Speculating on Curry Puffs?

800px-Old_Chang_Kee Old Chang Kee Limited (SGX: 5ML) recently announced that there could be possible transactions involving the company. In a statement, it said that “the controlling shareholder of the Company has informed the Company that he and his associate have expressed an interest to enter into a possible transaction involving the shares of the Company, which may or may not lead to an offer being made for the Company by a third party.” It went on to add that there had been no firm intention made by the third party and that the transaction may or may not proceed. The company will make further announcements should there be any material developments.

The announcement saw the company’s stock price increase from $0.675 on 3rd July to close at $0.85 on 4th July, a 25.9% rise in the price. Old Chang Kee has 120,898,000 shares outstanding. In terms of market capitalisation, the company added S$21.2 million overnight. The next day, the stock closed at $0.765. This was a drop of 10% in stock price. The market capitalisation shaved off was $10.3 million.

Nothing material changed about the company due to the announcement on 4th July. Business was still as usual at Old Chang Kee. Why then the contrasting price changes over two days?

The reason was that Mr Market turned euphoric once the announcement was made. There were people who might have thought that they could make quick money by being on the side of Old Chang Kee. Whenever takeovers are done, the acquiring party usually pays a substantial premium to the last done price. The next day, some of those who bought on 4th July at a low price might have sold off their shares since they had made some gains inadvertently, causing a plunge of 10% in stock price.

The above is akin to speculating in the sense that it works on the greater fool (fool, not Fool) theory. Those who purchased Old Chang Kee stock on 4th July because of the announcement did not pay attention to the valuation of the company at all and thought they could sell it higher when the takeover materialises.

Foolish Bottom-line

When buying stocks, we should approach it from a business perspective by looking at both the qualitative and quantitative aspects of the business. Benjamin Graham said it best when he said, “Investment is most prudent when it is business-like”. Analysing Old Chang Kee is no different.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.