kcchongnz blog
Picking Good Companies at Reasonable Prices in Bursa Works! kcchongnz
In my last article on “Stock Picking works in Bursa” as appended below, I have shown you value investing also worked very well in Bursa the last two years with three value investing strategies.
http://klse.i3investor.com/blogs/kcchongnz/75946.jsp
The portfolio of the ColdEye 5 yardsticks value investing strategy provided an average total return of 186.4% compared to the 18.5% of the broad market in the last two years from May 2013 to end of April 2015 with a whopping excess return, alpha, of 101%.
The high dividend value investing strategy on 35 stocks provided a total compounded annual return (CAR) of 16% a year compared to the 10.8% of KLCI, with an annual excess return, alpha, of 5.2% for a five year holding period from October 2009 to October 2014.
Another value investing strategy during the same period , the low Price-to-earnings ratio investing strategy on a portfolio of 104 stocks provided a total CAR of 17.6%, compared to the 10.8% of the broad market, or an annual alpha of 6.8% a year for 5 years.
I did promise to provide you with another value investing strategy, it is buying good companies at reasonable prices. Yes, you got it. Value investing is not only to buy cheap stocks, but also buying good companies, and growth companies at reasonable prices.
In Search of Excellence
I wrote an article in i3investors on 25th May 2013 giving my thoughts on the above for searching good companies to invest in with reasonable prices.
http://klse.i3investor.com/servlets/forum/900255072.jsp
My criteria of a good company is a well-run company with good corporate governance; no unfair related party transactions, independent board of directors. A more measurable metric for good company is its financial performance; a durable business, constant growth in its business, a return on invested capital (>10%) higher than the cost of capital, good cash flows close to net profit, and positive free cash flow, and healthy balance sheet.
However, research has shown that investing in good companies is not a winning strategy. This is because the market has built into it these expectations. The biggest danger is that the firm will lose its lustre over time and that the premium paid will dissipate. It is only when markets underestimate the value of firm quality that this strategy stands a chance of making excess returns. There is a strong tendency on the part of companies to move toward the average over time, or mean reversion. So even though a company may be a good company, we try not be pay lofty prices with PE ratio not more than 25, and Price-to-book less than 2.5.
Many forumers posted me questions on their stocks whether they are good companies to invest in as shown in the above appended link.
A total of 16 stocks were commented by me as good companies selling at reasonable prices and hence were considered as good investments.
Return of investing in good companies
Table 1 in the appendix shows the up to date return of the 16 stocks chosen from 25th May 2015. The prices were adjusted for all corporate exercises and dividend distributions and as provided by Yahoo Finance. Their total return were computed as at 30th April 2015.
Three quarters or 12 out of 16 stocks outperformed the broad KLCI index. The average return of the 16 stocks was 46.2% in the two years period, compared to the 9.0% of KLCI. The excess return, alpha, is a whopping 37.2%. RM100000 invested in May 2013 becomes RM146200 two years later, compared to RM109000 if invested in the broad market index.
The interesting phenomenon of value investing, the Dhandho Investor repeats here;
"Heads, I win! Tails, I don't lose that much!"
The only double digit loser is MBL with a loss of 24.3%, followed by SOP (-9.7%). This was probably due to the drop of palm oil prices during the last two three years. The other loser is P&O, at a minor loss of just 4.5%. The thirteen winners are all double digit winners, with half of them in the high double digits, and two triple digits; Pintaras at +124%, and Eforce at +144%.
The big winner, Pintaras was so clear to be a future winner at that time with a return on invested capital of 30%, but the stock was selling dirt cheap at a PE ratio of just 7.3, some more with plenty of excess cash in the balance sheet. So was Willowglen with an ROIC of 37% selling at a PE ratio of just 7.7. Similarly for Magni-Tech, ROIC at 23%, PE of 8.1, ECSICT, ROIC 25%, PE 8.1 etc. These are in fact great companies selling at cheap prices.
Conclusions
The above value investing strategy of investing in good companies at reasonable prices worked well in the past in Bursa Malaysia by providing extra-ordinary returns for investors.
The beauty is, this value investing strategy is not difficult. One just needs to spend a little time to learn, and check qualitatively and quantitatively if those companies are indeed good companies, and that they are selling at reasonable prices. The metrics can be easily extracted and computed from the three important financial statements; income statement, balance sheet and the cash flow statement.
