Bermaz Auto (Bauto) for income investment

Bermaz Auto is the second (of several) potential ‘forever stocks’ that I have started building my position in. It’s the second of two for the time being as I have yet to build a position in my other picks.

I’m writing about Bauto first because it’s currently making me a loss in value. Everyone talks about their wins, or the wins of people they know – not unlike what I did in a previous post. Writing about winners is easy. Writing about your losers, not so much.

Sometimes when you revisit the position that’s not doing so well price-wise, you might start seeing mistakes in your initial analysis. Since the stock price isn’t doing so great, it’s likely that there are a lot of negative opinions flying around and because of this, you start questioning your decision even though you had already done your homework and triple checked everything before you bought into the position. This is what I am experiencing as I write this post and retrace my analysis that led to the decision of opening the position.

I’m pretty sure everything was great back then…

RM 2.2 in May to RM 2.6 in July. 18% gain in 2 months.

Yeah… It definitely seemed like all the stars had lined up perfectly when the price rose from around RM2.2 in May to RM 2.6 in July.

Sweet TA

The 50 and 200 moving averages were moving up, with the 50 above the 200. MACD was moving from the negative to the positive. Stochastic had crossed above the 50 line.

I don’t know if many technical analysts use ADX but it is a tool that I like use in my TA. In fact, I mostly use ADX along with support and resistance areas (I am not a believer in exact values) and moving averages; just the 2 most common ones, the SMA 50 and SMA 200, and occasionally EMA 20 for short term trading.

I’m no Warren Buffet nor an accountant and I don’t think analysing company reports is something I can do but I try to understand the business that I am going to invest in and its fundamentals. I skim through the ones in my watchlist that seem interesting but mostly I just look at the ratios on malaysiastock.biz and the isaham app. I also look up the company website and annual reports as well as consider (with several pinches of salt) commentators’ comments to understand the business and their future potential.

When I started looking at Bauto around June onwards, what I saw seemed ok.

Earnings Per Share (EPS) is growing over several years, though there are fluctuations in the shorter term.
Lower profits in 2017.

Alright, so maybe not so OK. Profits fell in 2017, but recovered in 2018 and 2019 which is probably one reason why the stock price fell in 2017 but…

In fact, Bauto stock price started falling in 2015 even as the company posted great results… Which was followed by poorer results in 2016 and 2017, but who could have known that in 2015 when everything was so green.

This I believe is one of the risks of going with the flow. Not that I don’t believe in investing in profit making companies or trading with the trend. In fact, I look for companies with good financial records to invest in (like Bauto) and trend trading is my favored trading method. Many of my positions are built on trend trading, and even my almost-forever stocks that I invest in mostly for the dividend, I make entries based on the price position in the trend. I also do pure trend trading based on TA and swing trading based on trend movement (as well as pattern which is also another thing I am passionate about. Made me a bit in the US market).

What I always remind myself of when going with the flow is of the inherent risks it poses. Potential resistance areas is one thing I am always wary of. Of course, support area entry also has its risks. There is no perfect or risk-free method. If there were, everyone would be doing it and making tonnes of easy money.

Anyway, May to July 2019 was a good time for Bauto. Quarter reports were green, TA showed a golden cross, trend was up. And of course, the stock price was moving up nice and quick which I guess is the most important thing for many traders and the main reason that a lot of telegram channels were doing coverage of it and a lot of people were shouting about it. This was actually how I came to find out about Bauto.

Now though, after the stock price has receded about 30% from the July high of 2.9, opinion isn’t very favorable. The auto sector is expected to see challenges moving forward with the global economy not being very favorable at the moment. And competition from Proton/Geely is starting to look more scary. Occasionally I wonder at why I bought in at a weak support, and ignored the bearish pattern I saw. I could have gotten it at a much better price if I’d waited a bit more.

I think this kind of second guessing yourself is a normal experience for all investors and traders. It is for me, which is why I believe that understanding why you entered a position, and having a clear plan is important.

I could have initiated a position at the time Bauto broke above the 2.45 resistance area but it moved too fast and the risk to reward ratio after that was not worth it for me. Since I planned to invest long term in Bauto, I decided that a little wait for a better entry point was not a problem. Its move was also very fast which I usually give a big risk weightage. Whatever goes up fast can also fall down fast.

My structural support and resistance.

Bauto fell slightly short of the 2.9 area peak of 2015 before going down (this is why I prefer to define support/resistance areas rather than exact values). From July until now, it has been steadily going down. I finally bought in my initial position at 2.21.

Why did I buy in at this price?

Oh… I saw the potential head and shoulder alright. And the very likely floor around 1.8.

The first reason was because this position gave an implied dividend yield of around 5.4% (Bautos 5 year average dividend yield is around 0.12, not including this years special dividend). My purpose was income investing. My plan was to buy in at possible support and keep for many years. For me, 5% yield is the magic number. If the price yields above 5% and likely to yield that for the forseeable future, I’d invest in it.

The second reason is that, among all the stocks in my portfolio watch list, Bauto is the only one that ticked all the boxes. It had all the characteristics of a stock that I wanted to be in my portfolio.

The third reason is that, although chart pattern wise it was potentially forming a ahead and shoulders, it was also hovering around a 200 period SMA that is pointing upwards. It was a potential bottom.

Fourth, and finally, my investing plan for my income portfolio is to average in on my positions rather than put all my money in on a single position. I was clear of the downside risk and have decided to take it as a chance to add my position.

At the time of writing, Bauto has fallen to 2.04. I am waiting for the selling pressure to subside before averaging in around this price. If it falls further, I’ll wait around 1.8 to add in more positions. I’m hoping to get an average of RM 2 or less. If Bauto can continue to pay an average RM 0.12 annual dividend, this would translate into a 6% dividend yield which is brilliant for me.

So what do you think of Bauto as an income vehicle? And what do you think of my decisions and plan for my Bauto position? I’d love to hear constructive comments and suggestions that can help improve my investing.

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