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Author:   |   Latest post: Mon, 21 Jun 2021, 9:39 AM

 

My Thought Process On Writing a Put Option - With Actual Case Study On Citibank (NYSE: C)

Author:   |  Publish date: Mon, 21 Jun 2021, 9:39 AM


Since venturing into the options world and posting this part of the series into my monthly portfolio update, I've received quite a few emails from readers asking me the strategy I have used for my positions.

Now, before we start, I must do warn that options are a derivative tool which can be complicated and dangerous if you are not careful about it. There are plenty of risk management lessons to learn about options which I might do in a separate article because they are just so important.

Personally, I have undertook quite a few strategies with options play depending on the type and exposure I wanted to get myself involved in.

In this article, I will write one of the most favorite strategies employed by folks on writing a put option.

Writing a Put Option

First, let us be clear on what's a put option is.

According to Investopedia, a put is an option contract that gives the holder the right, but not the obligation, to sell the underlying asset at a pre-determined price at or before the contract's expiration.

As a writer of the put option, you would then consent to purchase the underlying stock at the strike price, if the contract finishes in-the-money.

Writing a put option is generally used as a way to generate income for investors as the writer would receive the premium that they lock in regardless of what happens to the price of the stock market. In other words, not only will you receive that premium, but will also front-load your expectation on how much you will need to break-even, make a loss or at what stop-loss price should you set.

This information is all front-loaded for you to make that preparation well in advance.

Pros & Cons

In an options contract, you have two parties that transact simultaneously.

When you write a put option, there will be someone opposite your end who has formulated strategies that will benefit his positions over the long term.

As a writer of the put option, your profits are capped at the premium that you locked in right from the start, regardless where the market might moves. Depending on your risk tolerance, you can be ultra conservative with your strategy and write a put option that you are comfortable with. For instance, you can write an ultra-conservative option today for Amazon (Nasdaq: AMZN) at a strike price of $2,500 expiring next month for a premium of $380 per contract (100 shares).

This is what I usually call as ultra-conservative play and the premium that you have written is almost like a 99.9% win scenario. I mean how often do you expect a company like Amazon to fall by 25% in a period of 1 month. That just doesn't happen very often.

This is also why writing an option is such a popular marketing gimmicks in many courses because gurus can easily tout their winning % rate to participants as it's almost always a winning trade.


Source: Analyst prep


Unfortunately, and like most things in life, things are often taken for granted.

Writing a put option does has its massive disadvantages in the form of an unlimited loss, especially if you didn't set a stop-loss in your trade.

Like the above mentioned example for Amazon, it is indeed very rare to see the company dropping more than 25% in a single month. But in a very rare event, it can still happen and this is the risk which I think can easily wipe out an investor's one year gain in a single swipe.

For instance, did you know that at the peak of the Covid-19 crisis, even companies like Amazon shed 34% from the peak to the trough in a matter of 3 weeks. What this means for investors is that should you be caught in a situation like this as a writer of the put option, you'd be "forced" to purchase Amazon at your strike price at the expiration date. Since the market value is lower than the strike value you will purchase, you will be immediately holding on to an unrealized loss.

Of course, the alternative to that is to close your positions before the expiry and book yourself a nice hot bath in a nice looking hotel to forget your loss.

With that basics understanding of the pros and cons of writing a put option, now let's get straight to the actual thought process when I usually write a put option.

Actual Case Study - Citigroup (NYSE: C)

Generally speaking, I tend to be very conservative in my strategy when writing a put option.

My goal isn't really to generate returns and earn passively from writing a put option. In fact, for most of the time, I'm just using this passively to wait for the big moments in the stock market where I could take up positions in the market.

I also do not try to roll-over my position month after month even though that can yield the most returns due to the time-decay playing to the writer's advantage. 

The main objective here is to not get caught unnecessarily when then market turns southwards and you are left with little or no capital to take advantage of that situation when it happens. The premium is a relatively smaller amount in the larger scheme of things that pays you to wait and be patience. Of course, if the market continues to move upwards over time, then the premium will get larger and more significant over time.

Having said that, the mental has to be trained to understand that the strike must be a good entry and one that you are comfortable taking regardless of the situation (entry can always get better in a bear market scenario, we're trying to get to the very best entry as we can).

So articulating all this theory with a position that I recently undertook on Citigroup (NYSE: C) last Friday.

Citigroup is a company I have been keeping in my watchlist since the post-recovery play takes dominant in the market. I have not tried to put my foot in so far as I thought some of these run looks over-extended. Since then, I've been waiting for a pullback and a safer entry range.

