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Harm Elderman
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I have over 8 years of experience in trading in a variety of products. Ranging from CFD's (contract for differences) to options and equities. I have worked in a variety of financial institutions doing all sorts of work (including algorithmic programming which I enjoyed the most). Nothing... More
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  • FDA Crunch Time For Novo Nordisk Brings Opportunities For Investors.

    Novo Nordisk (NYSE:NVO) is the world leader in insulin and diabetes care with a market cap of 117 billion. It's headquartered in Denmark with production facilities all over the world whilst employing over 35k people. It's truly a pharmaceutical behemoth.

    Its product line currently consists of many diabetic products from the likes of Levemir, NovoLog, Novolin R, NovoSeven, NovoEight and Victoza and more...

    So far Novo Nordisk has sustained a global position in the insulin market and proven to be a strong competitor for Eli Lilly (NYSE:LLY) & Sanofi (NYSE:SNY). They are truly a force to be reckoned with. (click to enlarge)

    Source: novonordisk.com

    From a fundamental perspective, as shown in the table underneath, Novo Nordisk is performing outstandingly well. Almost everything, from revenue to gross margin has been improving annually from 2004-12 till now.

    (click to enlarge)

    Source: Morningstar

    Is constant development of such medication a necessity? Yes, diabetes is on course to be an epidemic of monstrous proportions. I use the word monstrous, as I consider 439 million people a scary number.

    The picture on the right explains the rule of halves. It shows that the real situation is actually a lot worse as it shows that only a small part truly gets the care it needs.

    (click to enlarge)

    Source: novonordisk.com

    Shareholders had nothing to complain about with a YTD of around 30% and return of the last 10 years has been almost off the charts.

    NVO Chart

    NVO data by YCharts

    Like every other pharmaceutical company, share price is heavily susceptible upon FDA approval. And one FDA approval is coming up in just a few days, more specifically on the 11th of September 2014!

    (click to enlarge)

    Source: fda.gov

    It's for product (NDA) 206321, liraglutide (Victoza) as injection. The company is looking to get Victoza approved for the treatment of adults suffering from obesity and overweight adults with comorbidities such as hypertension, dyslipidemia, sleep apnea or type II diabetes.

    For anyone interested in where these kind of meetings take place, take a look at this link. It will provide the location of this meeting on the 11th of September.

    Now comes the interesting part. FDA approval in the past had quite its effect on the share price. This brings a vast amount of opportunities for investors. The ones which already maintain a long position in Novo Nordisk and for risk and thrill seekers which would like to take a speculative bet before the day of trading commences.

    What can history tell us?

    It takes us back to the 11th of February 2013 when the FDA came back with negative approval of the drug Tresiba and demanded further study to assess heart risk in patients taking this medication.

    Share price plummeted 14% as shown in the picture below.

    (click to enlarge)

    Source: yahoo finance data

    NVO Chart

    NVO data by YCharts

    As shown in the 1 year graph of Novo Nordisk, any positive noise out of the FDA committee on the 11th of September will likely surge the share price of Novo up to an all-time high.

    Conclusion

    FDA approval on the 11th of September will once again prove a great opportunity for buyers who want to acquire extra Novo Nordisk in case of a rejection. The business fundamentals of Novo are solid as outlined before and one does not get many opportunities to buy Novo Nordisk with such a potential discount.

    Under the circumstances that we will see a green light, Novo Nordisk could be topping to an all-time high which for some might be a good reason to cash in on their hefty Novo Nordisk positions.

    For all the other day traders, movement is to be expected and a speculative bet either way can yield impressive returns.

    I remain long for the time being.

    P.S. I am working on a fully detailed article on Novo Nordisk as this has been my main holding for the last 8 years and has been my star performer. Give me time :)

    Disclosure: The author is long NVO.

    Sep 08 7:38 PM | Link | 1 Comment
  • China Sanjiang Fine Chemicals, A Rare Gem With 100% Upside!

    China Sanjiang Fine Chemicals, a rare gem with 100% upside.

