BIG GSS Sale from Market Irrationality
CapitaMall Trust share price has fallen sharply from $2.75 to $1.70. That is about a 40% decline from its peak. While people are fearful, I got a little greedy. Everyone is panicking that their portfolio value is falling like grapes from the sky. I am panicking that I don’t have enough baskets and hands to catch the grapes.
That’s the thing I don’t understand. When CapitaMall trust is trading at $2.30, $2.40, $2.50, $2.60, people are all greedy and buying. The future of the merger with CapitaLandCommercial Trust seems bright like the diamond. Money keeps coming in and CMT keeps pumping up higher and higher.
But when CapitaMall trust has fallen from grace to $2.00, $1.90, $1.80, $1.70, people are all selling and running away. Suddenly nobody wants this diamond anymore.
Before this whole coronavirus, the large-cap REITs are all trading at around 3 – 4% yields. That does not make sense to me at all. But everyone is saying that this would be the new norm and all.
This new belief starts circulating around and it soon changed how people viewed the REIT market. The REIT market did indeed stay overvalued for quite a few months. Because nothing happened, their thinking got reinforced and everyone starts to think that it is really the new norm.
You realised that my REIT menu tab has been inactive for almost 6 months. My last post was divesting First REIT at a break-even. It has been inactive because the REIT market is severely overvalued. I still remember prices are stubbornly high and there seem to be no opportunities.
But remember, the market can stay irrational for a period of time. If Mr.Market is irrational, don’t blindly follow him and be irrational. Be patient and calm. If it doesn’t make sense to you, it doesn’t make sense. Trust your own instinct. Following the herd is the worst thing to do in investing.
Similarly, I think the recent sell-off is exaggerated.
For the first time, I am seeing stocks trading like shit coins in crypto. While I understand the latter can plunged 40% in a day, stocks have real assets worth billions. I don’t understand how they can drop 30 – 40% so quickly. In a matter of days, the entire capital gains of someone who bought CMT in 2010 has been wiped out. Can you imagine?
I think there is a mispricing opportunity here.
Hence, I nibbled a few CMT shares at this ridiculously cheap price of $1.73.
Valuations of CapitaMall Trust
Previously, I have already done some intrinsic calculations on some of the REITs in my watchlist. As discussed in my earlier art of war post, the general who wins a battle makes many calculations in his temple ere the battle is fought. Now the war has come.
What I did is I came up with three different valuations, one absolute (DDM) and two relatives (P/B & Dividend Yield). Then I just take the average of the three valuation figures.
Anyways, I have also looked at Parkway Life REIT, Mapletree Commercial Trust and Frasers Centrepoint Trust. The three of them are not cheap yet. But CMT is at an attractive valuation right now.
Dividend discount model for CMT is about $1.99. P/B relative valuation is about $2.39 and dividend yield relative valuation is about $2.32. The average of all three came out to be about $2.23.
In 2019, I used to think it would be a gem if CMT drops to Daiso price at $2. I got it today at $1.73. That is about a 20% margin of safety from its computed fair value.
Statistical Rare Occurrence
This is CMT’s P/B ratio and dividend yield since inception. So you are looking at the entire history of CMT since 2002.
Historically, the P/B ratio of CMT has always been supported at around 1. The only time it fell below 1 was during the 08 crisis. The same goes for dividend yield. It has always been hovering around 5%. Rarely did it go above 6%, except during the 08 crisis.
If we were to look at this from a statistical standpoint, the probability of CMT, in any given month, falls below the P/B ratio of 1 AND goes above the dividend yield of 6% is 0.5%. How I got 0.5% was I took 1 event divided by 204 months (12 months x 17 years).
0.5% and you are not pouncing on the opportunity? Seriously? I asked myself.
Valuation Metric from REITScreener
This is the price to book value of CMT over the past 5 years. You can see it fell right through the 2 standard deviations to the bottom.
This is the yield spread of CMT over the past 5 years. Again, you can see that it burst right through the roof of the 2 standard deviations resistance.
Is it mispriced? Oversold? I don’t know about your views. But that is a clear buy for me.
