One would notice that all stocks in my portfolio are small to medium capitalized stocks. but why? 

I am a value investor trying to find good companies trading at cheap price. It is hard to find them in the large capitalized stocks which I classify as good companies by the metrics of high return of equity and return of capitals. These stocks are closely followed and owned by local and foreign funds and hence would likely to be fully or overvalued. Furthermore a large company is hard to have high growth. A 50m increase in profit is 50% growth for a 100m revenue company, but just a 5% growth for a 1b revenue company. 

Kenneth French, a Dartmouth College finance professor found that a single dollar invested in the small capitalized stocks in US market grew to $5522 in a period of 74 years from the year 1926 to 2000, as compared to $2128 for investing in large company stocks. His findings in the UK, Japan and several MSCI countries yield unambiguous results, with the small capitalized stocks returned an average of 2.6% better than the large caps per year. 

The small caps are indeed the hidden gems in the stock market, including Bursa. Those selected by me generally have the following attributes: 

1. Their business is durable and likely to last for many more years to come. 
2. They have good financial position with little debts, or if with significant debts, their profit and cash flow can easily cover many times interest payment. 
3. They have good quality and consistent earnings. Cash flow from operations is equal or above net profit on average. 
4. They generally have positive free cash flow. Often FCF is abundant at more than 10% of revenue and invested capital. 
5. They have high return of equity and invested capital, at least more than 10%. 
6. Most of all, they are trading at low multiples such as PE ratio, P/B, enterprise value/Ebit, EV/Ebitda, EV/Sales etc. 
7. There is little or even none analyst coverage. 
8. Scant institutional ownership. 

So far what is the return of the portfolio since three weeks ago? Table 1 below shows the detail return of each stock and the average return of the portfolio. 

Table 1 
New 23/08/2013
Pintaras 4.99 5.75 0.000 0.760 15.2% 
Kfima 2.060 2.030 0.000 -0.030 -1.5% 
MFCB 1.700 1.810 0.000 0.110 6.5% 
Haio 2.670 2.640 0.000 -0.030 -1.1% 
Fibon 0.330 0.355 0.000 0.025 7.6% 
CBIP 2.830 2.740 0.000 -0.090 -3.2% 
Tien Wah 2.510 2.470 0.000 -0.040 -1.6% 
Homeritz 0.430 0.435 0.000 0.005 1.2% 

Average 2.89% 
KLSE 1785 1721 -64.000 -3.59% 
Alpha 6.5% 

The average return of the portfolio is 2.9% from the three week period. Nothing spectacular. However it is still 6.5% better than the market return of minus 3.6%. Actually the return of a 3-week period is not a representation of the long term return of a portfolio. We will have to wait for a period of 1 year, or even 5 years for judge the true performance of the portfolio.

Posted by kcchongnz at Aug 25, 2013 07:59 PM

Stock Pick Challenge 2013 2H