    If you know about China and ethylene oxide you know about Sinopec (NYSE:SHI) and PetroChina (NYSE:PTR). However, the third player is a company called China Sanjiang Fine Chemicals (after this called SFC) and it is the largest privately-owned manufacturer and supplier of ethylene oxide (EO) and AEO surfactants in China. These 3 hold the main EO market in China.

    Ethylene oxide is used in products like antifreeze, cosmetics, lubricants, paint solvents, detergents, soaps, natural gas purification and a variety of other products.

    In light of the last profit warning given by SFC I would like to shed additional information about why this still could be a fine gem for the value investor.

    A little bit over a month ago SFC reported that its net profit attributable to equity holders of the company will decrease substantially by more than 50% as compared to the net profit attributable to equity holders of the company for the 6 months that ended June 2013. Main reason given, average selling price of their foremost product dropped approximately 8%. They are currently cruising 1 dollar lower per share since last year as seen in the figure below.

    Figure: Share price SFC

    However, for anyone who was up to date with SFC knew this was coming. There is nothing new under the sun. They mentioned in the annual report of 2012 and 2013 a few reasons of concern in regards of the pricing of ethylene oxide and they adapted sufficient steps in those years to diminish the inevitable pain of volatility swings within those price levels. These plans come into effect end 2014/Q1 2015 which makes current times a good moment to step into SFC.

    Figure 1: Revenue SFC

    As shown in figure 1, SFC has a main dependency on ethylene oxide (87%) while the main price of their product dropped 8.3%.

    In 2012, as I told before the expectation was that the price of ethylene oxide could be an issue in the future therefore they switched additional focus towards building an upstream methanol-to-olefin (MTO) production facility to produce ethylene and propylene. This will give them the chance to diversify their product lines and since ethylene is the core feedstock of EO, it will secure several cost advantages. The construction of the production facility will be finished December 2014 and come into effect Q1 2015. By diversifying products to the propylene derivatives group it will lower pressure on the dependency of EO. Furthermore due to economies of scale, their dependency on the price of EO will lower. This is all good news.

    The Ethylene Oxide market

    The EO industry in China is oligopolistic. The main 2 producers of EO are state-owned, $SHI and $PTR. SFC is the third largest producer of EO.

    Entry to this market is relatively difficult. Production cost to set up a facility are expensive and considering EO is a difficult to transport good (due to its combustible nature) international trade is unlikely and main clients are often located close to the position of the plant.

    So where could growth come from?

    (click to enlarge)

    One possible answer is urbanization as China is undergoing that rapidly. The effects of this could have massive impact on the economy of China and this will go hand in hand with growing demand of cleaner and detergent products of which the main ingredient is EO, the product of SFC.

    Risks?

    There are obviously many risks involved. Considering it's a state regulated market, you never know when the Chinese Government might tamper with regulations which could offset some pull backs for SFC.

    It has a short listed history on the stock market and is not widely covered by analysts. Therefore it will take you, as investor, more time to do hands on research about this company.

    Another risk is the small number of suppliers of ethylene which predominantly come from Japan. This risk will hopefully be mitigated by the new production facility plant.

    It has a low P/E valuation. But what is low? It's not listed on any Western index and it's difficult to compare with other EO players. Funding of/by companies on the HK index seem to be quite adequate and better regulated and definitely a lot more safe than the Chinese counterparts in America who are listed on the NASDAQ where debt issues are a lot more severe.

    State owned parties are setting the price. It's difficult to compete in such an oligopolistic market.

    Additionally, since it's a Hong Kong based stock, one might consider that a risk as it's an investment in HK Dollars. However, I do believe that Chinese stocks listed in Hong Kong have a preference above the Chinese stocks listed on the NASDAQ due to stricter regulatory rules.

    Shareholders

    The main 2 holders in SFC are Delta Lloyd, a big Dutch Insurer and Hof Hoorneman Bankiers, a Dutch fund management party. It's part of Hof Hoornemans China Value fund.

