tips on picking stocks and staying ahead of the curve
TRANSCRIPT
B16 | The Sunday Times | Sunday, September 22, 2019
Investing can be a daunting experi-ence for some retail investors, par-ticularly during a time of volatile markets. Research reports can be an important tool as they provide access to financial know-how so that we can make informed invest-ment decisions.
The Sunday Times has been high-lighting how such reports contain a wealth of information on key eco-nomic developments as well as on specific sectors and firms.
Reports are produced by equity analysts who usually have at their disposal a tremendous amount of in-formation and historical data that they can use to make objective as-sessments of companies.
They also meet company manage-ment to get a first-hand under-standing of what is happening in a firm.
As such, the analyses in these re-search reports make them a good starting point for investors.
Research reports have three broad categories: company, sector and strategy. It is worthwhile study-ing these reports to understand the underlying characteristics and busi-ness model of the company and as-certain the various business drivers of the sectors.
Before making an investment, consider the upcoming opportuni-ties and risks, and formulate a view on the macro and sector outlook in relation to company-specific infor-mation and performance.
In this instalment, we look at how to arrive at an opinion on a share and how to put together a Singa-pore strategy.
FORMULATING A VIEW ON A SPECIFIC STOCK
Mr Joel Ng, investment analyst, Sin-gapore research at KGI Securities (Singapore), believes the most im-portant aspect when forming a view on a stock is to determine both the short-term and long-term out-look of the industry the company operates in.
PROJECTED INDUSTRY GROWTHThe projected industry growth is perhaps the strongest determinant of an analyst’s basis for a buy or sell recommendation on a stock.
With a good understanding of the industry, you can also identify the key factors that drive the perfor-mance of each firm, Mr Ng says.
Most industries go through cycles of peaks and troughs. However, a company’s valuations and outlook are permanently affected when its industry is in a structural decline.
Such changes are long-term and are driven by disruptive technolo-gies or changing demographics.
QUALITY OF SENIOR MANAGEMENTThis ranges from how well they communicate their strategy to their handling of corporate governance issues.
Although annual reports and pre-sentation slides can be useful, there is no replacement for the need to meet management in order to gain insights.
“Most of my most useful insights come after meeting the manage-ment of companies. There is a grow-ing list of SGX-listed companies which invite retail investors to their quarterly briefings. I highly recom-mend that investors attend these briefings,” says Mr Ng.
He advises investors to be cau-tious on companies operating in sec-tors that have been structurally dis-rupted, such as transport, media and oil and gas.
This is because it is challenging for a company to grow its earnings
in a structurally declining industry.An under-performing sector cre-
ates a vicious circle where compa-nies have to pay higher financing costs and where margins are con-stantly under pressure.
“In order to generate returns on equity (ROE) to compensate in-vestors sufficiently, these compa-nies leverage up, which usually leads to financial distress during a downturn,” Mr Ng adds.
“As a rule of thumb, when I ana-lyse businesses in the sector, I would be cautious of companies with a net gearing (net debt/e-quity) ratio of more than 100 per cent,” he says.
On the other hand, an example of a sector facing cyclical headwinds is technology-related manufactur-ing.
Mr Ng notes that this sector went through six quarters of heightened inventory levels from the second half of last year – which depressed margins and earnings of companies – caused by poor smartphone de-mand and the United States-China trade war.
“However, with inventory levels having adjusted to reasonable lev-els, we expect earnings in the sec-tor to bottom out in the third quar-ter of this year and for a new up-cy-cle to begin,” he says.
“SGX-listed companies in this sec-tor include Venture Corporation, Hi-P International, Valuetronics Holdings and UMS Holdings.”
PUTTING TOGETHER A SINGAPORE STRATEGYMr Yeo Kee Yan, vice-president of equity research at DBS Bank, be-lieves that one of the basic doc-trines an analyst should follow is “to stay ahead of the curve”. Driven by anticipation and not by hind-sight, the stock market is a leading indicator of the economy.
“The stock market is behaving now where investors think the economy will be six to 12 months
down the road,” he notes.“If lagging indicators (such as cor-
porate earnings and employment data) are falling but you wonder why the stock market is rising in-stead, that’s because ‘smart money’ thinks the economy and corporate earnings will improve in the months ahead.”
At DBS, Mr Yeo is responsible for developing the monthly strategy for its clients who seek to invest in the market. He says: “I adopt the top-down approach in my analysis, that is: macro first, followed by country, sectors and finally stock picks.”
