Thursday, 8 June 2017

Could Basic FA Have Helped Me Avoided Noble?

I bought Noble stock at the earliest date of, according to my record, early 2010 at a price of $1.69 (price quoted pre-10 to 1 share consolidation from here on). I traded a few rounds of Noble after that, with the highest buy price at $2.02 and lowest at $0.845. Details were sketchy as I just started investing back then and didn’t keep proper transaction records.

And what is the current price of Noble on 7 June 2017? $0.033. That is a whopping 98.4% plunge in from the highest price I ever paid for it. For the record, I held my Noble shares from 2010, and just recently sold in Mar this year at $0.195. In other words, I witnessed its share price dropped, and dropped, and dropped further. I lost around $13k on this share. 

It is the most epic, disastrous and horrendous investing experience I ever had.

Investors usually have a short memory and I believe many would not recall that Noble was once trading at $2.2, and perhaps I am one of the very few investors who held Noble for this long, and still bother to calculate the amount of loss and do a post mortem on this? 

While there are many analysis now looking back at Noble and concluded that it inflated its assets, had questionable accounting principles and unsustainable business models, they don’t matter to me because these are with hindsight benefit.  I am interested to know whether I could have avoided Noble, or rather, sold off before Iceberg and Muddy Waters shorted it using basic Fundamental Analysis which I usually employ for other share investment?

So, this exercise would look at Noble’s business quality using basic fundamental indicators, which are gross profit margin, net profit margin (pre tax), debt/equity ratio, pre tax operations cashflow, free cashflow, pre tax operations cashflow to net earnings ratio. I pick these because I think they function quite well as filtering criteria that remove companies that one should not invest in, and represent the qualities I look for: healthy margins and good earnings backed by strong cashflow with conservative amount of debts.

Iceberg released its research report in Feb 2015, with Muddy Waters followed suit two months later. So the period of this study will be the 5 FYs from 2010 to 2014. Without further ado, lets start.

*I extracted the figures from paid service of ShareInvestor portal

SN
Indicator/FY
10
11
12
13
14
1
Gross Profit Margin
2.88%
1.83%
1.60%
1.45%
1.74%
2
Net Profit Margin
1.28%
0.62%
0.46%
0.25%
0.20%
3
Debt/Equity
3.25
3.17
1.10
2.82
2.95
4
Cashflow from Ops (Pre tax)
-1695455
2562976
869698
876124
-1433747
5
Free Cashflow (SN4 - Capex)
-2307937
2090689
-85037
250269
-1995211
6
Cashflow from Ops (SN4) /Net Earnings before Tax
-1.82
3.91
1.63
2.82
-6.45

Would the numbers have made me reject Noble? – Yes, Probably, Not Sure, No
·       Gross Profit Margin – Yes. Extremely low margin of 1 plus percent which had been deteriorating from FY10 to FY14, albeit with a small improvement in the last year.

·       Net Profit Margin – Yes. A super big turn off with a company that earn less than 1% net on its revenue.

·       Debt/Equity Ratio – Yes. A debt/equity ratio consistently above 1. It means that out of all the assets that it owned, more than half did not belong to the company/shareholders. And in most of the years, only 25% of the assets belong to the true owner of company. Not healthy at all.

·       Cashflow from Ops – Not sure. While Noble had 2 years of negative cashflow out of the 5, it did have 3 straight years of positive cashflow. I may need further digging to find out how does this compare to its earnings, revenue, and what caused the large positive cashflow in FY11.

·       Free cashflow – Probably. Noble had only 2 years with positive free cashflow out of the 5. It showed huge volatility here, with free cashflow swinging from big negative to big positive annually. Such inconsistent free cashflow would probably deterred me from buying the share.

·       Ops Cashflow/Net Earnings Pre Tax Ratio – Not sure. Same as SN4, Noble did have 3 positive years from FY11 to FY14, and the numbers looked good too: with at least 1.6 times, and highest of 3.9 times ops cashflow backing up its net earnings. But I would probably seek more clarity on the -6.45 ratio in FY14.

Based on these very top-line, fundamental numbers, I deduced that Noble had extremely weak earnings margin and balance sheet strength. As for cashflow, it had questionable, or less-than-desired cashflow generation ability.

But could these numbers have prevented me from buying its shares?

I shall say that if I were thinking of buying it for the first time, these numbers would have turned me away, simply due to its appalling earnings margin and extremely high level of debts.

But if I already had a position in it, the chances of me selling out would be much lower. It would have riled some suspicion in me, prompted me to study the numbers more in depth. But the complex financial statements meant that I would probably give up halfway before gleaning anything conclusive. There could also be many other psychological factors and noises at play: buying into Noble’s past glory of ever-increasing share price, swayed by news or analysts report on commodity bull run, Noble’s size and blue chip status, mental reluctance of cutting loss etc.

But one thing I will remember by heart is that you have to scrutinise the financial statements before investing. This is the most basic of company research to be done religiously. And when there are numbers similar to above, avoid and look for others. It would be better to miss out profiting than losing money on it.

The share purchase happened long time ago in 2010. But looking back at old experiences can usually provide golden lessons too. Let this be a costly lesson to remember for life.

Readers, any experience, stories or opinions to share?

5 comments:

  1. TA would have alerted you too.

    ReplyDelete
    Replies
    1. yea you are right. cut loss after it breached certain long term MA

      Delete
  2. I don't quite think its your fault. Every bad company has a price/valuation too, and at a certain point, it could had been too cheap. There were also expectations and guidance of turnaround stories. And value investors tend to buy when the fear is the highest. Plus, they constantly had asset sales and rumours of takeover, so it as a punt, it could have gone the other way either. Finally, because of all the multiple asset sales too, it would had been rather difficult to analyse the prior year financials.
    I just thought the management had been a little dodgy and in the end, they seem to have lost the faith of the banks and other creditors. They also kind of misled people, failing to give proper guidance, announce a profit warning 2 days before earnings and before a public holiday.
    I thought cut loss discipline would be the biggest takeaway, and I am also very much guilty of this.

    ReplyDelete
    Replies
    1. true. cut loss is still an important art i am learning..

      Delete
  3. Position sizing, trailing stop loss, and stop over-thinking or over -analyzing things.

    But never pre-enter your stops into trading system beforehand.

    ReplyDelete

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