    This also adds to my previous assumption that SFC does not get a lot of coverage, as I'm not sure why these Dutch institutions seem to have a majority interest in this stock.

    Management

    Considering its origins, it's always good to know whether your investment is in safe hands. I have had a variety of experiences when it comes to Chinese management and that was not always positive. The last one being (NASDAQ:CXDC) which smelled a bit off…

    Although difficult to assess and compare, I find the management team convincing and most importantly honest. The man in charge has quite the experience in this field. Some of the reasons why the shares plummeted where mentioned by SFC ahead of time and a well experienced reader would also have read the precautions SFC took to lower the pressure on their books. In that case for the true value investor it was a simple accumulate opportunity by every major drop as I'm sure SFC will pay off in the foreseeable future.

    Financial Metrics

    Let's delve in the financial numbers of this Chinese Chemical operator.

    Financials

    2009

    2010

    2011

    2012

    2013

    Revenue

    1286.00

    1583.00

    2078.00

    2521.00

    3940.00

    increase yoy

    n/a

    23.1%

    31.3%

    21.3%

    56.3%

    Gross profit

    356.00

    360.00

    433.00

    530.00

    638.00

    increase yoy

    n/a

    1.1%

    20.3%

    22.4%

    20.4%

    Operating income

    316.00

    288.00

    353.00

    377.00

    485.00

    increase yoy

    n/a

    -8.9%

    22.6%

    6.8%

    28.6%

    Interest Expense

    33.00

    19.00

    32.00

    64.00

    75.00

    increase yoy

    n/a

    -42.4%

    68.4%

    100.0%

    17.2%

    Income before taxes

    304.00

    319.00

    464.00

    557.00

    686.00

    increase yoy

    n/a

    4.9%

    45.5%

    20.0%

    23.2%

    Net income

    260.00

    266.00

    405.00

    467.00

    605.00

    increase yoy

    n/a

    2.3%

    52.3%

    15.3%

    29.6%

    Net income available to common shareholders

    242.00

    266.00

    405.00

    467.00

    605.00

    increase yoy

    n/a

    9.9%

    52.3%

    15.3%

    29.6%

    EPS

    0.37

    0.35

    0.40

    0.47

    0.61

    increase yoy

    n/a

    -5.4%

    14.3%

    17.5%

    29.8%

    EBITDA

    417.00

    410.00

    588.00

    726.00

    927.00

    increase yoy

    n/a

    -1.7%

    43.4%

    23.5%

    27.7%

    Source: Annual Report SFC 13'

         

    SFC has been growing significantly year over year in an expanding market and shows a great deal of resilience in their numbers. Excess demand in EO will continue to let revenues grow and more importantly remain margin to a certain extent.

    SFC has been able to manage its risk accordingly and in my opinion its ability to mitigate risk has been misunderstood by other investors.

    In regards of valuation, they currently show a P/E value of 2.97/0.61 = 4.86. Although their gearing has increased the last few years it's important to keep in mind that there is a significant lag between investment in the production facility and the ability to generate cash flow which might dilute the actual figures at the moment. It won't start until end Q4/2014.

    If we assume EPS to increase the same as it did the last few years (although 2014 will be a significantly more difficult year) their EPS could be 0.80 for the year of 2015. That's a 30% growth over 2 years. Keeping P/E at 5 would justify a stock price at 6.25. Its current price is 2.97 and that would show over a 100% potential within the end of 2015. I think that lies within potential of this stock.

    Valuation with other stocks goes blank as the main 2 competitors are state owned and therefore lack the potential

    Let's say their earnings get cut in half. That would put their current P/E at 2.97/0.31 = 9.5 Keeping a in par expectation of growth with their EPS like before of 30% would generate an EPS of 0.403 that would justify a share price of 3.83, still 30% higher than its current share price.

    Their NAV would note around 3.03. They currently trade a little under discount in that sense.

    I'm always skeptic when it comes to EV/EBITDA & P/E values, but intrinsically SFC does note under discount. Time will tell how it looks like Q1 2015.

