Valuation Problems

Since the drop of First Resources the past few days, and with DBS Vickers coming up with a 12 mth TP of 1.16 and OCBC Research coming up with a technical TP of 1.08 based on resistance turned support, some have asked me if I made any mistake in my valuation etc.

To start of, I will admit that a mistake that I have made is to average up the 2nd time by purchasing more at 1.19. However, I still value First Resources with a 6 mth target price of 1.30 to 1.40, and a 12 mth target of 1.50.

DBS Vickers has stated that there could be negative earnings surprise as earlier upgrades were based on CPO price assumptions, and downgraded First Resoures to Hold due to limited upside.

As compared to other investors, I will reiterate that I am very bullish on CPO, and with the economy recovering, the prices of CPO will increase. Besides being bullish on CPO, I believe that First Resources is still undervalued to its peers, with its peers trading at approximately 15x to 16x P/E Ratio. First Resources, based on projected earnings (FY09 Results are slated to be out in March), would currently be trading at approximately 1.30. My 12 mth target is made with assumptions in an increase of CPO prices.

Furthermore, the positive issue about First Resources is that it prefers organic growth over acquisitions, although the management has not ruled out on acquisitions. Organic growth is important because it prevents the company from overpaying for growth. Similar mistakes have been made by companies in other industries, and I believe that the management is setting First Resources on the right path.

The DBS report can be found here. The writeup on Thakral will be posted later today. I will be heading down to the Budget Terminal since I am in the vicinity to check out Tiger Airways.

My Bank of America Purchase – Investment Mistake?

I purchased Bank of America on the 8th of December, without doing any fundamental analysis, after they had announced they were repaying their TARP funds.

Mistake No. 1 – Not doing any analysis
Logically speaking, I felt that the repayment of the TARP funds was a key indicator of the prospects of BofA. Ken Lewis was stepping down (Positive Point 1), they were searching for a new CEO and as BAC was in the TARP, they could not offer astronomical salaries to the replacement CEO. With the repayment of TARP, they had this cap lifted off, and could carry on the search for the new CEO (Positive Point 2).

Mistake No. 2 – Overthinking Merrill Lynch
BofA’s merger with Merrill Lynch was a major disaster, and resulted in BofA seeking the aforementioned TARP funds. As the economy recovers, so will the risk appetite, and this means more capital for Merrill Lynch. I had put too much emphasis (again without any fundamental analysis) on the profitability of Merrill Lynch, without much regard for BofA’s other income generating sectors.

Mistake No. 3 – Calculating upside based on past performance.
Looking at BofA’s share price, I looked at the possible upside, which was at least 33%. Looking at this number clouded my judgment, and my warnings indicators became clouded. If that’s the case I should be purchasing China New Town, with at least a 100% upside. (I stated China New Town as I just finished an analysis of it)
I am still holding on to BofA, and will not sell it off just yet. The purchase has been made, and the paper losses are less than 5%. I don’t intend to sell it off anytime soon, and will wait for any new developments. Low interest rates are going to be around till at least May next year, and it will be good for the financial sector.

A reminder to all investors: Make sure you know what you are investing in, and do your analysis beforehand. Logically thinking does not necessarily work, and even if you develop a surefire investment method, chances are the market will smash it up into pieces.
On a sidenote which has nothing to do with investment, I am mystified by how Russell did not win the latest season of Survivor. I know that many people feel that Survivor is such a boring show, but if you have time, read it all on samoa.survivor.com.

*Disclaimer I am vested