Like most other US banks, Citigroup has been on a correction in the past few days since the Federal Reserve concluded the meeting during the mid-week of its June meeting. If you look at the 10-year Treasury Bonds, it spiked up to 1.57% a day after the meeting is concluded to before reverting back to go lower at 1.47%. 

The 2-year Treasury Bonds however spiked up and did not come down.

What this means is that while the market is certain in the short-term rates are going up, the market is somewhat less certain  that this will spill over to the long term perspective of the bond market. We just don't know if we are going to get that recovery over the long term or not.

As a consequence, most banks and economic recovery stocks have dropped in the past few days, giving way to another run for tech plays.


Source: CNBC


Citigroup, in particular have dropped a consecutive of 13 days in a row since it hits the recent peak of around $80 just earlier this month. 

It last closed the day at $67.6.

Sensing this as an opportunity play, I quickly draw a chart and found out that there is a strong support at about $67 which it last hits that support back in April. Further, it also coincides with the peak around Jan which I highlighted in red.

Adding to that, there is also a strong upcoming EMA200 daily support at $66, which also coincides with the EMA50 weekly support at $65. I do expect price to rebound somewhat at this level due to the stock being oversold.

To further add to my thesis, there is also a Dow Jones weekly EMA20 support at $33,175 which is not far from here. There is just so much support at this level being justified.

As I mentioned earlier in my article, I tend to take a more conservative approach when writing a put, just to make sure I further reduced the chance of things going horribly wrong when it does.

So, I looked on to the next level of support and found that there is a next layer of strong support at $61.70 and then also at $57.5. This is between another 10-15% drop from today's oversold level.


Citigroup (C) Daily Chart - As of 19 June 2021


Using all this to come up with my decision, I decided to write a put option at the strike price of $60 (in between the next level of support at $57 and $62) at various expiry date, mainly July, August and October.

This coincides with the conservative approach of trying to diversify my exposure through a staggered ladder that I have created for my various options play in the event the market suddenly moves in one particular direction.

3Fs writing put options on Citigroup

Fundamentally, I am expecting Citi to report an earnings of about $7-8/share for FY2022 which will bring its PER to around 7-8x. Its current book value is at $75 so we do get some sort of margin safety there.

My mental tells me that this is a good price for entry even if I do get assigned at the worst case scenario. This is important because as a writer of a put option, you need to be convinced that you are not overpaying for a company even if you get assigned and you'd be happy either way to receive the premium or the stock itself at $60.

I hope this formulation and articulation of thought helps in the question that some readers ask me.

There are obviously a hundred and one strategies to articulate and it is very difficult to say which strategies are the best out there. I would just say that get into the strategy that you are comfortable in and works for you and then stick and do some simple and trial error yourself to try a new one.

In my next series, I'll talk about some of the other strategies I have on other options strategies and the risk I use to mitigate.

Stay tuned.

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How To Profit Against Huge Inflation Ahead

Author:   |  Publish date: Fri, 18 Jun 2021, 1:39 PM


I was walking past my favorite fast food chain today when I remembered reading a news a few days ago that several fast food chains in the US -  namely Chipotle Mexican Grill, McDonald and Burger King have decided to raise prices for their products across their menus due to rising raw material and labor costs.

U.S Consumer Price Index (CPI), which represents a basket including food, energy, groceries, housing and sales across a spectrum of goods, rose 5% year on year in May. This represents their fastest pace of increase in nearly 13 years. The last CPI gain which was above 5% was dated back in August 2008 when CPI gains 5.3% that year.

Source: CNBC


For a long time in this decade, we have grappled with the expectation and live with low inflation since the Great Financial Crisis in 2008. While many are still recovering from the post-pandemic era, there are still an obvious clear trend of laggard for job availability and rising wages, which may dampen the overall recovery of the economy before they can call it a success.

This can create a disparity between expectation and reality in purchasing power, and while nominal income may seem to increase on the surface, real income may actually suffer. This can then result in an overall drop in the standard of living.

Why is Inflation bad for the stock market?

Long-lasting episodes of high inflation are often the result of imbalance monetary policy.

For many years, central banks have kept interest rates near to zero which boosted productive borrowings from companies to grow and expand its offerings. This resulted in an overall increase in job creations and demand to purchase, which pushed many stock prices to its record high.

Unfortunately, the Federal Reserve has not acted fast enough to restore the interest rates when economy is recovering and many of these fueled money has gone into investment and speculative assets rather than concessionary spending, leading to inflation expectation over time.

Businesses have for many years enjoyed low costs of borrowings and a sudden increase in the interest rates will send mixed signal to the economy as companies have to cope with higher cost of borrowings. Risk premium expectation will also increase which will lead to a lower valuation of its business.