Is there some other better investing strategies in Bursa besides those which have been mentioned in my last two articles? You bet there are. That will be the next topic of discussions.
Are you keen to learn this financial statement analysis and interpretations, the language of the business in order to have a higher probability of success investing in Bursa Malaysia?
Please contact me at the following email address
ckc15training2@gmail.com
K C Chong (3rd May 2015)
Appendix
Table 1: Return of investing in good companies
|
No. |
Company |
Code |
Pass/Fail |
25/5/2013 |
Ad. Price |
30/4/15 |
Return |
P/E |
ROIC |
|
1 |
ECSICT |
5162 |
Pass |
1.280 |
1.150 |
1.630 |
41.7% |
8.1 |
25% |
|
2 |
Magni-Tech |
7087 |
Pass |
1.960 |
1.870 |
3.170 |
69.5% |
6.9 |
23% |
|
3 |
PRKCorp |
8346 |
Pass |
2.000 |
1.930 |
2.960 |
53.4% |
5.5 |
6% |
|
4 |
SOP |
5126 |
Pass |
5.600 |
5.480 |
4.950 |
-9.7% |
15.5 |
18% |
|
5 |
TDM |
2054 |
Pass |
4.880 |
0.590 |
0.775 |
31.4% |
12.1 |
15% |
|
6 |
Gadang |
9261 |
Pass |
0.910 |
0.840 |
1.510 |
79.8% |
6.8 |
11% |
|
7 |
FAVCO |
7229 |
Pass |
2.370 |
2.270 |
2.800 |
23.3% |
9.1 |
17% |
|
8 |
KMLoong |
5027 |
Pass |
2.450 |
2.160 |
2.840 |
31.5% |
14.0 |
15% |
|
9 |
HLInd |
3301 |
Pass |
4.380 |
4.320 |
4.980 |
15.3% |
10.5 |
11% |
|
10 |
Eforce |
*0065 |
Pass |
0.335 |
0.250 |
0.610 |
144.0% |
13.0 |
15% |
|
11 |
Cenbond |
7171 |
Pass |
1.610 |
1.380 |
1.440 |
4.3% |
10.1 |
17% |
|
12 |
Tguan |
7034 |
Pass |
1.650 |
1.170 |
2.080 |
77.8% |
6.3 |
9.6% |
|
13 |
Pintaras |
9598 |
Pass |
4.950 |
1.800 |
4.030 |
123.9% |
7.3 |
30% |
|
14 |
P&O |
6009 |
Pass |
1.470 |
1.540 |
1.470 |
-4.5% |
10.0 |
17% |
|
15 |
MBL |
5152 |
Pass |
1.140 |
1.090 |
0.825 |
-24.3% |
6.2 |
21% |
|
16 |
Willow |
*0008 |
Pass |
0.480 |
0.490 |
0.890 |
81.6% |
7.7 |
37% |
|
|
|
||||||||
|
|
Average |
46.2% |
|
||||||
|
|
Median |
36.6% |
|
||||||
|
|
KLCI |
|
|
1769 |
1667 |
1818 |
9.0% |
|
|
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Discussions
4 people like this. Showing 15 of 15 comments
Howard says that being too early is indistinguishable from being wrong and that averaging down is how value investors make their biggest returns when a firm sense of intrinsic value and confidence in ones thesis is present. The final matter that is quite obvious, is that you also have to be right.
“An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.”
2015-05-03 23:17
“Isn’t that a $10 bill laying on the ground?” asks the student. “No, it can’t be a $10 bill,” answers the professor. “If it were, someone would have picked it up by now.” The teacher walks away and the student picked it up and walked off to the pub for a cold beer.
2015-05-03 23:18
Thanks for sharing KC. MBL fundamentally is strong but wondering why its net profit dropping from year to year, hope to get your view KC? Thanks.
Salary for Exe.Director
2011= 3.2Million
2012= 4.1 Million
2013= 6.2 Million
Is this the reason higher expenses and reduce in net profit?
2015-05-03 23:48
Posted by donfollowblindly > May 3, 2015 10:38 PM | Report Abuse
His latest stock pick Elsoft not included above.
http://klse.i3investor.com/servlets/forum/600075038.jsp
My article discussed about those stocks asked about by i3 forumers in May 25 2013, and their performance two years later which is now. The article on Discount cash flow analysis on Elsoft was shared by me on April 17 2015, two years later.
