Good and bad picks

Unlike PTKM which I mentioned earlier, ZVZD did ok on the last quarterly report. Not good, not bad, but ok. Which is exactly what I expected. Although there are some balance sheet adjustments which lowered the cash to equity ratio somewhat, the overall business seems to be going along just fine. While it would be naive to expect a sudden increase in demand for edible oils (though biodiesel may actually change that in the near future), it would also be silly to expect a significant slowdown in sales as well. Like I’ve already said, this stock is something like buying a bond or a chunk of gold at 1/3 of the actual price. It won’t bring you much in terms of dividend yield, but sooner or later you’ll be able to sell it for more than you paid for it. Especially if it grabs a chunk of biodiesel industry one day, but that option is currently on a pretty long stick.

LPLH also did fairly well, which was to be expected considering a good tourist season. However, I believe income sheets will be negative all the way up to next summer, since the company is still in the process of transition from shipping to tourism. Ultimately, I do believe the company has strong potential, but I also expect a few more bumpy years to come.

DDJH report didn’t come in yet, but I’ll go out on a limb here and say I expect the results to be similar to PTKM with somewhat equivalent price target. It’s just a badly run company which doesn’t seem to be able to do anything other than piling up debt.



This is a stock that used to show great potential back in 2007. However, years of state corporate mismanagement have made it an utterly horrible investment. Although a significant (for Croatian terms) activist investor bought the stake in the company, it seems that he hasn’t been capable of creating a turnaround, which is not surprising as the state still controls more than 50% of what’s left of the company.

The reason why I’m writing about this stock is twofold, but it is most certainly not going to be a buying recommendation. This is the stock that has been trumpeted for years as a magnificent investment, especially by the aforementioned activist, and I must admit that even I bought the story for a short period of time. The first reason is basically an illustrative example of how TA helped me identify the growth phase as well as avoid the crash in the midst of a flurry of optimism. My old readers know that they were not post hoc conclusions, but things I managed to identify in advance. The second is a nice pattern that formed afterwards which suggests some pretty gruesome targets.


There are quite a few things we can see on this chart. First of all, we can see a rising wedge (blue) from 2009 to 2012 which had a significant breakout with almost doubling in price. What we can also see, however, is that the peak resistance of 360 showed to be a strong barrier that wasn’t breached (except for one or two intraday trades). Now, remember, this was a time when the activist investor (I’m intentionally avoiding his name because I don’t want personal conflict, but everyone knows who he is) constantly implied the value of around 900kn between the lines, based on several year old market data. I believe it wasn’t an unintentional mistake, because when I warned of the drastic price fall in the fertilizer price and the resulting price mismatch, he erased my comments and banned me from commenting on his blog. Whether that was wishful thinking or price manipulation, I don’t really know or care, but in retrospect it was actually good thing, as it was one of the reasons that caused me to think more with my own head and focus on a blog of my own.

Anyway, what happened afterwards was something I warned of, and something not many people in the optimist crowd realized. Basically, the stock broke two supporting trendlines (the wedge trendline and another one colored green) and stared a dramatic downfall. Fundamentally, the fall was more than justified, as it turned out the company earnings were horrible without any realistic chance of improvement.

What’s nice about this whole situation is that we can see two totally different mechanisms (media hype and fundamental weakness) appearing in the charts one after another. The company wasn’t really that much better in 2011 than it was in 2012, but the hype made it seem so. If an investor went by fundamentals only, he’d never be able to gain on the initial price growth. If he based his actions on media hype and activist writing, he’d lose a pretty significant sum of money. TA is a great tool that helps us pinpoint when the change between the two trends might occur.

That being said, what’s the future of the stock in mention? Not too good I’m afraid. What we can see is a huge double top, starting its way all the way back in 2004 and lasting whole 10 years. This year it briefly stuck at the 60kn mark, which was the formation resistance line. After the resistance was breached, there was really no other way to go but down. Now, even though the target price of such a top looks to be somewhere between zero and a number too small to measure, I believe the line at the 15kn mark could be an interesting support point.

I do not believe the company has any serious chance of making it if it were left to market devices only, but since the state holds a significant share, I think it is likely that it may step in at one point and make yet another bailout (I believe it would be the third in the last few years). Now, if it manages to pack that with a company sale, I believe the investors who buy at slightly above 15 may stand to gain a significant profit, depending on the terms of the sales agreement. On the other hand, if the terms are unfavorable or if no buyers show up, it may as well go down to 0.

The fundamentals can be seen here , and they’re downright horrible. I won’t even bother with translation, because numbers speak for themselves. Just one hint – red is bad.

