Let me know if this story sounds familiar.
Almost a decade ago, an ex-colleague of mine decided to buy shares in a company at 30 cents per share.
Our FREE SGX stock pick!
At that point, the company was bidding for a huge project that could pay off significantly in the future. Then, came the big news: The company had clinched the deal! Shares subsequently shot up to 60 cents per share.
Elated, my ex-colleague sold his shares for a tidy profit of 100%, satisfied with his returns.
But then, the company’s share price kept climbing. In just three days, the company’s shares touched the $1.00 mark. Feeling distressed from missing out, my ex-colleague decided to jump in again, putting his newly-earned profits to work.
From there, shares of the company came within sight of $1.20 before tumbling down to less than 40 cents at the depth of the Great Financial Crisis two years later. Today, the company’s shares trade at around 70 cents apiece.
So, this was the gist of the story. Were you able to catch the mistake or mistakes being made here?
What went wrong
In case you’re wondering, the company in question is Genting Singapore PLC (SGX: G13). On 8 December 2006, Genting Singapore won the bid to build Singapore’s first integrated resort in Sentosa.
As the news broke, Genting Singapore’s share price went into a frenzy, spiking upwards. You can see this in the chart below:
Source: Google Finance
The problem was, even as Genting Singapore’s share price soared above $1.00, the company had not even laid one single brick into building the integrated resort. In other words, the company’s shares were bid up based on speculation, rather than any real business value being created.
Eyes on the wrong ball
You may have noticed that the key focus of my story was all about the movement of the share price.
I had said very little about the underlying business developments of the company while recounting how its share price moved from 30 cents to $1.00 and then eventually to 70 cents. There’s a good reason for that. My ex-colleague was focused on only one thing: The share price.
I would submit that the movement of the share price is not the right thing to focus on for investors.
Without any underlying business profits being generated by Genting Singapore back in 2006, there wasn’t much to support the move in its share price from 30 cents to $1.00 that my ex-colleague saw. As the excitement died down, market participants might have realised that there was still the ‘small’ matter of building a successful integrated resort that would take years to construct.
Genting Singapore’s share price may have come down as a result.
Price is what you pay, value is what you get
Genting Singapore’s share price traded at the 70 cent mark in late 2006. Today, its shares are hovering around that level again. On the surface, the price tag for Genting Singapore’s shares look the same.
But, the value an investor’s getting today is significantly different from what it was in late 2006.
In late 2006, investors paying the price tag of 70 cents will be buying a company without the Sentosa integrated resort. Investors paying the same 70 cents today, would be getting a company with the aforementioned resort. Meanwhile, Genting Singapore also generated over $1 billion in free cash flow in 2015; the company’s operating cash flow in 2006 was less than $340 million.
To be sure, the goal here is not to point out whether Genting Singapore is a good company or a bad company to own. The lesson here is about the difference between the price that you pay (70 cents) and the value that you get (with or without an integrated resort).
Value might be where we want to keep our eyes on.
For more investing insights and updates on what's happening in the world of finance, you can sign up here for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.