“The person that turns over the most rocks wins the game. And that’s always been my philosophy.” Peter Lynch
There was a time not too long ago, when I actually sat down and looked through the stocks listed in the Singapore Market. I was going through the companies start from Z to A in POEMS. Basically for me I narrowed down my search with my no. 1 priority. Which is low or zero debt. That sort of narrow down the companies I focus on. My reasoning is that interest rate will eventually go up (not down), and I should first focus on the downside risks. So if you look at my portfolio, my later stocks (which exclude Golden Agri, SMRT and SIA) have very low debt to equity ratio.
With that in mind, I focus on other things such such 5 years EPS growth rate (CAGR) of approx. 20 percent (ideally), high Return on Equity (>15%), not too high P/E (let’s be frank – growth stocks are seldom dirt cheap), low price to book (esp. asset heavy companies), EV/EBITDA, free cash flow, etc. And after zooming in to a few companies, start calculating the trailing PEG and intrinsic value (in a very elementary sort of way). Also try to work out a narrative / thesis behind why the growth might continue.
On hindsight, I am using a very simplistic way of analyzing companies, like how I would value a lemonade stand (basically all these are self taught and I did not study finance or economics in school). The disadvantage of this method is that I will exclude highly leveraged companies which may be so, due to the nature of their business. For instances, REITs, business trusts, banks, insurance companies, utility companies (eg. Starhub, M1 etc), real estate developers, commodities companies etc are typically highly leveraged. Some of which might be excellent companies, not to mention, having high dividend yield. I must admit I have yet to master the art of evaluating these types of companies. It is another ball game altogether. Occasionally I would read up on how others would value these companies or critique these companies.
The issue with REITs is that you are dealing with assets (real estate) that have a lifespan. I often wonder how do one justify Net Asset Value, NAV (like how real estate agents value my flat). Where do the REITs Trust Manager get this value anyway? There are so many factors to consider in valuing a property – so much so that it becomes an Art. However, ultimately it is the price, which the other party is willing to pay (remind me of the greater fools game) – not what the price which your neighbor happens to sell his property for. I have heard of people staying next to each other, but get very different quotations for each of their property. Also unless a property is freehold, being leasehold, there is a lifespan to a building, and typically as the building age (after a certain no. of yrs), it loses its value. In addition, as a building age (be it freehold or leasehold), the maintenance cost goes up. I have also came across articles (eg. from Ho Ching – read here) describing: “Trust manager agreeing to buy assets at inflated prices, and the vendor agreeing to lease back the asset at higher-than-market rent for a period of time. This way, the vendor gets a higher upfront payment while the manager is able to boost yields in the short term.” Being totally unaware of (and not up to date on) real estate value makes me a greenhorn in this field. It is this added dimension (depreciation with time & ambiguity of property valuation) that makes me think twice. Ultimately, the pertinent question is whether a company can maintain its dividend payout rate (rather than the dividend yield itself).
As I study more on Golden Agri and other agri-commodity companies, I also realise that these companies are also dealing with assets with a lifespan (eg. Oil Palm that are in their prime or coming into their prime etc). Of course, there are also other companies that deal with contracts / monopoly that have lifespans (eg. Nagacorp).
The issue with leverage has always been very critical in my evaluation. It is no secret that leverage affects ROE (eg. high leverage can equate to high ROE). So I try to eliminate this possibility by choosing companies that has little or no debt.
“Leverage, of course, can be lethal to businesses as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.
Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.” Warren Buffett
It (going through stocks listed in the Singapore Market) wasn’t the most interesting thing to do. However, after some time, I did cover most of the companies. It will probably be some time before I revisit that. Nevertheless, it sort of given me an overview of which are the better companies (well at least in my definition).
Reading up on Motley Fools helps – as they have always been recommending solid companies (although these may not be cheap). I find their views less opinionated & more factual. This is where I found out more about Vicom, Raffles Medical, Kingsmen Creative, Riverstone, Colex, Super Group, Sarine Technologies, 800 Super, Japan Food, Osim, Breadtalk, Dairy Farm, Boustead, SIA Engineering, etc.
Next I started reading up the companies in the Value Buddies forum. I find Value Buddies more informative than Share Junction – there were more posts on the fundamentals / news regarding the companies. This is also one of the ‘go to’ website when I want to find out why there is a sudden drop in the share price of certain companies.
Starting with posts on Singapore Shares (in the Value Buddies Forum): This is where I found out about Penguin International, Great Eastern, Spindex, NeraTel, NSL, etc. After reading up on Singapore Shares, I jumped into Hong Kong Shares. This is where I found out about Hosa International, Luk Fook Holdings, Man Wah Holdings, Real Nutriceutical Group Ltd, Tencent Holdings Ltd , Nagacorp, Vtech, etc.
Another great avenue is http://greatinvestors.tv/. This is where I found out about Japanese shares like Shimano Inc. & Isamu Paint Co., Ltd.
Singapore Investment Bloggers & TheFinance.sg are great websites to visit as well. We are like students in school who are constantly peering over to see what others are doing. I think this is one of the few websites where one can find a high concentration of local mini millionaires around. Often, after reading their blogs, you all of sudden realize that hey, this guy who is talking about F.I.R.E is only in his 30s and has already $1.3mil, or this lady has $2+.mil. Or others who have retired before reaching 40.
Of these, there are a few who really spend a great deal of effort in analyzing companies and going into details the financial jargon / definitions. Or talking in depth about difficult topics like business moats, evaluation of REITs, property investment rules & regulations etc. These articles are really gems in my opinions.
I also like to read The Edge magazines. I find it more in depth than The Business Times. Wall Street Journal gives a more global view (sad to say I have time only for local companies). Sometimes if I do have the time, I will go to the library and check out their collection of The Edge magazine.
Well, most of the stocks have high prices currently. However, I have listed all of them down, and hope one day the list would be useful. Some companies may after a while turn out to be ‘lemons” – fundamentals deteriorated etc. However, it was (and still is) interesting to read about the different point of views esp. in Motley Fools, Investment Blogs, Value Buddies Forum etc. Be it Value Investing, GARP investing, Net-Net investing, Distressed companies / bankruptcy (trading at 52 weeks low) – Deep value investing, activist investing, etc.
I will soon be getting busier with my job. Need to move to a new location to work (same company though). Travelling time will be longer, Work load heavier. So may not have that much time to read up on investment articles. Well, nevertheless did enjoy the time I had to read up. 🙂
To all – enjoy the long weekend!