GRVG momentum building up

I’m not sure whether this analysis is influenced by my writings, or whether it’s a case of “great minds think alike” scenario. Whichever the case, the authors of a renowned investment firm seem to share the same sentiment about Gorenje as I do. This is highly relevant, as it indicates that the stock in question seems to be coming into investor focus. Such events are important for stocks and markets with low liquidity, as they can generate strong buying pressure and push the price high. Or in other words, they generate price discovery by “unlocking underlying value” (I hate to use such a trashy term but I believe it really does happen on occasion, such as this one). After bouncing off the 6.00 line (the second resistance level, after the 6.50 I mentioned was breached), it looks like it may well be on the uptrend. Anyway, without further ado, I’ll post a screenshot of the first two pages of the review. The rest is pretty much what I already said, although I have to give credit to the author as it is explained in more detail than I ever bothered (though he is getting paid for it 🙂 ). Should anyone require the complete analysis, I suggest contacting the company to see whether it’s public data or available for purchase. Whatever the case, the expected P/E ratio of 4, supported by positive cash flow, is something that should most certainly be taken into consideration.

Just remember, you saw it here first!



Although I’m primarily focused on Zagreb Stock Exchange, I do follow some other markets as well. One of the markets I also follow is Ljubljana Stock Exchange, and the primary reason for that is Gorenje (GRVG). The reason why I consider this stock to be interesting is primarily because of its low P/B and P/S ratings. Although cash flow and earnings have been negative and close to zero, the company assets are priced very cheaply. This company is basically like ZVZD with bad earnings.

However, I consider the earnings are likely to increase for several reasons. The primary reason is that their investment cycle has been completed, and they’re in the process of optimizing expenses. Concretely, they have bought the Swedish company ASKO, known for its high-end appliances, transferred production from Sweden to Slovenia, while transfering production of Gorenje appliances from Slovenia to Serbia. They also made several acquisitions of low end appliance manufacturers. That means we should expect the production costs to decrease, while income should remain fairly stable. The second important factor is the alliance with Panasonic, which has decided to buy a significant stake in the company, which offers the possibility of a long-term merger. Should that ever happen, Panasonic will likely be forced to pay a significantly higher amount per stock than the current market price.

What must be considered, however, is the fact that this stock is still losing money, and that its debt is somewhat high. On the other hand, its primary product line is one of the first type of products that gets hit during a recession (home appliances), and considering the average lifespan of those units, it is likely that demand will have to pick up fairly soon.

Overall, what’s attractive about this stock from a fundamental point of view is a pretty limited downside, with a fairly significant upside. They’re basically a very cheap factory which offers zero gains. But should they be able to increase their margins in the near future, the low stock price makes extreme P/E ratios quite possible.

This is the stock I have already written about when it was somewhere around 4 euros, so my faithful readers may know that it’s already made me some 70% or so profit. However, what’s even more interesting about this stock is its technical situation, which I’ll now describe.

This year, we have seen a 3-wave rising pattern (wave 3 being a complex wave), which makes it very likely that a fifth and final wave is about to arrive. Although we cannot claim that the fourth wave is a part of the rising pattern (it may be the beginning of a 5-wave falling pattern leading to 0), I think it is much more likely than the alternative. The flag I mentioned earlier seems to have broken downward, and I expect it to stay at or near the 6.5 resistance zone. If that resistance doesn’t hold up, however, any investor should be prepared to sell and suffer the losses.


But the reason why I believe the 6.5 resistance is significant is also because of the 5 year chart shown below:


Although my drawing isn’t the best (the green line should be somewhere around 6.45), it is obvious that the pattern we have ahead of us is magnificent. We’re talking about a big W, which is something like a double bottom on steroids. The difference between a double bottom and a big W are the smooth sides of the later, which means that there is no significant resistance points until the very top of the formation. In this particular case, the resistance is somewhere in the 12-14 region, which still leaves enough space for something like a 100% profit over the next year or two. Considering the formation has broken through, we’re likely to experience growth to at least 12 euros, which would be my recommended sale price. Being a modest person that I am, a profit of 300% is something I’ll be quite satisfied with. The current pullback does hurt the performance somewhat, but it also offers a great entry opportunity for any latecomer.

Rising star

Today has been one of the more interesting days on the ZSE. It seems that ZVZD has finally broken through the low liquidity that has been holding it down for the last few years, as it was one of the most traded stocks on the exchange. Tourism stocks, on the other hand, don’t seem to be doing so well. I have already gone against the current and warned about KORF/RIVP becoming somewhat overrated, and it seems the market has started to agree with me. RIVP is down more than 20% since its merger with KORF, which is quite a significant drop considering such a small time frame. At this rate, it may actually become a good buying opportunity in a week or two 🙂

Anyway, here’s the daily chart that illustrates exactly what has been going on in the last few days:


As my writings become more and more popular, it is difficult to say whether they have influenced this ZVZD market shift or not. They might have, but I don’t consider it to be a relevant question anyway – it’s like asking which particular snowflake caused the avalanche. Yes, my snowflake was likely somewhat bigger than the others, and there weren’t many to begin with, so it just as well might have been the one. But I believe the avalanche was bound to happen anyway. I don’t believe I had any effect on KORF/RIVP, however, since they were high volume stocks whose movements didn’t seem to correlate with my prior writing.


