Taking stock on developer stocks rally
I have mentioned in my previous post on my position in developer stocks to ride the rising land price cycle. The focus for me was on companies that got their land bid in 2016 when land price was still relatively depressed and the en bloc party was but a distant memory 10 year back. Significant position added on this thesis was Guocoland (who got Martin Modern in 2016) as well as Wee Hur (who got Parc Botannia in 2016).
The investment thesis was based on a higher margin of safety obtain from the record land bid price in 2017 as well as the en bloc party which I also blog about previously. Naturally, the profit margin on developer who got land at a reasonable price in 2016 should be more assured of their profitability for these projects.
As there are greater exuberance in the market noted over the past half year, I have mindfully told myself to unwind my position, or simply put “take money from the market” in the event the market turns.
I partially unwind my position earlier this month and would like to share the entry and exit position for stocks I invest based on the above thesis.
The gain above excludes some modest dividend which I received during my period of investment. The reality the nature of a developer business is such that it and as the market starts to price in potential gain from their inventories that was purchase in 2016, a rational investor should take some profit.
For cyclical stocks, my view that it is important to get in when there is a significant margin of safety and sell when there is high level of exuberance in the market. It does require a bit of quantitative analysis (on benchmark such as P/B ratio) as well as qualitative analysis (Did anyone notice a greater number of property experts during your coffeeshop visit?) as well as luck. For me, the day which I unwind all 3 positions (yes in the same day) was a day I took leave and I happen to notice price weakness for developer shares for the past few trading days. I guess that was luck for me.
My view on the property sector in Singapore is that the price has overrun its value largely driven by sentiments mainly from the en bloc craze. Factors such as continued rental weakness and government cooling measure which remain largely intact would translate to developers who got their land in 2017 at record price bearing a higher risk of an unprofitable developer. Given the large supply coming through from the en bloc deals fast forward 2 years later, I believe the overall real estate sector will be prone to any external shock that might occur similar to what happened in the last en bloc party in 2006 which came to a halt in 2009 due to the Global Financial Crises.
Price vs Value
En bloc party
Guocoland Beach Road foray