Inflation. Inflation..Inflation

Michael Burry - who famously shot to fame by betting against mortgage securities leading up to the Great Financial Crisis and was depicted in a movie called "The Big Short" (I would strongly recommend you to watch it if you haven't watched the movie) revealed his positions in a funds he held through Scion Asset Management in the recent 13F quarterly filing.

On the 21st Feb 2021, he shot a warning to the rest of the market in his tweet - a prediction he has similarly taken in the past leading up to the Great Financial Crisis which he calls it as "no one listened".

He tweeted:

"People say I didn't warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned."

Source: Twitter


Source: Twitter


Further, he has also compared the upcoming US inflation to the hyperinflation that happened in Germany during the 1920s and what the consequences that the country should be prepared to pay for. In his most recent tweet, he also called the market the greatest speculative bubble of all time is forming at the moment.

In the recent 13F Filing (ended March 2021), he shared his open positions and direct inflation strategy that includes some of his positions profiting from the rise in inflation expectation:

Source: Scion's 13F Filing

The most prominent one is his positions on the Put options Ishares 20+ Year Treasury Bond ETF (TLT) - which represents 12.7% of portfolio holdings and also one of his largest current stake (other than the short position on Tesla).

This particular ETF tracks the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the "underlying index") and performance of the U.S Treasury that have a remaining maturity of greater than twenty years.

A rising inflation over time will force the hands of the Federal Reserve to increase interest rates earlier than expected which would lead to a decline in the value of these bonds. Longer maturity term bonds would be more sensitive to changes in the interest rates which would likely give way to more volatility in the price action of these bonds.

Source: 3Fs Working Compilation

Burry has used options in majority of his positions in order to magnify the return of his investment, but has also taken more risks should the thesis gone the other way against him.

Other than TLT, he has also taken a couple of positions in the call option ProShares UltraShort 20+ Year Treasury (TBT) and ProShares UltraPro 20+ Year Treasury (TTT) which is an inverse of the bond ETF so he is betting that these ETF will go up. He uses call option further in order to magnify his positions even more to signal his conviction.

P.S: TBT UltraShort goes up 2x when bond index goes down and TTT UltraPro goes up 3x when bond index goes down.

Most of his positions should be largely profitable by now and while inflation fears have tapered a little in recent weeks depicted by a drop in treasury yields, Burry should still be sitting quite comfortably in the black.

If you are interested to take a position in TLT, you can take advantage of the offer from Phillip MetaTrader5 and open a direct short position. This will put you in a similar position with the put option which Michael Burry undertakes.

Do note that there are no limitations on how much users should trade and users are allowed to trade as small as 1 ETF CFD on the platform. There is also no minimum fee incurred on the user and commission trading is zero.

Source: Phillip MetaTrader5 (iShares Barc 20+ Yr Treasury ETF)

Alternative Investment: Energy Select Sector SPDR ETF (XLE)

An alternative investment that will be a good hedge against inflation is an exposure to Energy stocks.

XLE is an ETF made up of the 23 largest Energy companies in the S&P 500 - valued today at around $26 billion of assets under management. It comprises of some of the largest name companies such as Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP).

Energy is one of the commodities that correlates strongly to inflation movement. In the past 5 years, you can see that whenever there is a hint of inflation spikes, energy commodities values also went up subsequently.

The underlying reason for this is because oil price setting is a balance between demand and supply and with inflation trending up, the likelihood of oil following suit is very probable. These companies included in the ETF would then be direct beneficiaries of rising oil prices.

Source: U.S Labor of Statistics


A quick benchmark of the mentioned ETF against S&P shows that it came out a clear winner this year, returning over 47% as compared to S&P which only returned 13%. Forward valuation for the ETF is also modest at around 20.8x and is still below pre-Covid days.

Source: 3Fs Working Compilation

Source: Phillip MetaTrader5 (Energy Select Sector SPDR ETF)


Conclusion

The takeaway here is that fast and rising inflation can hit the fan really hard when and should it comes and there will hardly be any place to run and take cover for it.

In the past few weeks, prominent figures such as Michael Burry, Warren Buffett, Ray Dalio and Bill Ackman have all warned about an unprecedented rise in inflation this year which the Fed continued to brush away, giving the market assurance that these inflation increases are likely to be temporary in nature and will stabilize soon. 

But if there is anything, the recent data in the past couple of months tells us otherwise and it is better to be safe than sorry.

Do take note that the two abovementioned ETF CFDs only require 20% of the margin requirement which grants your capital a greater efficiency. For instance, if you decide to purchase 100 shares of the Energy Select Sector SPDR ETF, you would usually require a capital of 100 x $55 = $5,500. In this platform, you would only require 20% of the $5,500 = $1,100 to purchase that same 100 shares.

