Investing in late-cycle earnings growth
Positive news flow on ongoing US-China trade talks continued to buoy sentiment for global stocks over the past week. Following reported progress after days of negotiation in Beijing, further discussions have resumed in the US. Clearly, markets have now priced in some sort of deal to avert another tariff hike or at the very least, an extension to the March 1 deadline.
Volatility as measured by the CBOE Volatility Index (VIX) has fallen quite sharply since hitting a high on Christmas Eve last year. That said, many investors remain wary that volatility could return in the near future.
If so, this would not be at all surprising, considering that the global economy is very late in the current upcycle. There is bound to be greater uncertainties over the timing of the turning point. Unemployment rates have fallen far below levels seen in the last recession – US unemployment is near a 50-year low.
Analysts are already talking about an earnings recession. According to estimates collected by data provider, FactSet, US corporate earnings are now expected to contract 2.2% in 1Q2019, well off from an estimated growth of 4.9% less than three months ago, at end-November.
Currently, earnings are forecast to grow 1% in 2Q2019 but this could easily turn into a second consecutive quarter of decline, if analysts continue to pare back earnings estimates.
Of note, revenue is expected to grow at a faster pace, of 4.7% and 4.5% for the two quarters, respectively. In other words, the market is forecasting margins contraction, which is a symptom of late-cycle expansion when slack has been taken up.
All of the above, I believe, means greater opportunities for stock selection strategies as opposed to beta investing, which had gained increasing popularity in recent years of low volatility, liquidity driven rally.
We can expect a higher degree of late-cycle earnings dispersion and thus, should see more focus given to underlying fundamentals of individual stocks. It is more likely that value – and hence outsized returns – can be found in smaller companies. As such, we are actively looking for fresh stock ideas within these parameters to add to my Global Portfolio.
Granted, many smaller cap companies have low profiles and are not well researched. Hence, the information available could be limited, sometimes in a foreign language. As a result, their share prices too tend to be more volatile.
Case in point, shares for Shanghai Haohai Biological Technology, which we sold for a 34% gain, traded as high as HK$59.90 and fell as low as HK$34.05 before rebounding to the current HK$48.50 – all in the past one year.
Similarly, shares for Sunpower Group have rebounded quite smartly in the past couple of weeks, recovering almost all of its recent losses. Recall its share price took a sudden dive in October 2018, which was not reflective of its underlying business and earnings.
Inevitably, there are times when we would just be dead wrong. A good example is Towa Corp. Its share price reversed into a persistent downtrend soon after we bought back in December 2017. We took a loss of 16% in February 2018 and since then the stock has fallen by another 60%.
We rely heavily on data analytics in the search for stocks globally, which unfortunately does not usually give any nuance on localised issues. Losses are always a risk. Our aim is to find more winners than losers.
Share prices for China Sunsine and Ausnutria Dairy are performing very well, up some 23.4% and 23.2% respectively from our acquisition costs. On the other hand, our investments in DIP Corp and Nine Dragons Paper remain in the red.
I suspect price upside for Nine Dragons could be limited in the near-term on muted sentiment despite its valuation attractiveness. Demand for containerboard (for packaging purposes) has weakened, affected by trade conflict and China’s economic slowdown. There is evidence of de-stocking activities. The result is lower selling prices, which is also capping the ability to pass on higher costs.
Recently, there were speculations that after tightening impurity requirements for imported scrap paper, the government is mulling an outright ban in 2020. This would negatively impact margins given that local scrap prices are trading much higher currently.
In the long run, further industry consolidation would be positive for Nine Dragons, which is the biggest paper-packaging manufacturer in the country. The company has a head start in diversifying its feedstock and recently acquired pulp mills in the US. In other words, its business and longer-term outlook are intact. I am staying invested at the moment. However, I do not rule out disposing the stock in the near-term if there is a better investment alternative.
Elsewhere, shares for DIP have remained weak despite upbeat earnings. It is quite perplexing. With low unemployment rate – the labour market is the tightest in four decades – the number of job advertisement listings is on the rise and DIP has been expanding its operations.
Revenue is growing – by 10.2% y-y in 1QFYFeb2019, 10.3% in 2QFY19 and 10.9% in the latest 3QFY19 – albeit lower than previous years, due in part to larger base effect. Net income for 9MFY19 is up an outsized 24.9%, reflecting improving margins, despite lower ad rates. In addition to raising head count, the company is lifting productivity through the use of technology.