So what is your point, donfollowblindly? Please elaborate.
On 25th May 2013, if there is anybody who asked me about Elsoft, I would have asked him to buy buy buy.
Its adjusted price then was 44 sen. At Rm1.78 now, the return is 305% in two years. RM100000 investd in it would become RM400000! What say you, donfollowblindly?
2015-05-04 11:41
Always good to learn from KC articles. Looking forward for next article.
2015-05-04 15:33
Posted by kcchongnz > May 4, 2015 11:41 AM | Report Abuse
On 25th May 2013, if there is anybody who asked me about Elsoft, I would have asked him to buy buy buy.
Its adjusted price then was 44 sen. At Rm1.78 now, the return is 305% in two years. RM100000 investd in it would become RM400000! What say you, donfollowblindly?
You were recommending Elsoft only recently not anytime earlier. People look what you recommend now not how far the stock has gone up.
2015-05-04 16:19
Posted by donfollowblindly > May 3, 2015 10:38 PM | Report Abuse
His latest stock pick Elsoft not included above.
http://klse.i3investor.com/servlets/forum/600075038.jsp
My article above discussed about those stocks asked about by i3 forumers in May 25 2013, and their performance two years later which is now. The article on Discount cash flow analysis on Elsoft mentioned by you was shared by me on April 17 2015, two years later.
So what is your point you are trying to convey here, donfollowblindly? Please elaborate.
2015-05-04 16:23
Looking back at the threads from 2013, There were so many good and cheap stocks to buy back then. How I wish I was fully invested back then and kept holding those stocks till today
2015-05-04 17:13
Noby, your focus might be a bit more on Individual stock performance.
If your focus is on whole portfolio performance, you should be doing much better. At least you will be much at Ease.
Just my thought. Hope it helps.
2015-05-04 18:36
just take a look at above portfolio created in year 2013. Nobody knows which stocks will outperform and which one will under perform. And it is impossible to create a portfolio with only the Winners.
So we have to accept those that are under perform as much as those are out performing. We cant criticize fund manager whose stock pick is under performing as We have to evaluate the Whole portfolio to be Just.
So as long as the portfolio is Out performing we stick to the strategy. We really cant evaluate based on Individual stock performance. Fair?
2015-05-04 19:03
Let me Bring our thoughts to the next level.
We know it is a Winning strategy. Is there anybody here who is following it? The key is who is following the Winning strategy? If No, why is it so hard to follow and Not only that keep disputing about it? Why?
2015-05-04 19:25
Is it because we cant accept those stocks that are under performing and losing out money? And we must have all winning stocks in our portfolio, possible?
is it because we are always afraid that all of our profit will disappear if we did not sell faster than others? And we kept all the losing stocks and sell all the Winning stocks.
Next time, when we evaluate and calculate; We do it by evaluate and calculate the whole portfolio performance.
2015-05-04 19:47
Posted by tc88 > May 3, 2015 11:48 PM | Report Abuse
Thanks for sharing KC. MBL fundamentally is strong but wondering why its net profit dropping from year to year, hope to get your view KC? Thanks.
Salary for Exe.Director
2011= 3.2Million
2012= 4.1 Million
2013= 6.2 Million
Is this the reason higher expenses and reduce in net profit?
MBL's business reached its peak in 2012 and has seen deteriorating, very fast. This results in its ROIC deteriorated to 7%, even below its cost of capital. Revenue dropped from RM79m to less RM46m. Net profit reduced by a big amount from RM17m in 2012 to less than RM4m last year.
Small company subject to economic change, lower palm oil prices, cyclical business etc.
The amount the directors take is more than what that is due to all shareholders. Not credible management.
A lesson here, cyclic business cannot grow forever and the power of mean reversion is real. So never overpay for anything hoping the business will keep on growing at fast pace forever.
I have long ago given up hope for this type of company
2015-05-05 06:23
Hi kc: please allow me to quote your good lesson into thread of GTronic. Thks
2015-05-05 07:11
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
donfollowblindly
His latest stock pick Elsoft not included above.
http://klse.i3investor.com/servlets/forum/600075038.jsp
2015-05-03 22:38