Do check out the full comprehensive list of all the available ETF CFDs in this link here.

If you are interested in downloading the free Demo account, click the link here to get started.

If it something that you like, you may register your interest and account by scanning the below QR code with your phone which will direct you straight to the registration page for the next step.


Disclaimer: This post is written in collaboration with Phillip Futures. However, all opinions stated are that of my own.

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HUYA Inc. - Post-Merger + Transformation in Business Model + Undemanding Valuation

Author:   |  Publish date: Tue, 15 Jun 2021, 4:46 PM


In my last portfolio update, I revealed a position in HUYA Inc. (NYSE: HUYA) which I recently undertook. I had a long position in the company at a purchase price of USD 14.88.

I was a little skeptical at first given the uncertainty of the Chinese strict regulation and a lot of the Chinese companies have been impacted negatively in the past few months. However, upon further deep dive into the company and its prospectus, I decided to put faith in my decision.

Based on the price action alone in the past 5 years, this does not look anywhere near justice. In fact, it looks like a company in trouble. Basically, it is a very predictable movement in the price action where the share price visited near the low of $15 in each of the year in 2018, 2019, 2020 and 2021 and then bounced back up strongly thereafter.

While growth rate is visibly slowing down in some of the key operational metrics in the past few quarters due to a saturated market where DOUYU and BILIBILI are competing with them, I believe there will be a transitional change in the business monetization model once post-merger with DOUYU is approved and done with.

Together with an undemanding valuation which I have explained more in detail below, this makes it a calculated buy at this point.

But first, let's take a look at the business model of this company.


Source: Yahoo Finance

Business Model

HUYA INC. is a one of the leading game live streaming platform in China with a large and active game live streaming community. 

The company was initially established in 2014 as a game live streaming business unit of YY INC.

HUYA cooperates with e-sports event organizers as well as major game developers and publishers, and has developed e-sports live streaming as one of the most popular content genres on its platform.

Popularly known as the "Twitch of China", HUYA is the first Chinese company to expand into the West with its first ground breaking deal with Team Liquid (one of the most valuable e-sports team around the world).

Emergence and Popularity of E-Sports

The emergence and popularity of e-sports tournament worldwide is on the rise.

In the West, e-sports tournament has consistently attracted more than 100m viewers in the past 3 years and this number is growing rapidly across the years. 

In Asia, e-sports was featured as a medal event in the 2019 SEA Games in Manilla while there are discussion about including e-sports tournament as a demonstration sport in the upcoming 2024 Paris Summer Games.


Source: DBS

HUYA's Huge Opportunities Lies in its Transformation of its Business Model

When someone look at HUYA earnings result, they quickly point out that the growth has been stalling and slowing in the past few quarters.

If we look at some of the data from the earlier years, they've managed well to sustain the growth in the Monthly Active Users (MAU), Mobile MAU and Paying Users (PUs) - building an ecosystem around the platform to keep them engaged.

The current business model of monetizing the platform today is tricky as HUYA generates the majority of 95% of their revenue from the sales of its virtual gifts on its live streaming platform while only 5% of the revenue comes in from digital advertising. 

This means paying users, also known as "fans" come in to stream and watch their favorite gamers perform and then purchase and send gifts to them. As a streaming platform, HUYA gets a cut of that gift fees.

You can see that the room to maneuver this is very low as conversion tends to gyrate within the 3-4% rate.

This means that for every 100 active users you bring in to the platform, only 3-4 people are contributing to its topline. The rest of the 97 are what I call as active but non-contributing to the company's revenue. In other words, opportunities are "wasted".

Source: 3Fs Working Compilation


Our generation today consume a large part of information from the internet today.

The ability to create an eco-system inside and within its large monthly active customers mean that there is clearly huge opportunities within the monetization model that they have yet to tap into. 

While this currently contributes only 5% of the company's topline revenue, they will be able to quickly scale up their growth topline should they change their business model to incorporate more advertising, subscription and broadcasting - which I am sure is already in the pipeline now that Tencent is the controlling shareholders post-merger.

HUYA needs to monetize the model better to utilize all these available and engaged MAUs


Lesson to learn from Twitch

Twitch was a company that was bought by Amazon back in 2014 for $970m at a valuation of 70x Price to Sales. Clearly, Amazon sees an opportunity back in the days that no one saw and has clearly made that investment paid off in the long run.

The company main revenue stream comes in three main channels - Advertising, Subscriptions and Broadcasting.

According to a source from SuperData, Twitch's revenue surpassed Youtube's gaming revenue from 2018 onwards, racking up over 20% from the overall gaming streaming channel.

