Chapter 178 Buy when it’s bad, sell when it’s good

Lin Menghan began to re-screen eligible stocks according to the scope redefined by Li Feng. In more than half an hour, she had screened out more than a hundred stocks.

Among them are well-known stocks such as CNPC, Sinopec, CNOOC, China Shenhua, China Shipbuilding, Aluminum Corporation of China, Shandong Gold, Baosteel Group, etc., as well as a large number of companies she has never heard of, such as Luoyang Molybdenum Co., Ltd., China Tin Co., Ltd., Huayu Mining, Tianshan Aluminum, Zhangyuan Tungsten Co., Ltd., Panjiang Group, Hunan Gold, Chifeng Gold, Pangang Steel and Vanadium, Xingye Group, etc.

There are so many that it’s dizzying just looking at the names, let alone the businesses they operate.

"With so many stocks, which ones should we choose?" Lin Menghan looked back at Li Feng and asked.

"Generally speaking, apart from precious metals, copper has the strongest financial attributes and the greatest elasticity among non-ferrous metals. Among the non-ferrous metals sectors that saw the largest increases in 2007, Jiangxi Copper saw its price rise from 5.08 yuan at the beginning of 2006 to 78 yuan in 2007, a peak increase of 15 times... Yunnan Copper saw its price rise from 4.03 yuan at the beginning of 2006 to 98.02 yuan in 2007, a full 24-fold increase..."

While listening, Lin Menghan retrieved information about Jiangxi Copper and planned to study it.

Li Feng stopped her and said, "Don't bother looking at these two companies. They've basically exhausted their own mines. They're now half smelters, just wage earners, with limited flexibility... The rising star right now is Zijin Mining."

"The just-released 2009 annual report shows that Zijin Mining is currently China's largest gold producer, with an annual output of 40.8 tons, the largest zinc producer, with an annual output of 374,100 tons, and a leading copper producer, currently producing 369,900 tons of copper annually. Its business spans both domestically and internationally, with its expansion primarily focused on Belt and Road countries. More importantly, it has recently acquired the Bor and Timok copper mines in Serbia, as well as the Kamoa copper mine in the Democratic Republic of the Congo. These two world-class mines have the potential to produce over 100,000 tons of copper annually!"

"Furthermore, aluminum stocks within the non-ferrous metals sector were also a dark horse in 2007. Yunnan Aluminum, the leading stock that year, soared from 3.58 yuan at the beginning of 2006 to 37.99 yuan in 2007, a tenfold increase. Another giant, Aluminum Corporation of China, closed at 17.92 yuan on its first day of listing. Just a few months later, it hit a high of 58.97 yuan, a direct tripling of its value!"

Lin Menghan also directly selected these two stocks into her watchlist. After taking a quick look at the information of these two stocks, she couldn't help but wonder:

"Yunnan Aluminum is okay, with a current price-to-earnings ratio of 20 times, but China Aluminum's price-to-earnings ratio has reached 111 times! That's too high!"

"Aren't you a conservative value investor? How could you choose a stock with such a high P/E ratio?"

"Buying stocks with such a high price-to-earnings ratio, isn't that speculation?"

Lin Menghan was quite puzzled.

In her impression, Li Feng is very conservative. He only dares to buy bank stocks with a price-to-earnings ratio of less than 8 times, and manufacturing companies cannot exceed 12 times. Even the price-to-earnings ratio of 20 times of Kweichow Moutai feels a bit high.

Today, why do you go against the norm and buy a company with a price-to-earnings ratio of more than 100 times?

Li Feng knew her doubts and explained seriously:

"Menghan, you only know one side of the story. These stocks also have another name: pro-cyclical, or strongly cyclical. This means their performance is highly resilient. A 20% performance increase for ordinary stocks is considered high growth, while a 50% increase is considered explosive performance. But for these strongly cyclical stocks, once the cycle arrives, a 50% performance increase is considered acceptable, a 100% increase is considered high growth, and a 500% increase is considered explosive performance!"

“The performance elasticity is very large!”

"This is because the resources they produce are basically fixed in cost, so during a period of high inflation, any price increases will directly become profits!"

"For example, Aluminum Corporation of China not only owns bauxite, which is used to produce alumina, but also produces downstream products such as electrolytic aluminum. China has the largest reserves of bauxite in China and 1.8 billion tons of reserves abroad. Last year, it produced 13.8 million tons of alumina and 3.79 million tons of electrolytic aluminum."

"You can do the math. If the price of alumina rises by just 100 yuan per ton, that's over a billion yuan in profit. If the price of electrolytic aluminum rises by just 1,000 yuan, that's several billion yuan in profit. And in a period of hyperinflation, a 100 yuan increase in the price of alumina and a 1,000 yuan increase in the price of electrolytic aluminum are just starting points."

"Look at the current electrolytic aluminum futures price of 11,225 yuan per ton. It's already below cost, a price that's been set before the economic crisis. When inflation hits in the future, it will at least exceed the 2017 peak of 17,000 yuan per ton! This business alone means a profit difference of over 10 billion yuan."

"Do we still have to look at the futures price?" Lin Menghan suddenly felt the pressure of analyzing the market increase a bit.

The futures market was an industry she had never been involved in before.

"Yes, domestic copper and aluminum deliveries are all based on the prices of the Shanghai Futures Exchange, so it is very convenient to track copper and aluminum prices."

"But, didn't you say you wanted to buy resource stocks priced overseas? Isn't this Chalco priced domestically?"

"Yes, there's no shortage of bauxite, both globally and in my country. However, the biggest cost in electrolytic aluminum production is electricity. Electrolytic aluminum is also known as solid electricity, because electricity accounts for approximately 35% of the production cost. Electricity is also a form of energy, so during periods of high inflation, electricity prices are also significantly affected."

"In addition, the pandemic is raging both domestically and internationally, and the US and China are still in a trade war, which is very chaotic. When we choose companies, we also need to guard against the policy risks of minerals abroad. Therefore, the second stock we chose is Aluminum Corporation of China."

"What about the third stock?" Lin Menghan continued to ask.

"I chose Tin Industry Co., Ltd. During the bull market of 2007, Tin Industry Co., Ltd. was also a unique non-ferrous resource stock. From 2.68 yuan at the beginning of 2006, it soared to 102.20 yuan in October 2017, a full 38-fold increase!"

"Its main product, tin, is also known as industrial MSG. It's used in very small quantities in the electronics industry, but it's essential. The end user isn't sensitive to price. Tin Industry Co., Ltd. is the leader in my country's tin industry, so it's a relatively safe bet."

After saying that, Li Feng opened his account. Now he still had more than 6 million in and out of his account. After thinking about it for a while, he bought 2 million yuan of Zijin Mining, 2 million yuan of China Aluminum, and 2 million yuan of Tin Industry Shares. There were still more than 600,000 yuan left in the account, which was used for living expenses or temporary replenishment.

Li Feng emphasized again: "When investing in strong cyclical stocks, you must enter the market when performance is poor and the price-earnings ratio is high, and sell when performance is good and the price-earnings ratio is low!"

“Buy when it’s bad, sell when it’s good.

"Hmm? Why?"

Even Lin Menghan widened her eyes when she heard this explanation which was completely different from value investing.

When it comes to value investing, isn't higher performance the better? Isn't a lower price-to-earnings ratio the better?

—————

At the beginning of 2024, the market fluctuated violently, and institutions secretly adjusted their positions. Investors who had already boarded the market felt okay.

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