Recently I have not been buying stocks. No doubt the STI Index P/E ratio has not been exceedingly high, but it is getting harder to find bargains nowadays. Most of the stocks I bought are showing unrealised gains. While those with unrealised losses are stocks from mediocre companies.
However, I made one exception, and that is Colex Holdings Ltd (despite the relatively high stock price). There are many factors on why I decide to purchase this stock, eg. strong fundamentals, high growth, low PEG & intrinsic value etc…and one of the factor interestingly is because it is one of the most (if not the most) “un-glamorous” & obnoxious business I can find in the Singapore Stock Market. Well, I will consider a funeral house the worst (but I can’t find one in the Singapore Stock market), and waste management comes a very close second.
To maybe elaborate this better, let me invent this “Glam” index to rank the basket of stocks in my portfolio. 1 being the least glamorous stock and 10 being the most glamorous stock. This is purely base on my own definition (there are no hard facts supporting the ranking).
So on a scale of 1 to 10, Singapore Airline (SIA) would be the most “glam” company while Colex would be the most “un-glam” company. The glam factor just dissipates as you go down the list. And if you look deeper at the purchase dates, you would realise that I tend to buy those “glam” companies earlier (in general). Sun Hung Kai Properties might seem a bit out of place as it was bought due to a one off event which cause its share price to plummet briefly (biggest corruption case in Hong Kong’s history).
One explanation (I reckon) is that my earlier stocks were base on well known companies that are big and famous. Hoping that they would be too big to fail. At that time, I seldom look ‘under the hood’ at their financials (too lazy), and my decision is based more on their brand name and size. In a way, I view these companies from the perspective of an employee. Let’s say you are a young dude with loans to service, and a family to take care of, you as an employee might tend to look for big stable companies / MNCs that provide above average starting pay, good job prospect & opportunities to learn. Well it is not uncommon for any self respecting honours / masters (dean list) grads (with the exception, for people whose dad or mom owns a SME and are tasked with helping or taking over the ‘family’ business) to search for jobs in the well known MNCs like SIA, Goldman Sachs, Merrill Lynch, CapitaLand, Keppel…etc. After all these companies are big, stable corporations that compete with the best in the world and they would demand the most from the brightest employees (and consequently would be willing to pay top dollar & provide nice perks for the best) – in stark contrast to the many ‘sweat shops’ around.
This is perhaps where I err. While some of the criteria, which are used as a yard-stick by an employee in assessing a company is important in evaluating whether it is a good company/ stock to purchase, these criteria may not be the most important.
It is important to draw the distinction between purchasing a stock and purchasing fractional shares of a business. A businessman sees his stock ownership as a fractional share of a company’s business. A regular speculator in the stock market sees his shares as lottery tickets that go up and down based on the whims of the market.
“I am a better investor because I am a businessman, and a better businessman because I am no investor.” Warren Buffett
Now imagine you are an Angel Investor with a few hundred thousands or millions to spare and wants to purchase a stake in a company to generate income. When you first walk into the company, what you would be looking for, would be very different from that of a potential employee. While a potential employee’s first questions would be their medical benefits, annual leaves, bonus, Overtime pay, flexible working hours, nice working environmental, understanding & approachable boss, central locations, near amenties / eateries etc… as a part owner / investor, the first questions would be profit margin, efficient & top notch management, low rent, low maintenance cost, strong moat against competitors, stable clientele..etc In fact an Angel Investor might want a presentation by the CFO & CEO first before he goes for a tour around the company. He would probably want a happy work force, but not a “too happy” overpaid work force (it may not even be in his top 5 criteria). I wonder how many potential employees would actually bother reading into details, the financial reports or annual reports of the company (provided if they are available to the public in the first place). Now let’s ask ourselves …would any self respecting MIT graduate or Dean List SMU graduate want to work in Colex, Vicom, ISOTeam…. as a Cleaner, Mechanic, Painter? Maybe (long shot)), but in most cases they would rather work in Apple, Google, Goldman Sachs, Temasek, etc… (well, nevertheless, there will always be those who rather go to “the road less traveled”… and we do see more of them nowadays).
Interestingly, recently I heard a number of polytechnic grads / university grads with an entrepreneur spirit opt to start cleaning companies as the profits are higher than giving tuition.
Technically, Apple, Google, Goldman Sachs etc might be great companies to invest in. And no doubt many has made huge profits by investing in their stock, but these companies face great competitions and are always in a constant need to innovate. They invite competitors hungry for a share in their market like bees to honey. Which is why they are always on the lookout to hire the very best (they simply need to innovate just to survive).
“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.” Warren Buffett
Eventually, all businesses fail as the competitive landscape changes. Some businesses have significantly longer life spans than others due to the nature of their products. Wrigley gum is an example of a business in a slow changing industry. Consumer taste for gum may change, but the gum industry is unlikely to experience a radical shift other than changing flavors and ingredients. Compare this to the technology industry, which is in a continual state of innovation and upheaval.
I don’t know how long Google, Alibaba, Facebook etc will last, but I do know the premise in which the company reside in will need a person to clear the trash for a long long time. Technology will change, these companies will rise and fall and they may probably replace that cleaner with a robot or system — but at the end of the day, trash need to cleared. And you need to pay to clear it. We are ultimately still organic physical beings that produce wastes.
In his investment classic, One Up On Wall Street, Peter Lynch expounds on how he seeks out boring stocks with dull names for superior returns. “A company that does boring things is almost as good as a company that has a boring name, and both together is terrific.” His reasoning: The lack of glamour repels momentum chasers, so the acute trader can buy at a discount. In Lynch’s case, he believed that companies like Waste Management (NYSE:WM) would tend to trade at a discount because of the disagreeable nature of the business—you rarely hear about people investing chunks of their life savings in a toxic waste hauling company, and Lynch believed this created an undervalued opportunity for investors to exploit.
If I did bother to compare the financials of SIA, Capitaland, Golden Agri, SMRT with those of Riverstone, Super Group, Vicom & Colex in 2010 / 2011, I might not have bought the former group of stocks at all. And as the index inches up year after year, those big brand name companies with fat profit margins (Facebook – P/E 73.95, Google – P/E 25.58, Alibaba – P/E 47.95 etc), their stocks would have already been way over-priced.
From another perspective, I like companies with as little unknown risks as possible. In Singapore, there are four Public Waste Collectors (PWCs) serving the domestic and trade premises. Of the four, three are listed in the Singapore Stock Exchange (Sembcorp Industries Limited, 800 Super and Colex). Fundamentally, I feel that Colex is stronger than 800 Super while Sembcorp Industries Limited is a more complex company to decipher. Being a small company in a small confined market with high entry barriers, where the successful bidders are awarded seven-year contracts to service a sector, do have their benefits. (of course, one of the downsides will be the limitation in expansion – however I feel Jurong which Colex is currently operating in has room & potential to expand).
The company will be more sheltered from foreign competitors (given the high entry barrier to a small market) and unaffected by foreign policies, currency fluctuations, commodities pricing, etc. The seven year contracts ensure a foreseeable constant revenue. No doubt there are risks from government policy changes in a regulated market (eg. foreign workers’ levy etc), but it affects all players equally (and should be priced in by now). Total debt / Total equity ratio is a low 0.2127. So any change in interest rates will not affect the company’s cash flow significantly.
Who knows maybe this most obnoxious stock may become the most profitable stock. Nevertheless, need to do further research into this company.