How to react to Good News and Bad News?

February 4, 2012

As investors, we are often buffeted by good news and bad news. How should we react to them? One good example is the on-going case of Genting Malaysia (‘GenM’)’s lobbying for a casino license in Miami, Florida.

GenM’s pitch for Casino License in Miami

Three weeks ago, the chance of Genting Malaysia’s plan for a USD3.8 billion casino-and-hotel complex in Florida looked promising as a state Senate committee voted to allow the proposal to be debated by the state’s lawmakers.

Florida’s Senate Regulated Industries Committee voted in favour of a Bill that would allow the setting of up to three Las Vegas-style casinos, with dealers and table games in addition to slot machines.

Despite the promise of creating new jobs and generating more revenue for the state, the support for the idea of setting up casinos did not gain popular support. Recent polls show a rise in the number of those who are opposed to the setting up of casinos from 38% a few months ago to 46% now.

Last Friday, the bill was withdrawn before a committee in the state House of Representatives due to the lack of support. There is little chance that it will come up for another vote this year.

Bad News Should Lead to Price Correction

With this piece of bad news, we can expect GenM to take a fall when market re-opens on Wednesday. There are two questions to ask: How bad is this news? Did the market factor in the earlier good news and if so, how much did it factor in?

From Chart 1 below, we can see that there were sign of accumulation in GenM, probably due to the prospect of it securing a full-fledged casino in Miami. Investors jumped into GenM on the news that a bill for the setting up of casino would be tabled in the Florida Senate. Alas, the latest news that the bill will not be tabled due to lack of support in the Florida House of Representatives and this should have a negative impact on the share price. GenM rose from RM3.80 to RM4.10- a gain of 30 sen. We can expect a sell-off on Wednesday for GenM and the stock to shed at least 30 sen.

Chart 1: GenM's daily chart as at Feb 3, 2012 (Source: Tradesignum)

Not All Bad News are the Same

Some bad news can be the start of something beautiful. If a stock has been weighed down by a bad investment or business, the decision to sell off that investment or business could be a turning point for the company & the stock. One very good example was Supermax Corporation Bhd (‘Supermx’)’s decision to terminate its investment in the loss-making rubber-glove manufacturer, APLI in early 2009.

That decision, coupled with the upswing in the rubber glove sector, saw the share price of Supermx rallied from RM0.30 to RM3.30 over a period of 18 months. See Chart 2 below.

Chart 2: Supermx's daily chart as at Feb 3, 2012 (Source: Tradesignum)

Recently, MISC Bhd announced its decision to exit the liner business. MISC’s liner business suffered a total financial loss of US$789 million (RM2.5 billion) over the past three financial years. This loss had impacted its overall financial performance.

MISC has expected to incur further losses in the current financial year ending Dec 31, 2011 with the one-off costs from exiting the liner business estimated to be about US$400 million. Once the liners business has been disposed off, I believe MISC would enjoy the same revival like Supermx in 2009, though the rise in the share price may not be as spectacular. See Chart 3 below.

Chart 3: MISC's daily chart as at Feb 3, 2012 (Source: Tradesignum)

What about Good News?

A good example of how the market reacted to a good news that had been factored in is the case of Genting Singapore securing the license to operate a casino in the Republic. The stock rallied from a low of S$0.30 in July 2006 to a high of S$1.30 in December 2006. Then the news came out and the stock stayed above S$1.00 for the next few weeks before it slid back to a low of S$0.32 in October 2008. Go here for the 10-year chart of Genting Singapore.

Buy on Rumors & Sell on News

These stories illustrate the point that the market discounts everything- most of the time. As such, if you read in the newspaper a good news and you haven’t been following the market or the particular stock for a while, you should not jump into that stock. Chances are the share price has already reflected the good news. Sometimes, due to overly enthusiastic market reaction, the share price exceeds the new fair value of the stock. As such, we often encounter situations where a stock will experience a decline in price after the announcement of a good news. To the laymen, it is just another example of how illogical the stock market is but in actual fact, the market has a very logical mind.

In conclusion, you should be careful when you read any business news. Acting on business news can be bad for your investment.

(This is my latest article in Merdeka Review. For the Chinese version, go here.)