMGR etc. to prevent these stocks to down further. This buy-back policy could bring back the confidence of investors (because the government dared to enter in the time of turmoil), and also provided profits to the Government itself, because they buy the shares at an actualy discounted price.

But still, the government never tried to control the price of SOE shares on the Stock Exchange.

Meanwhile, when a company ‘cooked’ its own shares until it rose high, whether along with promotion/roadshows or not, its ending is usually very uncomfortable. You may wonder, why the stock of Trada Maritime (TRAM) continued to down to the present price of Rp60 per share, from the price of 1,800's. But have you ever asked, how could TRAM, in 2012 – 2014, continue to rise from the 500’s to 1,800’s with a very large volume of transactions, whereas the company’s fundamentals were extremely bad?