The biggest income stream comes from advertising, which they managed to chalk up over $400m in 2020, followed by subscription and broadcasting. In the space of subscription, subscribers can sign up to Twitch Prime for $7.99/month for which they are also entitled to streaming content from Amazon Prime video (a good thing that post-merger HUYA-DOUYU Controlling shareholder is the mighty Tencent Holdings).

Today, the company is estimated to be worth more than $20billion in market cap, which is almost a 20x investment return for Amazon within the space of 7 years.

Merger with DouYu

For a long time, the competition within the streaming and gaming space has been dominated by big players such as HUYA and DOUYU. The planned merger of HUYA and DOUYU will create one large dominant player in the industry.

This means that once the two companies merge, a gigantic one combined platform with a market value of over US$7 billion will be created and it captures more than 80% of the entire market share within China.

The merger may provide many economies of scale within the space of sharing one common platform and operational efficiencies without having to think about wastage and challenges that they have previously faced against one another.

Like HUYA, DOUYU's unit economic growth is visibly slowing down as well, as evident from the lower increase in the monthly active user and paying users conversion. 

Post-merger, should it be approved, will see DOUYU gets delisted from the US market while HUYA will remain as an enlarged entity.

HUYA is offering 0.73 American Depository Shares (ADS) for each DOUYU ADS 


Source: CaixinGlobal

Financials: Cheap Valuation

HUYA is today valued at a market cap of around US$3.5b while DOUYU is valued at around US$2.9b - I think it's incredibly cheap at how the market is valuing them at the moment.

A quick look at the balance sheet across the past 5 years and you can see that the net assets of the company have been growing larger and healthier. This gives us the assurance that at least the company is moving into the right direction.

As at 31 March 2021, the company has more than RMB 9.7b in cash equivalent (sum of Cash and cash equivalent, Restricted Cash and Short-term deposits) and no debt borrowings. Most of the liabilities are related to the accrued and deferred revenues.

If we take the total of the cash equivalent of RMB 9.7b (~USD 1,481m) divided by the 236.2m number of shares outstanding, we get around USD 6.2 / share.

This means that at the current market cap of around $3.5b, close to 40% of current market cap belongs to cash value in their books. If we further add the investments portion, this will add another 10% of the current market cap to 50% overall.


Source: Balance Sheet FY2016-2020

Source: Earnings Result Q1 FY2021

Furthermore, the company has garnered US$1.67b in total revenues for FY2020, which puts the current valuation at Price/Sales of only 2x (Current Market Cap / Total Annual Revenue). 

If we exclude the abovementioned existing cash and investment, this will put the company's valuation at only Price/Sales 1x (ex-cash and investment). This is incredible cheap even for a company that's not growing, let alone one that is in the industry leader like HUYA.

To give a perspective of reminder, Amazon bought Twitch back in 2014 at a value of $970m at around Price/Sales of 70x and today Twitch is estimated to be worth $20m. While we don't expect the combined entity of HUYA and DOUYU to get anywhere near Twitch for the near term, I think there's still room for upside.

Final Thoughts

I've put some money in my position for HUYA because I thought there are greater risk reward for the company at the moment which might paid-off.

Clearly, a lot of things can go wrong from here, for example the merger is not approved which might provide a setback to the company going forward.

Currently, HUYA short volume ratio is a high 32% and I believe there are many who are suppressing the company's actual worth because of many of such uncertainty.

With the post-merger play ongoing and a transformation in the business model, with an undemanding valuation, a 100% upside target to $32 is not unlikely in the next 12 months. This puts the company at a market cap of around $7b or a price to sales multiple of 4x, which is still very much reasonable for such a company.

As always, do your own due diligence and let me know what you think in the comments below.

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Jun 2021 - Portfolio & Transaction Updates

Author:   |  Publish date: Thu, 10 Jun 2021, 2:13 PM


No.

 Counters

No. of Shares

Market Price (SGD)

Total Value (SGD) based on market price

Allocation %

Category

1.

Alibaba

       300

US$213

     84,350.00

23.0%

Growth

2.

Lendlease Reit

  85,000

S$0.79

     67,150.00

17.0%

Dividend

3.

JD

       300

US$72.7

     29,000.00

8.0%

Growth

4.

Ping An

     2000

HK$81.3

     28,400.00

8.0%

Matured

5.

Huya

    1,000

US$16.2

     21,380.00

6.0%

Growth

6.

AMD

       100

US$80

     10,500.00

3.0%

Growth

7.

ISHARESHSTECH

    1,200

HK$16.70

       3,500.00

1.0%

Growth

8.

