How I Took Advantage of Mr. Market’s Overreaction to News

In his classic The Intelligent Investor, Ben Graham named the forces that drive stock market “Mr. Market”. Mr. Market is infamous for his changeable emotions. When he is in good mood, he positively overreacts to news and pushes up stock prices; when he is in a bad temper, the market drops even with good news. To many, such unpredictability can be a source of risk or volatility. To value investors, however, the episodes of overaction offer great opportunities to look for undervalued stocks or sell overvalued ones. Below, I’d share two of my recent transactions where I took advantage of Mr. Market’s overreaction to news.

Be fearful when others are greedy.
Buffett’s wise words

Case 1: Nam Tai Property Inc (NTP)

Overview of the Company

I learned about NTP when I reviewed one the recent reports on Most Undervalued Stocks in Real Estate Sector on September 4, 2020. I initially searched real estate reports to diversify my investment and based on the belief that real estate sector would grow fast in the next stage of business cycle. NTP caught my eyes because it topped all three rankings for the sector, industry, and sub-industry. So, I researched the company.

NTP is a Chinese real estate company that focuses on developing technology park in Shenzhen, China. To be honest, I don’t know much about real estate. But I have expertise in China (remember, you should always focus on and invest in your circle of competence). Shenzhen is arguably the technology and innovation hub in China. Additionally, the city is located in the Guangdong-Hong Kong-Macau Greater Bay Area, a new strategic focus of the Chinese government. Despite the losses in the past two years, the new strategic plan for the area means that the development of technology industry and the real estate properties serving it have great potential in the future.

Value Analysis

The financials of the company, at first glance, could raise several red flags. For instance, it has had negative earnings per share in the past two years, its price/sales ratio is high, and its free cash flow could also do better. However, I noticed some promising indicators in comparison with similar companies. For instance, comparing with the real estate management & development industry, it has very low price/book raio, high revenue growth, and most importantly low debt ratios. Given that NTP is a real estate company, strong growth in revenue and cash flow plus low debt are good signs.

 NTPReal Estate Management & Development Industry
Price/Book1.896.01
Revenue % Change TTM73%20.55%
Cash Flow Growth (5 year)25.14%23.79%
Long Term Debt/Equity (TTM)42.75%129.11%
Total Debt/Equity (TTM)44.48%149.8%
Current Ratio1.141.82
Value Indicators of NTP and the Real Estate Industry

Verdict

Given my optimistic expectation for the company’s future perform (because of my expertise on the region), the aforementioned value indicators, and the undervalued stocks report (which take into consideration many more factors), I was confident that the NTP price was undervalued by Mr. Market.

In terms of the reasons for the undervaluation, the neighboring Hong Kong has been suffering from instability in the past two years, and the United States government has also cracked down on Chinese technology firms during the same time period. Are they just coincidence? I don’t think so.

However, as an expert on Chinese affairs, I know too well that these difficulties are only temporary. So, planning on holding the stock for long term, I bought NTP when the market opened the next day at $9.1 per share (The Sprout undervalued stocks reports are issued bi-weekly on weekends to give investors time to research).

My Transactions of NTP
My Transactions of NTP

One of the positivity of information technology is that the fast, easy access to information has made it easier for the market to notice undervalued opportunities, which means undervalued stocks don’t stay undervalued as long as in the past.

The NTP price slowly picked up until the morning of September 14 when I saw a nearly overnight 20% jump in the price. Immediately, I checked the news and found the CEO of the company resigned. Obviously, Mr. Market was very pleased to see the leave of the CEO, who was blamed for the previous two years of losses. However, given the unfavorable external environment (e.g. Hong Kong and US-China relationship), I don’t think the CEO is entirely responsible for the losses.

Anyway, the point is that I noticed that Mr. Market just turned from being over-pessimistic about the old CEO to being over-optimistic about the future CEO, about whom we have little information. It’s true that the new CEO could turn the company around, but it’s also possible that he/she would not. So, I decided to change the plan and take advantage of this opportunity. I sold all my shares on Sep. 14 at $11.00, nearly the highest point since then. I may purchase the stock back depending on the future development of the company.

Price movement of NTP
Price movement of NTP

Case 2:Viacom CBS. (VIAC)

Overview

Another company I traded is Viacom CBS. The buying transaction took place before Sprout Stocks was built. I noticed and 60% plummet of VIAC earlier this year when I was browsing a financial website. After some digging in the news, I learned about the facts that the company just went through a merge between Viacom and CBS and that the CBS CEO resigned due to allegations of sexual misconduct. I also learned that some analysts had concerns about the merge.

Without much research into the financials of the company, I sensed at the moment that the company could be undervalued due to Mr. Market’s overreaction to a little too many uncertainties at that moment. Intuitively, as a not-so-loyal viewer of CBS News, I did not notice much change in the quality of CBS programs and I kind of like the easy and free access to its content. Neither do I think Americans will stop watching college sports any time soon. The content is the value of the media company.

Buy Buy Buy

Trigger for Buy

That being said, my intuition alone wasn’t enough to persuade me to press the “Buy” button. I need more persuasion so I monitored the stock.

And the most persuasive buy signal came! Shari Redstone, the President of National Amusement that controls ViacomCBS, purchased $2 million worth of the company’s shares in two months in her PERSONAL ACCOUNT! As value investors have been saying all along, executives (or insiders) of a company may sell their shares for various reasons that can be irrelevant to the company’s operation. For instance, they may need money to buy houses and planes, or hold parties etc. But, when they buy more shares of their company, especially using their personal accounts, the only possible reason is that they expect the company to perform well and the share price to go up!

Shari purchased VIAC stocks twice in two months, at $28 and $19 respectively. For some reason, Mr. Market didn’t trust the money of the company owner (see how irrational and overreacting Mr. Market can be?). And the price continued to drop. That’s a real undervalued buying opportunity!

So, I closely monitored the price movement for several more days and bought some shares at $11.9 after the price bounced back from the bottom. Since the owner of the company purchased the shares at much higher levels, I felt very comfortable to purchase more VIAC shares below Shari’s buying prices.

My Purchase Records of VIAC

I sold my VIAC shares recently mainly because VIAC is not one of the most undervalued stocks in the the Most Undervalued Stocks in Communication Service Sector on September 4, 2020 report and the stock has reached Shari’s buying level. Even though I do think there is still room for the stock to go up, I think I have gained enough return on it and it’s time to catch other opportunities.

VIAC Price Movement since My Purchase
VIAC Price Movement since My Purchase