Stocks lag, not lead
September 21st, 2020
⏰ 1 minute read
⏰ 1 minute read
Palm oil stocks are behind, not in front
Discounting?
You know how it is... stocks go up & down suddenly, gains & losses wiped out in no time with investors scratching their heads trying to work out why. The normal explanation is stocks discount long into the future, so the slightest differences now at a high discounting rate, can mean huge changes to future value. But is this true?
Palm oil
Here’s a current example which proves this theory is not true. Cast your mind back to early 2017. The palm oil price was at RM3,400, the plantations were making money, paying down debts & their share prices were strong. Then the price fell & shares have lost half of their value up to today, using an index of 7 companies.
Hang on!
But hang on a minute... Right now the palm oil price is back above RM3,000 again & in Rupiah terms higher than 2017. The average production of those listed plantations is also higher than it was in 2017. As costs are the same or lower, the current profitability of the companies must be higher, not even including the future potential.
Lagging
If stocks only followed the present earnings potential, then the share prices should on average be double where they are now (several more than double). If shares discount the future, they could be much higher again as production at least is rising & price looks likely to rise as well. Instead the shares are lagging. So what are they following?
Accumulative
It turns out share price are not discounting future, they’re accumulating the past. The accumulation of past is cumulative cashflow, which is the net cash(debt). As palm oil companies lost money, net debt accumulated matching shares. Investing is mixing knowing the past, the present situation & a little bit of future & that’s the basis of our Sharpfokus Saham research.
You know how it is... stocks go up & down suddenly, gains & losses wiped out in no time with investors scratching their heads trying to work out why. The normal explanation is stocks discount long into the future, so the slightest differences now at a high discounting rate, can mean huge changes to future value. But is this true?
Palm oil
Here’s a current example which proves this theory is not true. Cast your mind back to early 2017. The palm oil price was at RM3,400, the plantations were making money, paying down debts & their share prices were strong. Then the price fell & shares have lost half of their value up to today, using an index of 7 companies.
Hang on!
But hang on a minute... Right now the palm oil price is back above RM3,000 again & in Rupiah terms higher than 2017. The average production of those listed plantations is also higher than it was in 2017. As costs are the same or lower, the current profitability of the companies must be higher, not even including the future potential.
Lagging
If stocks only followed the present earnings potential, then the share prices should on average be double where they are now (several more than double). If shares discount the future, they could be much higher again as production at least is rising & price looks likely to rise as well. Instead the shares are lagging. So what are they following?
Accumulative
It turns out share price are not discounting future, they’re accumulating the past. The accumulation of past is cumulative cashflow, which is the net cash(debt). As palm oil companies lost money, net debt accumulated matching shares. Investing is mixing knowing the past, the present situation & a little bit of future & that’s the basis of our Sharpfokus Saham research.