Ho Bee Land

       300

S$2.40

          720.00

1.0%

Leftover

9.

Options / Cash

          -

-

    135,500.00

35.0%

Options Premium

 

 

 

 

 

 

 

Total

 

 

 

   380,500.00

100%

100%


I am going to do an earlier update for the June portfolio this month as I will be busier in the later parts of the month.

We have seen a good rebound in the overall market in the early part of June after a rather turbulence month of May where we saw a couple of overbought companies falling from its peak.

Some of the companies in my portfolio also rebounded with the overall market while there are still a lot of laggards play inside the portfolio which might need some good amount of patience.

The jobs report for the month of Jun (one of the three critical reports that always spooked the market) looks decent enough, sparking an overall optimism surrounding the faster rebound of the economy.

Over in Asia, many countries are still grappling across lockdown and re-infection numbers so we are unlikely to rebound as fast yet as compared to some of these Western countries.



Portfolio Updates

My first update of the portfolio was for the divestment of my previously largest position in Manulife REIT as I saw opportunities elsewhere where I wanted to deploy the funds to. While the company was managed in superb condition, I was also somewhat cautious of the impending inflation rise which might result in the earlier hike of the interest rates which might dampen plays like Manulife REIT, which has borrowings done in the US (although they are unlikely to be impacted much as they have just refinanced not long ago).

Using this opportunity, I also doubled my position in Ping An at around HK$80+. The upcoming interest rate hike as well as inflation should bode well for the insurance company and with China recently announcing and allowing the 3-child policy, it looks like there is a good amount of organic TAM over the mid to longer term.

I have also added a new position in Huya, one of the biggest gaming stream company in China. Their share price has been wrecked since they hit a peak of around $34 just a few months ago. At the current valuation and market cap, I reckon it's worth a shot at this company. I'll do a more thorough writing in the next article on Huya articulating my thoughts and reasoning behind this move.

I am starting to sort of accumulate back positions in cash - keeping quite a lot of powder dry in the form of cash and short term options which allow me to move swiftly against the tide of the market. At the moment, not much compelling plays yet apart from what I think I already have to ride in this market but otherwise the majority of the play are still on waiting.

P.S: I don't publish my options position publicly here but occasionally share insights in my social media sites (Facebook and Instagram) so if you are interested, do follow them here.

Networth Updates

I am happy enough to see the portfolio rebounding from the drop in the previous month to end this month higher at $380,500.

There's no surprise to this really, it's just growing at a very slow pace at the moment but I am happy to see it trending in the right direction and there's still a good 6 months away to see where I'd end up till the end of the year.

My target at the start of this year was to hit $350k by the end of the year and it looks like so far it has been a pretty good progress overall. I am pushing this target up now to $400k by the end of the year.


Another 3 more days to go before we finally see the end of the heightened alert in phase 2. Hopefully, the case keeps going down and we can finally have some breathe air outside.

Continue to stay safe and well.

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Can Gold Future-Proof Your Investment Portfolio?

Author:   |  Publish date: Tue, 8 Jun 2021, 9:06 AM


Since its discovery, gold has been used for ages as an efficient means to preserve wealth. However, in recent years, it has been sought after by most investors for several reasons. One major argument is that its desirability in the market doesn't decline. 

It's because unlike other speculative financial investments, whose worth has gradually decreased over time, this precious metal still holds its high value. In fact, the cost of gold has continually increased over the years. Among other factors, its scarcity and ever-increasing demand are some of the reasons its prices keep going up. 

Additionally, gold has lesser losses when the market is unstable. Also, economic or political changes have lesser correlation on its price. Therefore, most individuals consider it a haven for their capital, especially in times of turmoil. Overall, this makes this valuable metal a good and stable long-term investment option that could help protect your portfolio. 

Are There Challenges To Owning Gold?

In the past, gold was mainly held as a physical possession. Some people still consider this. However, there are several challenges involved in owning this metal tangibly. 

A major risk, especially for novice buyers who don't know how to identify genuineness, is the danger of being sold a substandard product. Also, there's the possibility of theft or misplacing your precious metal. Proper storage is, therefore, a significant consideration. Some people buy safes or store their gold in banks. But as security may not be fully guaranteed by these two, some individuals would consider insurance covers. 

For some people, it may be too risky to possess physical gold. Also, the cost of secure storage systems and insurance premiums may be a bit high. Therefore, they prefer other ways to invest in this asset besides having it as a tangible commodity. Other options available are gold certificates, exchange-traded funds, and mining companies' stocks. You can buy these alternatives or the metal itself from banks or dealers like Gainesville Coins and other precious metal dealers. However, ensure you first verify the credibility of the supplier before purchase. 

