Saturday, April 30, 2016

Riding Waves

The graph below shows the weekly price chart of the SGX counter Hotung Inv from November 2011 through April 2016.

Looking at the graph, it does conjure an image of a string of ocean waves rushing to the shore.   There are the highly distinguishable crests and they can be seen to occur at regular intervals around April or May each year.   Each of these peaks is invariably followed immediately by a big drop in May.   The graph then stays low after that until it moves up to another peak the following year.
The behaviour of the graph can be easily explained by the fact that this counter goes ex-dividend in May each year.   As the day of ex-dividend gets closer, the price of the stock goes up and this gives rise to the peaks or crests of the waves.   When the stock subsequently goes ex-dividend, its price drops and this is reflected in the falls in the graph.

This phenomenon provides an opportunity to ride the proverbial wave as the price of the stock moves up to its peak.   The strategy is to capture the pure capital gain by picking up the stock before its price moves up, riding the wave of its ascent to its crest and selling it before its price falls.   Let me call this the 'ride the wave' strategy.
The time to get ready to ride this wave is before the price of the stock ascends.   It is never possible to pick the lowest price for entry but it can be seen from the graph that some low points of the price do occur in the months of October, November and December each year.   Hence, an entry can be made in any of those months.    The action plan is to buy the stock at the end of the year, hold it through the new year and then dispose of it on the day before the stock goes ex-dividend in May.
This strategy is tested on the 4 waves (from November to May for each wave between November 2011 through May 2015) shown in the graph.   The closing price on the last trading day in November is arbitrarily used as the purchase price.   The selling price is the closing price on the last trading day before the stock goes ex-dividend.   The returns obtained are shown in the table below:

Closing Price 
on the last 
trading day 
in November ($)
Closing Price 
on the last 
trading day 
before ex-D ($)
Date of ex-DCapital 
Gain / Loss ($)
Gain / Loss (%)
Nov 2011 - May 20121.220 1.470 7-May0.250 20.5%
Nov 2012 - May 20131.460 1.630 6-May0.170 11.6%
Nov 2013 - May 20141.470 1.620 22-May0.150 10.2%
Nov 2014 - May 20151.510 1.540 25-May0.030 2.0%
Simple average0.150  11.1%

From the table above, it can be seen that by 'riding the wave', the total capital gain is $0.60.   The average capital gain per 'wave' is $0.15 or 11.1%.   The individual capital gains of the first 3 'waves' are above 10% each but the average per 'wave' is dragged down by the capital gain of the last 'wave'.

Will the wave repeat itself this year?

Looking at the right-hand side of the chart, the graph is now already in the process of making a new wave.   It can also be seen that if one had bought the stock last November, one would already be holding some capital gain.   The actual capital gain as of 29 April 2016 is $1.58 - $1.36 = $0.22, representing some 16.2%.   This is already above the average gain of the last 4 'waves'.

The month of May is approaching fast.   Let's watch the development as it unfolds. 

1. The total dividends for the same period from November 2011 through November 2015 was $0.48.   The closing price of the stock on 30 Nov 2015 was $1.36, giving a capital gain of $0.14 (= $1.36 - $1.22).   The total returns (capital gain + dividends) obtained by holding the stock throughout the same period was thus $0.62 (= $0.14 + $0.48).

2. There was a 10 into 1 share consolidation on 4 December 2015.   All relevant prices and dividends above have been adjusted accordingly.


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