Is Market Timing Important to Value Investing?

Posted by: Dr. Ge on August 29, 2006 7:23 pm | In General thoughts | |

The fat hen sings again. If you were one of what I called “chicken flu investors” and bought some of the chicken stocks at the bottom, you must have done very well. Gold Kist Inc (GKIS) sees its stock almost doubled from the April low. Sanderson Farms Inc. (SAFM) reported a better than expected earnings today and the stock surged to near $30 level. Long term readers of this blog may remember that I was a buyer of SAFM (stocks and options) in the April low and sold everything out in the June pop. If you bought SAFM at the bottom and still hold the stock, this may be a good time to sell. Chicken Flu is still a serious threat. No one knows what will happen in the next flu season – I am sure there are still plenty of avian flu viruses alive in some corners of the world.

Some value investors say that market timing is not important to value investors – you buy when you see the value. I would argue that timing is especially important to value investors – it determines how big the return will be. As I have confessed many times before – I tend to buy early and sell early. The last several months were extremely cruel to value investors who didn’t time the market well. I bought Cogent (COGT) in the $16s and saw the stock dropped to $9s (after hour) after the last earning report. It’s tough to handle a 40% drop. Valuation didn't mean anything in a poor market. COGT recovered quickly and it now trades at $14. If you were a lucky bottom fisher who had bought COGT at $9s, then you would have gained 40% in just 2 weeks. I always search for the real bottom where desperation can be smelled and buy gradually but many times, the bottom is far deeper than you originally thought.

I personally believe that in recent years, the proliferation of hedge funds and many quantitative long/short strategies directly contribute to such volatility that we saw in last several months. Therefore, the Buffet “buy and hold” strategy may not work in current environment. Instead, buying at a deep discount and selling at a reasonable profit may yield a better return. By the way, as patience is the most important virtue of value investing, very few people have the patience of Warren Buffet. Can you keep holding Coca Cola (KO) in last 5 years? I can’t.

China Techfaith Wireless Communication Technology Ltd. (CNTF) and OmniVision Technologies Inc. (OVTI) are the two companies that I wrote in last year (See my posts of OVTI and posts of CNTF) and both saw their stock prices doubled and thus reached my price targets in less than 3 months. I saw value when OVTI was trading at $11 and CNTF was trading at $9. OVTI then went up to $34 a share and far exceeded my price target of $20. I wrote in my blog that it might be a good idea to take some profits because the competitive position of the company actually didn’t change much but the stock price tripled. Now OVTI trades at $16s.

China Techfaith Wireless Communication Technology Ltd. (CNTF) is a totally different story. The stock reached $18 two months after I profiled the company in my blog and then it started a long and painful slide to current price of $7. If you remember what Benjamin Graham said “Investment is most intelligent when it is most businesslike”, the stock price of CNTF dropped because the business went bad. One of CNTF’s major customers NEC exited from the China market at the beginning of this year and CNTF’s other Chinese customers (major cell phone manufacturers) were killed by Nokia and Motorola from the high end and Chinese counterfeit manufacturers (so called "black" phones in Chinese) at the low end. I warned my readers about the problems CNTF might face when I saw that the cash flow from the operation decreased significantly in Q3 2005. The company soon shifted its focus from low end GSM phones to high end 3G smart phones but the transition process was not as smooth as the management predicted.

In my opinion, the company grew too fast in last several years and it lacks the human talents (few employees including senior executives can barely speak English) to deal with carriers in the U.S. and Europe, two major markets it hopes to break into. The company itself is transforming from a cell phone design house to a mobile software outsourcing provider. Therefore, the stock price may fluctuate further in the coming quarters. However, I am bullish on the company in longer term because

• it has 2000 skilled and cheap engineers ($500/month for an experienced programmer);
• it has a good established relationship with 2 mobile software powerhouse – Qualcomm and Microsoft;
• it's still the No. 1 mobile design company in China;
• 3G in China will come, probably in 5-6 months;
• it has plenty of cash and a beautiful balance-sheet;
• the company is controlled by the CEO and he hasn't cashed the majority of chips yet;
• the company is buying back its stocks  - rare for a Chinese company and good for investors;

I think price at $7 or below may be a good entry point for CNTF.

Good luck!