The tools he uses to arrive at a view include the leading economic indicators, currency and commod-ity trends, upcoming events, valua-tion and technical charts. The key, he says, is to look forward and de-cide which tool to use.
For instance, his view early last month was for the June-July stock market recovery to give way to a correction. On the macro front, the US-China trade war and weak global purchasing managers’ in-dexes continued to tell of slowing global growth.
Anticipation of an interest rate
cut tends to underpin equity mar-kets. But this support was lacking last month because the next US Fed-eral Reserve meeting was only this month, he notes.
If the macro outlook looked un-certain, country-level factors were even more telling.
Firstly, there was a 3.4 per cent drop in Singapore’s second-quarter advance gross domestic product es-timates compared with the preced-ing quarter, announced on July 12. This indicated a weak results sea-son in the second quarter.
Secondly, the Straits Times In-dex’s (STI) seasonal trend over the past 12 years pointed to a 100 per cent chance of an August decline, he recalls.
“There is little mystery to this be-haviour. I believe it has got much to do with index heavyweights – bank stocks and Singtel – going ex-divi-dend over the late July to early Au-gust period.
“Barring any unforeseen circum-stances, investors will have to wait another eight months for banks and four months for Singtel shares to receive a dividend uplift again,” he says.
Mr Yeo also notes anticipation that the Singapore dollar would weaken further against the US dol-lar ahead of the Monetary Author-ity of Singapore policy meeting next month.
Finally, leading technical indica-tors such as the moving average convergence/divergence, 14-day relative strength index and the mar-ket breadth indicators forewarned a correction.
“Against this backdrop, my view for August was for the STI to fall to 3,180,” he says.
“As we believed that the stock market was likely to correct during August, we adopted a more cau-tious ‘risk-off’ mode, preferring stocks with a stable dividend yield and earnings visibility.”
In contrast, his September strat-egy has taken on a relatively more positive tone. His view is that the STI, having fallen nearly 6 per cent last month, will find support at 3,000 to 3,060.
On the macro front, the US-China trade war had then taken a turn for the worse as both sides announced more tit-for-tat tariffs. However, global equity markets had already reacted negatively last month. At-tention now shifts to the outcome of continued US-China trade negoti-ations.
Anticipation of a Fed rate cut in the lead-up to the September Fed-eral Open Market Committee meet-ing that took place last week under-pinned the equity markets.
At country level, the price-to-earnings and price-to-book valua-tion for the Singapore market rela-tive to its 10-year history is most at-tractive compared with regional bourses.
Furthermore, the 3.91 per cent yield for the Singapore market is among the highest.
Finally, September is seasonally a calmer month compared with Au-gust. September has been higher month on month seven times over the past 12 years, with a median gain of 1.255 per cent.
Sector-wise, DBS believes that hospitality real estate investment trusts (Reits), which have under-performed this year, are on the cusp of an upturn.
Singapore Tourism Board data shows that the standard average oc-cupancy rate rose to a historic high of 93.8 per cent in July while rev-enue per average room (RevPAR) recovered to $203.70, the highest in more than 31/2 years.
“We think this is partly due to a lack of new supply over the next three years,” says Mr Yeo.
“The Singapore Grand Prix that is happening now, the October Golden Week, as well as the year-end holiday season will give an added boost to the hospitality sec-tor for the rest of this year.”
This spells good news for hospital-ity Reits, which are still relatively under-owned within the Singapore Reits sector.
DBS’ top pick is CDL Hospitality Trust (CDL HT), which historically is a leader within the sector. The tar-get price is $1.80.
With a large proportion of the room renovations for Orchard Ho-tel already completed in the second quarter this year, Mr Yeo believes that CDL HT is well positioned for the turnaround in sector RevPAR.
SEE INVEST B15
The Marina Bay Sands Hotel and the Sands Skypark as seen from the Gardens by the Bay. Singapore Tourism Board data shows that the standard average occupancy rate rose to a historic high of 93.8 per cent in July while revenue per average room recovered to $203.70, the highest in more than 31/2 years. ST FILE PHOTO
Real estate agent Ryner Koh is building his dream home and will move in once the construction is completed. B13
The ST-SGX Research Leaders’ Insights Series is a collaboration between The Straits Times and the Singapore Exchange (SGX) to help investors understand equity research reports to guide investment decisions
Me & My Property
ST-SGX Research Leaders’ Insights series
Lorna TanInvest Editor
Most industries go through cycles of peaks and troughs. However, a company’s valuations and outlook are permanently affected when its industry is in a structural decline.
Tips on picking stocks and staying ahead of the curve
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