Investment Loss - Lifebrandz (Consumer products)

In a short span of investing since 12/10/04, the value of my investment in Lifebrandz has dropped a whopping 70.7%! What went wrong???

This is a case of following blindly and not following to the end. This company was in good publicity then, having investing a lot in advertising of its products and brand, every TV watcher would know. Wallstraits first bought in Jun 04 and sold out on 25 Oct 04, two weeks after my purchase price of $0.1877. I have made a bad entry timing!! I followed WS's buy call not knowing that it was waiting to get out and when it got out, the price dropped below my purchase price and hence I decided to hold and wait. Never did I know that the fundamentals would decay so fast that in the recent announcement, Lifebrandz warned that it is likely to make a loss for Q2.

WS made a trading profit of $2,373 but I'm suffering a paper loss of >$1,000!!!

Trades by WS:
#1
25 Jun 2004: LifeBrandz
buy-Take initial stake in LifeBrandz, best known for Extrim (weight loss) and Intenz (skincare) brands. Recent meeting with CEO Michael Wong impressed me with his passion, vision, and his ability to negotiate favorable pre-sell agreements with distributors...most recently a $36m deal in Indonesia.

#2
21 Jul 2004: LifeBrandz
buy-Buy 50,000 @ $0.15 to double our stake and average down our cost from 19c to 17c.

#3
25 Oct 2004: LifeBrandz
sell-Sell 100,000 shares at $0.195 to close position as we consolidate small fry holdings.

Rationale fvrom Sage:

Today we closed our small fry position in LifeBrandz, selling 100,000 shares at S$0.195 each. As we near the end of 2004, which has been a year of re-positioning for WS8, we continue to consolidate our positions heading into the new year. Our goal is to pretty dramatically reduce portfolio turnover in coming years, thus we would like to own a minimal number of promising businesses by year-end 2004 and add to these holdings in years to come.

We find LifeBrandz a very interesting company from a brand marketing and capital efficiency prospective, but are still having trouble getting over our skepticism in their product range-- diet pills and creams, facial masks, and skin nutrition products. Michael Wong is a passionate leader at the helm of LifeBrandz, as many of you witnessed during his speech at our last quarterly networking event. However, Michael seems to believe that marketing a brand is separate from the product value proposition, which we are having trouble with, as we believe the nature of the product being marketed will relate to brand sustainability over time.

Furthermore, we remain somewhat concerned about complete reliance on outside distributors and retailers for product sales. Osim is a brand marketing company also, but it has also invested heavily over many years to control a good amount of its distribution and retailing experience-- owning all shops in 5 key markets-- China, Taiwan, Hong Kong, Malaysia and Singapore. It is a less capital efficient model in the near term, but appears far more durable in the longer-term.

Therefore, the combination of these two factors-- skepticism about product value and lack of control over shelf space and customer experience-- makes it unlikely we would increase our stake, thus we choose to close it out immediately.

Lessons learnt

1. Consumer market again! Changing consumer preference, low barrier to market-entry as evident by more brands popping up

2. Deteriorating fundamentals as seen by its efforts to go into different businesses (masked up by saying it is developing Lifestyle business using its proven brand management models). The new business does not even share any hints of its core brand - lifepharm!! If it is so good in developing new brands from scatch, why not it just be a 3rd party brand management company instead???

3. My instrinsic value calculation for this company as of Sep04 was only 22.73 cts, offering only a margin of safety of 21% despite its short operating history and my seemingly high growth project for year 2005 to 2007 of 17%. For IPOs, my margin of safety should be much higher!!!

What should I do now??

The currently price at 5.5 cts now is a dirt to sell and with only 8 lots, not much capital can be recovered. At this price, it is close to my intrinsic calculation of 4.88 cts (however, I'm aggressive about its recovery over next two years). I shall watch the 2Q results to update any recovery for the next two years and may consider to sell even at a loss if things do not look up to stop wasting my time on this company. One consolation for this company is that it is still has S$20M of cash (or 3.3 cts/share) this is the only factor for believing that it will stay alive for now. However, with all the new investment going on, the cash horde may not last for very long...