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If July exceeded expectation, August was Explosive, thanks insane STG !

In our last report for July performance we showed how our portfolio exceeded all US indices for that month and its increase was higher than any other index. We gave our expectations for August and expected some correction for August. It happened, but honestly we can’t be so optimistic that time to expect that our portfolio will be exception for that correction ! To recap for those didn’t read our July report, below was the performance for our portfolio in blue compared to other US indices in July. We recommend to take a breath before seeing the explosive August below July trend !!!

Below is our explosive August ! Thanks STG !!

How insane STG exploded the portfolio !

In July report we highlighted our portfolio ownership indicating that STG was the highest owned. Actually we kept increasing in STG for the beginning of August to a level that was of higher risk. Our stand in STG was strengthen after STG meeting on 17th Aug and announcement of Q2 results that proved how STG is a rare-time gem that we can’t wait. Below was our highlighted July ownership in last report and followed by current end of August ownership.

1STG “Sunlands Technology Group”31
2BABA “Ali Baba Group”21
3AAP “Advanced Auto Parts”13
4AFLYY “Air France KLM”11.5
5MQ “Marqeta”7
6DNFGY “Dong Feng Automobile”6
7SMTSF “Sierra Metals”5.5
8CALM “Cal Maine Foods”5
Our portfolio at end of July 2023 as highlighted in July report

Below is our portfolio, at end of August 2023 showing our higher investment in STG.

1STG “Sunlands Technology Group”71
2BABA “Ali Baba Group”8
3AAP “Advanced Auto Parts”5
4AFLYY “Air France KLM”6
5MQ “Marqeta”4
6DNFGY “Dong Feng Automobile”2
7SMTSF “Sierra Metals”2
8CALM “Cal Maine Foods”2
Our portfolio at end of Aug 2023

The increase in STG ownership percentage was driven by higher buys and the increase in its price. STG had covered actual loses from other picks as general stock markets were weaker in August that will allow push up to our portfolio when markets recover. If you followed our reports, we highlighted our buy in STG from 14th July 2023 at $4. We didn’t add shares in STG after crossing $8 in August 2023. Below is STG trend for the last 6 months from Google Finance.

Why STG became so explosive & why we increased its ownership !

We had gave the name “insane” for STG during 14th July report that because it is rare to find profitable company trading at PE ratio below 1 and almost around 0.5 ! Just knowing that companies like Microsoft, Amazon, Apple, Nvidia is trading above PE of 20 and sometimes in crazy numbers above 50. For a company to have its PE change from 1 to 50, its price need to increase 50 times if it maintained the same profit ! What does a PE ratio of 1 means, it simply means the company need 1 year to have net profit if distributed to its shareholders, it will be equivalent to its traded share price in the market. If the price of the share increased in market, its PE increase too. So, STG was gaining more than $6 a year for each ADR traded share while it was trading for $4 ! Crazy, isn’t it. To simplify, it means you are buying a business for $40,000 while it provide $60,000 net profit yearly to you that you can distribute to yourself or keep and expand the business or even pay outstanding liabilities as STG is doing. That explain why we were buying always when PE was below 1 and around.

The company had one negative factor which was closed by 17th Aug report. It was the negative equity for shareholders resulted from previous losses. The company continue its profits, continued its equity improvement and we expect by next report of Q3 to have price to book value of 5 at current prices which indicate an increase in integrity for STG owners. Below shows how liabilities was decreasing each 3 months with minimum impact to assets because of continuous profits and from next quarter, we will be in new horizons.

Numbers in China Currency CNY

Is STG still a good buy ?! What is its future ?

Currently STG is trading in PE of around 1.4 for price of $9.71 which still attractive. We need to remember that STG was trading for $15 in Feb 2023 at a worst financials, it was trading at $80 five years ago. At $4 it was really insane price and we felt the bear weaknesses while buying and monitoring. We feel for current Aug, the fair value is just below $8 and we feel that each quarter we can increase the fair price by $1.5 and $9.5 is the fair price after Q3 report and $11 is the fair price by end of the year.

Can we see a double of current prices within the next 2-3 years. Our answer is yes and because of that we didn’t start a real sell as we don’t see STG trading far from its nearby targets. In case you don’t have a share and want to have a small entry position, then it is ok. You can expect a double from current prices in the near 2 to 3 years which mean 33% growth a year.

Very important factors for STG

We highlighted many factors of STG in previous reports. We will now add few which we didn’t highlight before. The 1st is the buyback program STG having to support its share price which may have affects in current price rise. Any traded company can support its shareholders by providing dividends as delivered cash which STG did last year by giving around 68 cent per ADR share while the stock was trading at $4 at that time. Another support can be by introducing a buy program of its shares from market using available company profits especially if it sees its traded price is trading low. The approved program has value of $15 million and at 17 Aug 2023 the company only used $2 million. At that time the STG price was $6.38. We were monitoring the current buy and it didn’t exceed a net buy of $1 million by end of August. Just imagine the protentional increase if the program implemented fully.

The 2nd important factor is the insiders of STG “its management and those belong to the company” has share ownership of more than 50% ! That show the trust of management in the company even at its previous bad financials. That is actually the drive at the improvement of the company. It was always proven that companies is performing much better when management own in the company instead of being pure employees. Just imagine when they have most of the company ! Actually, the revenues show some decrease with time because of competitions, but always the expenses decreasing even higher resulting in better net profits. That is driven by increasing the efficiency of the company financials. Management will do when they care and feel they pay expenses from their own money.

Can above 2 factors work together where the management sell to the buy program, the answer is logically yes. But such ownership will not allow them to sell to small buy program and allow just to sell a small portion if happened. So, for us the management and insiders will remain high in the company and continue honest improve to its value.

Our Expectation for September 2023

Honestly and after amazing performance in August, we will not be setting any optimistic targets. We need to digest such increase seeing how far our portfolio stand from US and global indices. We have good position as some STG profits was wiped up by down trend in most of other picks allowing improvement to our portfolio inline to global market from other picks even if STG stabilized. our main target in September will be maintaining such profits. We already started minor sell in STG and searching for newer picks and new gems.

Does above mean STG is bad? The answer is no and that is proven by remaining in hold for STG at current prices for causes highlighted in the previous sections. But we need to get our gains to reality if we saw higher prices than required for current period.

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