Post by oldman on Oct 23, 2013 11:34:02 GMT 7
Spot on. Herein lies the challenge of investing before the herd. Once the transformation takes place, the investor has to decide whether this is for real or whether this is just a short run up. This will determine whether he sells into strength or whether he will continue buying even more.
Sometimes new controlling shareholders might have short term effect on the stock price, with syndicates taking opportunity to push up the price to unload. If one is interested in the stock, it might be better to buy after the hype has settled down, rather than joining the herd and get chopped.
Let me share this experience. I originally invested in Eng Wah because the cinema chain had lots of strategically located properties hosting its cinema business. Most of these properties were badly undervalued and if I recall correctly, the fair value of the properties would have been in excess of 30cts per share when the shares were trading at around 6cts. Then, in May 2007 Eng Wah announced a reverse take over by TransCu and the share price rocketed to 18 cts. The management of Eng Wah was allowed to then take out the existing business plus its properties.
Although the share price went up 3 fold, it was not my preferred option as I was looking forward to a 30cts exit once the original properties were revalued. But in investing in listed companies, one has to realise that he has no control over these decisions and one simply has to make the best out of the situation.
I then looked at the business of Transcu and decided that this was not in my area of competency as I knew how difficult it was to find serious financing for a biotech company. Hence, I exited at around 16cts and many questioned my decision to jump off the ship when it was just about to sail. 5 years later, Transcu is trading at 0.6cts.
Hence, at every transformation of a company, one has to have a clear mind and relook at the fundamentals of the company completely and make decisions based on his judgement of the new business. Much as I liked the original fundamentals of Eng Wah, I cannot be sentimental when I make such investment decisions.