For those who are residing in Singapore, you may check out their office located at 1 Harbourfront Place Singapore 098633.




Is Gold A Good Long-Term Investment? 

Regardless of the investment method you pick, adding this precious metal to your collection of financial assets could be quite beneficial. Here are some reasons why it may deserve a place in your portfolio: 

1.) It's A Good Portfolio Diversifier 

Adding gold to your collection of investments may be advisable since it offers some sense of comfortability. This is because it's inversely related to the United States dollar and the stock market. This means when stocks and the value of the dollar fall, gold prices go up. Hence, having this metal could guarantee protection against future market conditions that may be unfavorable. 

Usually, it's recommendable to diversify your assets in a way that offers your portfolio a reward and risk balance. Therefore, adding gold to it may be an excellent consideration. 

2.) It Holds Its Value Over Time 

Unlike money and other assets, gold either maintains its current value or appreciates over time. Thus, it could be an excellent investment for your future and could also be a better asset to pass on to other generations. 

3.) It's A Hedge Against Inflation 

Some individuals prefer gold to other investment options like stocks, fiat currencies, or savings because this precious metal isn't affected by inflation. Usually, inflation makes the cost of commodities go up, reducing the purchasing power of the dollar. Despite this, gold prices increase in such times. Therefore, you could consider adding it to your portfolio because it's a hedge against inflation, which could help secure your hard-earned money. 

4.) It's Scarce And Has High Demand

The demand for gold is ever increasing. As people continue to realize its benefits, more individuals want to own it. However, besides being utilized as a financial investment option, it's also used in several other manufacturing industries. 

The jewelry sector has been one of the largest markets for this precious metal over the years. This commodity is also used in making electronics, medical devices, awards, and many other products. 

That being so, gold is a natural resource with a limited supply. Furthermore, today, most mining fields have been closed down, and new locations with large deposits are rarely discovered. Therefore, unlike other assets, this metal may have more potential to guarantee you good profits in the coming years.



Conclusion

As you seek to diversify your investment portfolio, gold could be a good addition. For several years, it has been recognized as an asset that maintains or increases value over time. Also, unlike other financial instruments, its prices aren't affected by geopolitical or economic changes. Therefore, these aspects make the metal an excellent long-term investment option to safeguard one's portfolio against unfavorable market conditions. 

Some of the factors that may guarantee a promising future with gold are its ever-increasing demand and low supply. Additionally, this precious metal is considered a hedge against inflation and could help balance the risks and rewards in an investment portfolio.


Disclaimer: This is a sponsored collaboration post article with Gainesville Coins. Please do your own due diligence before investing in any assets.


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Intel: Every Cloud Has A Silver Lining For Investors

Author:   |  Publish date: Sat, 5 Jun 2021, 4:12 PM


In my previous article, I wrote a piece on AMD which looks like for the most part largely dominant in the competition of chips design in the CPUs space against Intel and GPUs against Nvidia.

One thing about investing in a growth company that you have to be comfortable at as an investor is the market will be pricing in premium expanded valuation to the company and at some point the growth will taper and that expanded valuation will have to come down quickly. Bluntly said, the market is pricing in a perfection and any risk that might deter the projected growth progress would send the company's share price quickly downwards.

In this article, I'll transform myself and take the opposite view and see Intel as a company from the angle of a contrarian value investor and see what's left of value for Intel.

Source: Intel Infographics


What are Intel's biggest problems?

I think I covered this pretty thoroughly in my previous article on AMD but for those who'd like a summary - basically Intel's biggest problem lies in its delayed development in its modern generation of chips which allowed companies like AMD to gain ground in the CPU market quickly.

While Intel's 10NM CPUs are comparable to AMD's 7NM CPUs, the nodes are measured differently and the latter offer similar performance with a much cheaper price. Intel is trying to catch up quickly by investing huge amount of capex into its foundry, hoping that they could close the gap with AMD in terms of its own 7NM chips but even at the earliest it will not be until 2023. 

Meanwhile, latest news that came out in the last few days that AMD has proceeded and signed a 2 year contract with TSMC to manufacture its 3NM and 5NM chips for the next two years leading up to 2024.

In March 2021 earlier this year, Intel CEO - Pat Gelsinger announced the company's new vision for "IDM 2.0", a major evolution of the Integrated Device Manufacturing (IDM) model. This includes spending an approximately $20 billion investment to build two new factories in Arizona and aims to become a major provider of foundry capacity in the US and Europe.

While having its own foundry has its own benefits in terms of being able to control its own supply, it also means that they will have to spend huge amount of upfront capex to build these factories and manufacturing capabilities and this can erode the company's margin while having to compete with the other foundries globally across the globe.