    Conclusion

    SFC is an undervalued stock if we expect earnings to be in line and grow the moment the new facility comes into place. This will not only generate new revenue and income but also lower risks which were mentioned before. It currently already has a low valuation. They have been honest and fair about the upcoming issues for years and showed great business skills by starting to build the MTO facility far ahead of time which will lower their dependency on EO in the end of 2014/Q1 2015. They are uniquely positioned in an expanding business. Their growth has been solid for years and it's only a matter of time before the returns will head in the right direction.

    Although considered a risky investment, as with every Chinese stock, the potential upswing with SFC is undeniable great.

    Main risk in my opinion is the margin trouble on ethylene oxide. However I never said it was a safe bet. However the upside is bigger in comparison to the downside. And therefore as a risky investor, SFC is a good bet.

    I'm sure SFC will double before the end of 2015. However, before that happens, don't be surprised if SFC might cruise a little lower before it turns the tables.

    Aug 04 8:47 AM | Link | 2 Comments
  • Trading With Leverage, What Everyone Should Realize! The Mathematics Of Growth!

    This article will discuss the advantages of using statistics in your day to day use of wandering around in the world of financial markets.

    During my period of being a student at university (bless those days), I was studying for an economics and econometrics BSc & MSc degree. The majority of my friends were all investing their student money in CFDs and other derivative products alike. Some of them were using substantial amounts, far exceeding 10k per portfolio. That is quite daunting for someone who just reached the age of 20 years old, but hey, you are young, you can take the risk right?

    I was at the time a frequent user of many online day trading communities. During those university years I saw so many traders come and go. Many of them blew up their portfolios with a lot of precision. I couldn't have done it better myself if I wanted to. Back in the day most of them were all asking, how many % was I making? I said I was already happy with 1% a week. Most couldn't believe what I said. They rather saw their portfolio double in a week. What they failed to understand is that 1% a week is still a solid 67% (1.0152) return a year. Everyone knows that 67% return per year is not sustainable. Although if you would ask a bunch of people: "is 1% return a week possible?" the majority could or might agree. The book "Thinking fast and slow" by Daniel Kahneman is a good read when it comes to behavioral finance and it touches perfectly upon this subject.

    What is leverage?

    Back on topic, the reason why most of my comrades blew up their account was due to the use of leverage. What is leverage? Leverage is using certain tools (financial products) to magnify a desirable outcome.

    Let's say you believe in the story of stock A. You have checked fundamentals and technical and you came to the conclusion, stock A is what you want! However you just graduated from university, have debts to pay and your entire cash pool is only 10.000$. Even though if this stock would rise 10% in 1 year (which is a great result) you would only get an extra 1000$ dollars. What if you could use a derivative which might magnify this return? The variety of options you could use is endless. The Netherlands offers sprinters/turbo's and speeders and in the United Kingdom CFDs are mostly used for these short term opportunities. These are derivatives with enormous amounts of leverage. If you are not allowed to trade any of these (for example if you would live in the USA) you could always try options. The underlying idea is the same, magnifying a certain outcome which you expect will happen!

    Theoretical example

    Let's have a random generated stock price for stock A.

    The value of the stock at month 1 is 100 dollars. You only buy 1 stock in the beginning of month 1. It ends after 121 months at the price of 144.55$. A return of 44.55% after almost 10 years, which is around 3.7% return a year. Not bad, but you would like to magnify this outcome. A leverage of let's say 16 would make this 3.7% return into 60% return a year right?

    Wrong!

    Let's see what it looks like if we magnify the monthly outcomes by a factor 2, 4, 8 and 16.

    As depicted in the graph above, when using leverage (thus magnifying the outcome of a monthly result) you simply get 2x, 4x, 8x or 16x times the 1x monthly result. Cool right? Bam! Screw it, let's go for 16x times the leverage! I want this 60% return a year!

    Oops…

    Unfortunately the 16x leverage portfolio got blown out of the water and went on minus before the end of the period was reached. Ouch! Although it seems that 8 times the leverage is the best choice, the lowest value of the 8x leverage was 10.55$. This is an 89% loss out of the initial 100 dollars!