Zvijezda is what I believe one of the best opportunities on ZSE, and it is one of the rare stocks I would explicitly recommend. It’s a company specialized in the manufacture of edible oils and similar associated products (mayonnaise, ketchup, pickles, etc.) The primary reasons for that are outstanding fundamentals, which can be seen from the chart below (ttm):

Share price 2980
P/S 0.31
P/E 41.74
P/B 0.33
BVPS 8990
Money/Share 2475.43
Debt/capital 47.10%
P/FCF 1.43

Now, the reason why I will go so far to actually recommend a stock, as opposed to just implicitly suggesting its value is primarily based on the fact that the amount of money per share is nearly equal to the share price itself. Therefore the price of whole business,  real estate, inventory, and brand is barely 20% of the apparent value. Since BVPS is 8990, you’re actually buying the whole business at a price equal to a little more than 7% of what it’s actually worth. This sort of fundamentals can sometimes be found in stocks that are on the verge of bankruptcy, but Zvijezda is nowhere near that. With debt to capital ratio of 47%, it’s debt burden is actually pretty light. P/E is not something to write home about, but it’s a positive number which means the capital is pretty safe.

It’s basically like opening classified ads, finding a perfectly rentable house for 20% of the price at which comparable houses are trading, and realizing it’s actually got nearly all of that amount sitting inside in piles of cash. In a real estate market, such opportunities are practically certain to be some sort of a scam, and the chance to find a legitimate one is probably less than the chance to win a lottery. In a stock market, however, these things do seem to happen on occasion, and this looks like one of them.

The most interesting thing is the P/FCF ratio of 1.43, which means that cash flow into this stock is humongous. Even though it’s likely to be an anomaly, historical P/FCF ratio has usually been well below 10, which means the stock is a pretty good money maker.

The only problem with this stock is the fact that its primary business is not the kind of product where you can have extreme margins. Nevertheless, margins are good enough to keep the whole business positive. On the other hand, we’re talking about a food production business that is as stable as they come.

So to put it all together, it’s an extremely cheap stock, conducting extremely stable business, with great cash flow, positive margins, low debt, and a whole lot of money on its account. It’s also a stock whose price was nearly 10 times higher during the market bubble 5 years ago, and one that hasn’t really felt the recession at all, as it kept making money ever since. Why some people who were willing to pay 22k for the stock 5 years ago aren’t prepared to pay 3k for the same stock today, even though it’s in a better shape now than it was then is beyond me. Nevertheless, it makes a great opportunity so I’m not really complaining.

Technically, we can see few important formations. The first formation is the beginning of a classical 5-3-5 growth phase, which is currently at the bottom of wave 2. That bottom is reinforced by a strong resistance line, which is actually a part of a descending triangle. The stock is likely to return to the upper triangle resistance, and if it pushes through, it’s likely to become a triple bottom or upside-down H&S of sorts. That would basically mean the stock has entered a no-resistance zone, which extends all the way up to 12000. Although the triangle isn’t yet breached either way, I consider it to be extremely unlikely to sink below the resistance line near 2700kn. There’s just nothing in the fundamentals to allow for that possibility, barring forged financials or upcoming world war. What’s also interesting to note is a significant increase in trade volume that has happened in the last couple of days. Interestingly enough, it correlates with visits to this blog, especially to my previous ZVZD comments. Could these events be related? I won’t claim for certain they are. But what it shows is that the interest for the stock is growing. And increased interest combined with an extremely undervalued stock can often lead to pretty extreme returns.



Picture from Rast d.o.o.


Now, after mentioning the obligatory RIVP, I believe there is a much more interesting tourism stock on the horizon, which is LPLH. Even though its name suggests it’s a shipping company, it’s actually a company composed of two different branches, one is shipping and the other is tourism. The shipping part has been doing horribly, and it’s been dragging the company down, obfuscating the profitable tourism business. It’s actually been doing so bad that it’s most likely a matter of months till it gets shut down alltogether. With that happening, the true value of the stock is likely to surface, since the tourism aspect will become clearer. Most of its tourist object value has been underdeveloped or underreported in financial statements, so I believe the true property to be higher than portrayed.

Now, as for the TA, it shows a very interesting picture:


What we see here is a pretty unusual double bottom, formed in the shape of a very wide Big W. Big W’s are one of the strongest earning patterns out there, and the expected target of such a pattern is generally the price from which the descent began in the first place. In case of this stock, the target is somewhere around 800kn, which provides for an earning opportunity of somewhere around 250%, give or take. The current growth spur has created a 3-wave pattern so far, which would mean there’s a decent chance of a short-term pullback to approximately 225 before the stock launches back up again.

Fundamentals are also very interesting:

P/S 2,08
P/E -17,13
P/B 1,64
P/FCF 1.63

Now, although the company seems to be expensive and losing money, its P/FCF is an unbelievable 1.63, meaning that the last year company generated cash amount equivalent to 60% of its total market value. I believe the confusing fundamentals are a result of bookkeeping confusion regarding the shipping and tourism sectors, with big writeoffs on one hand, and big tourism earnings and capital reindexing on the other. In other words, once the shipping part of the company dies, I believe we can experience significant income on the balance sheet, which may lead the price even higher than 800 in the long term.