Where Does Intel's Value Lies At?

So we already know (the market knows too) that Intel is facing all sorts of problem where it has to compete with the other foundries in terms of margins and manpower capabilities and AMD is also eating its bread and butter in the CPU and Data Center space.

Because of this, the market has priced in lots of negativity in the company's valuation and today it is only trading at a PER of 12.4x, which is below the long term average of around 15x. In comparison, AMD is trading at a valuation of 34.5x (triple of Intel) and TSMC is trading at a valuation of 32.7x (almost triple of Intel).

In terms of FCF yield, Intel is still generating plenty of free cash flow with a yield of around 8.5% before they have to start spending on its growth capex on building the foundry to start manufacturing chips on its own.

As an investor, it might be worthwhile to look at Intel as a company from a bottom-up where you calculate your potential internal rate of return from your investment and the worst case scenario where most of the thesis surrounding the semi-conductor play doesn't go according to plan.

First, Intel is currently trading at an earnings yield of 8.1% and FCF yield of 8.5% and it also pays a dividend of around $1.39/share which translates into a 2.42% yield for the investor. The company has also guided for a $10.5 billion FCF for the full year ended 2021.

In comparison, AMD is trading at an earnings yield of 2.9% and FCF yield of 1.8%. AMD also does not pay dividends to investor.

Second, and this is probably big and will be quite significant to movement on its earnings, is the announcement of the $10 billion accelerated buyback program which it announced late last year. While CEO Pat has played down some of the buybacks in recent weeks since the announcement of the $20b capex investment in building its own foundry, it is a program which has been approved by the Board and can be done given that Intel has generated so much FCF in recent years.

In other words, assuming Intel divide this buyback equally across 4 years, the company would spend a sum of $2.5b each year which will be approximately 10% of the FCF they are generating.

Third, the entire global IoT industry is screaming an increasing demand of chips while there is a huge lag of supply in today's context which gives an opportunity to companies like Intel to catch up and continue to grow, despite losing market share to AMD.

What this means is that while AMD can continue to grow at 40-50%, Intel is likely to see a modest growth of between 5-10% over the next few years which is very decent for a company with their enticing valuation as compared to their peers.

Combining all the three metrics together - with dividends of around 2.4%, EPS growth of 3% through buyback and organic growth of around 5-10% would mean that it will still make a decent investment for an investor.

Let me explain here what I mean by that.

Putting it into Numbers

Intel has traditionally spend a maintenance and growth capex of between $13-$14b, which resulted in the FCF in the past two years of around $20b. The company has guided for a $20b investment for its own foundry in 2021 which means FCF is likely to half to around $10.5 billion which the company has already guided in its Q1 earnings call. This is an anomaly one-off spent which is likely to resume to normal from 2022 onwards. I have projected for a conservative 5-8% growth thereafter.

The company spent $2.6 billion in share buyback program last year and if we divide this number by the number of shares outstanding, it will add around $0.63 to the organic earnings per share.

In other words, just by doing buyback, Intel can actually "grow" its earnings per share by around 10% each year. Assuming the exit PE multiple remains equal, this means it is a 10% internal rate of return to an investor.

On top of this, investors get to enjoy a 2.4% dividend each year which should also be taken into consideration.

Last but not least, assuming the company still continue to grow at between 5-8% per year due to the overall sector boom, the company's intrinsic value will be at around $63, which if we take across a 3 year CAGR, it is around 3.5% return per year.

If we add up the entire thing, an investor could well end up with a "10% + 2.4% + 3.5% return" each year from investing in Intel. Whether that is good enough it is subjective for each individual.

Source: 3F Working Compilation



Final Thoughts

I know there are likely many investors who are writing off Intel as an investment as compared to the other popular choices such as AMD and TSMC but I think it might be worthwhile to consider them from a bottom-up value investor point of view.

The risk about investment is having to pay high enough for a company that has its valuation expanded and the last thing we want to see is that thesis failing to play out and price action go down rather quickly.

For Intel, I think there are plenty of bad news that have been taken into account and you may be interested to look at it as a reversion to mean play.

Personally, I have enough exposure in this sector in my portfolio so I will not be adding Intel at this price range, although I would be interested should they go back to test around $44-$45 - a support line which have been tested 5 times in the last 4 years.

Source: Tiger Brokers

Source: Shareinvestor Web Pro (Peer Comparison)


Intel (Nasdaq: INTC) is a company that is available for trade in Tiger Brokers, CFD Phillip MT5, LT ATP Program. You can find further information on Intel at Shareinvestor and Fundamental Scorecard (use the code "brian5" upon checkout)

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