Furthermore, the price of $1.70 – $1.75 is at a support zone in technical analysis. I like to throw in some charts and identify the support levels as a complement factor. While prices don’t respect TA so much in volatile times, at least I know I am not getting in at the wrong levels.
Logical Mind vs Emotional Mind
The 18 years P/B average is 1.23 and the 18 years average dividend yield is 5.08%. At the price of $1.73, the dividend yield is about 6.54% and the P/B is about 0.87.
That is how I keep my sanity in check, using statistical data and historical data to facilitate the logical side of decision-making. The emotional side likes to swoop in and interfere with the thought process. All these recession headline news, fear and herd thinking is going to make your brain go flight.
If you had played before Rich Dad’s cash flow game, you would have realised how easy it is to get out of the rat race. That is because you just buy when the stock price is $1 and sell when it is at $40. There are absolutely zero emotions involved because you didn’t lose anything. But in real life, we suck at the cash flow game. Because of emotions.
The logical mind ALWAYS beats the emotional mind in investing.
Having a Portfolio Strategy
In times like this, no one knows what to do. Sell, hold or buy? What if it drops further? What if it rebounds back up? There is a lot of noise in the market. Who do you follow and listen? One day you will see analysts say buy. Another day you will see analysts say sell. It will always be like this regardless of what market conditions you are in.
The best way is to listen to yourself and have a clear investment goal. Come up with your own investment philosophy or strategy. Mine is simple. Accumulate dividend stocks and build a passive income over time.
Hence, the formula for the success of my investment goal can be summarised into a one-liner. Accumulate as many golden gooses as possible using the least amount of resources available.
When the golden goose is cheap, I buy. When it is expensive, I don’t buy.
The ironic thing is those who bought CMT at $2.50 has a significantly higher risk than those who bought CMT at $1.70. But it does not appear so on the surface.
That is because when CMT is at $2.50, the outlook looks bright and positive. But when CMT is at $1.70, the outlook looks depressed and gloomy. Most people stop there.
If you go one step further, think about the risk and reward ratio at $2.50 and $1.70. What is the amount you could potentially lose at $2.50? HUGE! And what is the amount you could lose at $1.70? The lowest closing price CMT went during the 08 crisis was $1.20. And what is the potential upside you can gain at $2.50 and $1.70? You get the idea.
Remember again the big picture, we are looking at a REIT juggernaut merger worth S$8.27b happening in June 2020. The combined entity will become the 3rd largest REIT in Asia-Pacific boasting a market cap of S$16.8 billion and a combined property value of S$22.9 billion.
In the meantime, CapitaLand will step in and provide relief package for mall tenants affected by Covid-19. Comforting to know that CMT has a strong parent. CMT has 17% floating rates while the other 83% is fixed. That 17% could provide some relief from rates cut.
Other than that, CMT is on its own to manage occupancy rates and rental reversions. But I believe their management team is competent as seen from their solid track record. They will navigate through tough times and emerge stronger than before.
What if a Recession Comes?
That is where balancing how you fire your bullets is important. I only nibbled in the first bit and it was not an all-in aggressive strike at $1.73. I came up with this dual-bullet strategy in the recent bank post.
First bullet: fire at undervalued high yield conditions. Second bullet: fire at the pit of a recession to average down to a recession cost price. That is my simple strategy. Don’t need to worry about boat left or anything.
Again, always keep the end goal in mind. Accumulate dividend stocks and build a passive income over time. If it becomes cheaper and I can get more golden goose into my farm, why not? I would be more than happy to get them at a discount.
Don’t be so afraid to buy at a low price. Be afraid to buy at a high price. Good prices are bought in bad times and bad prices are bought in good times. Maximum profits are made on maximum pessimism. Remember, when the market is irrational, don’t follow it. If it is cheap, I just buy.
As Warren Buffet famously quotes, “If you plan to eat hamburgers throughout your life, would you wish for higher or lower prices for beef. If you are going to buy a car from time to time, would you prefer higher or lower car prices? Most people would get these two questions right.
But if you plan to collect dividends from stocks throughout your life, would you wish for higher or lower stock prices? Yet most people run and fear when prices are low.
Interesting how our psychology work isn’t it?
It’s been a long while since I got some REITs. Happy to be back in the game!