    Portfolio with leverage

    Lowest value in portfolio

    Loss in comparison to initial value

    1x

    $88.82

    -11%

    2x

    $77.64

    -22%

    4x

    $55.27

    -45%

    8x

    $10.55

    -89%

    16x

    $0.00

    -100%

    Would you sit still and not make a move in your portfolio when it shows -89%? Most likely you would not and sell everything far before that.

    Cost of loss

    I recommend for every starter on the stock market, no matter the amount of money they have to only invest little chunks of their portfolio rather than going on a 'all-out war'. The best argument to this advice is the cost of loss.

    Let's go back to the 100$ dollar initial investment. You buy a derivative and lose half of the value the first day. How long does it take for you to get back at where you were?

    The graph above depicts three scenarios all on the basis of a 100 dollar investment. One where you have a solid growth of 1.37% a week (3), one where you lose 50 dollars on the first day due to a wrong investment but you have a stronger growth of 2.8% (2) a week and you have scenario (1) where you lose 50 on the first day but you gain a similar growth per week of 1.37% a week.

    When you prevent severe losses of your portfolio (scenario 3) and gain a solid 1.37% a week you end up with 200 dollars in the end of the year. However if you have made the unfortunate mistake of betting the wrong horse (scenario 1) it takes you at least a year with the same return as scenario 3 to get back to at least a 100$ dollars. You ended up with nothing. And in comparison to scenario 3, you have lost the opportunity to gain a 100$ dollars. It takes you (scenario 2) at least 2.8% return a week to get back on track to the same value as not having lost the 50 dollars in the first week.

    This indicates the importance of shielding losses of your portfolio.

    So what do we know about % losses? One last test, a simple check…

    A simple check ...

    When a share is priced at a 100 dollars and it drops 5%, is that the same movement as a share priced at a 95 and increasing 5%? If not, which share moved the most in price value? You got that right? So what if a share is priced at 105 and drops to 100 or a share is priced at 105 and increases to 110. Which stock has the highest percentage change? I assume you can fill in questions like that within a flickering of a thought.

    I hear you say …

    Awesome, another nitwit which raises concern about the use of leverage within a portfolio! And a common second phrase could be: "I am aware of the leverage issue, therefore I only use 1/5th (or any other percentage) of my portfolio for derivative products!" However if one would use only 1/5th of its portfolio for leverage (and uses a leverage of 5) the overall leverage would still equal to just 1.

    Summary

    Be aware of what you do from a statistical point of view. Loss of portfolio is very costly. It could cost you years before you recover from losses. From a statistical point of view it's always better to lose 5% rather than 25%. Playing with leverage is like playing with fire. Having a few candles in your house lit is awesome, but the moment the house is on fire you run to the exits and you'll be left with nothing. Double digit growth year after year is not sustainable. This has nothing to do with the fundamentals but it's purely a statement from a statistical point of view. A country (or company) can't grow 15% per annum nor should you take double digit leverage without overshooting it twice. I've read fundamental research reports (here and on other websites) with valuations which reach to the sky. I worry when I see people pour their entire life savings after having read reports like that. After every crash you read in the newspaper how investors sue the company they invested in as they "expected it would grow constantly" but unfortunately that wasn't the case. These people obviously will only lose more money due to litigation and attorney fees but a wise lesson can be learned out of all that.

    I'm not saying to liquidate all positions and stand on the sideline (I myself am long equity) but remain realistic. You know that feeling when you are drunk and you see everything in a different perspective? Beer goggles? That famous phrase a friend says: "I never went to bed with an ugly woman but I definitely woke up with plenty?" People lose their rationalism when they see their portfolio hit high levels of greed. Math's however are never wrong.

    Currently there is a lot of debate in regards of whether or not the stock market is overvalued. People getting more and more greedy and therefore some even try their luck with very high leveraged products. The more you get, the more you want right? This article shows that investors should tread cautiously with leverage. And that is where I stand!

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 22 5:32 AM | Link | Comment!
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