15 November 2011

How to Estimate the Enter Point in Stock Market: Potential Profit / lose = Risk / Uncertainty - Case study: MMODE (0059)

We always want to know when is the best time to buy or sell in stock market. In fact, that is no such a thing in real world. All is about risk and potential profit/lose. The higher the risk, the high the potential profit/lose. And the risk is based on the uncertainty of a particular business. In this post, I am going to use MMODE as an example to explain this idea.

MMODE announced its impressive EPS in its first quarter of 2011, its market price was only 0.165~0.17, if the EPS can be maintain, estimated PE was only around 2.2. In other words, there was huge potential profit (>100%) when PE is adjusted to 5 from 2.2. But its risk was also very big: Can MMODE maintaine its EPS in the future? Can the receiveable be received? After that, the price gone up to around 0.19~0.26 until second quarter.

Yes, another impressive EPS was report in second quarter. But unfortunately, Bear was coming, the MMODE price had been press to 0.22~0.31 for few weeks before it soared to 0.35~0.40. With average of 0.30, PE was adjusted to around 3.3. This is because more people have more confident about its future due to the fact of impressive EPS in last consecutive two quarters. Uncertainty was relatively less compared to the first quarter since the EPS of second quarter shown that the EPS of MMODE keep moving up.

After three months, again, another impressive EPS was reported in third quarter. Where should its market price moves in the future until last quarter comes out? This time, more uncertainty of MMODE have been cleared - the amound of Cash is increased, Receivable is received, EPS keeps maintain in attractive amount. What should the PE now?

From the case study above, it shows investment is invest in uncertainty. The more uncertainty, the more potential profit/lose. But for investors who do sufficient homework know that the uncertainty is from the risk of each business instead of the movement of market price. As long as a particular business can keep earning money, giving dividend, and growing, it is just a matter of time for "market" to appreciate its value.

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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