The stock is trading at PEG of less than 1 time with an estimated yield of 2.4%. DIP has forecast dividends rising to ¥49 per share for the current financial year, up from ¥43 in FY18. I like DIP’s business proposition but admittedly, it has been a drag on the portfolio. Perhaps the market is anticipating significantly greater competition – in an already fragmented industry – in the future. We are sticking with the stock and believe the market will catch up with our views.
Stocks in the Global Portfolio traded broadly higher last week, paring losses (since inception) to just 3.2%. Although the portfolio continues to underperform the MSCI World Net Return Index, which is up 1.2% over the same period, the gap has been narrowing in recent weeks as global stocks regained investors’ confidence.
Improved sentiment in global markets lifted stocks on the Bursa Malaysia broadly higher last week. Shares for Dialog rallied after releasing good earnings results for 4Q2018. The stock is another of InsiderAsia Top 10 stocks for this year. For more detailed financial information, please visit out www.absolutelystocks.com.
Total portfolio returns now stand at 56% since inception. The portfolio continues to outperform the benchmark index, FBM KLCI, which is still down 5.4%, by a long way.
Performance Comparison Since Inception (%)
- Tong's Value Investing Portfolio
- FBM KLCI
SHARES HELD | QUANTITY | AVERAGE COST | COST OF INVESTMENT | CURRENT PRICE | CURRENT VALUE | GAIN / (LOSS) | GAIN / (LOSS) |
---|---|---|---|---|---|---|---|
SCGM BHD | 1.732 | 19,218.4 | 1.200 | 13,279.2 | (5,939.2) | (30.9%) | |
AJINOMOTO (M) BHD | 11.813 | 17,720.0 | 18.940 | 28,410.0 | 10,690.0 | 60.3% | |
PANASONIC MANUFACTURING MSIA | 26.157 | 17,182.0 | 38.100 | 22,860.0 | 5,678.0 | 33.0% | |
Y.S.P.SOUTHEAST ASIA HOLDING | 2.413 | 25,340.0 | 2.880 | 30,240.0 | 4,900.0 | 19.3% | |
FORMOSA PROSONIC INDUSTRIES | 1.540 | 27,720.0 | 2.000 | 36,000.0 | 8,280.0 | 29.9% | |
HONG LEONG INDUSTRIES BHD | 9.126 | 18,251.0 | 9.640 | 19,280.0 | 1,029.0 | 5.6% | |
MALAYAN BANKING BHD | 10.250 | 30,750.0 | 9.530 | 28,590.0 | (2,160.0) | (7.0%) | |
ECO WORLD DEVELOPMENT GROUP BERHAD | 1.235 | 18,772.0 | 0.965 | 14,668.0 | (4,104.0) | (21.9%) | |
DIALOG GROUP BHD | 3.452 | 19,676.4 | 3.320 | 18,924.0 | (752.4) | (3.8%) | |
SAM ENGINEERING & EQUIPMENT | 7.380 | 22,140.0 | 7.690 | 23,070.0 | 930.0 | 4.2% | |
POH HUAT RESOURCES HOLDINGS | 1.490 | 19,370.0 | 1.600 | 20,800.0 | 1,430.0 | 7.4% | |
SUPERLON HOLDINGS BHD | 1.300 | 19,500.0 | 1.350 | 20,250.0 | 750.0 | 3.8% | |
Total | 255,639.8 | 276,371.2 | 20,731.4 | 8.1% | |||
Shares bought | |||||||
No transaction. | |||||||
Total shares held | 255,639.8 | 276,371.2 | 20,731.4 | 8.1% | |||
Shares sold | |||||||
No transaction. | |||||||
Cash Balance | 35,690.3 | ||||||
Realised Profits / (Losses) | 91,330.0 | ||||||
Change since last update Feb 14, 2019 | |||||||
Portfolio | 1.9% | ||||||
FBMKLCI | 2.5% | ||||||
Portfolio Returns Since Inception | 200,000.00 | 312,061.5 | 112,061.5 | 56.0% | |||
Portfolio Returns (Annualised) | 12.8% | ||||||
Portfolio Beta | 0.668 | ||||||
Risk Adjusted Returns Since Inception | 83.9% | ||||||
Performance Comparison | At Portfolio Start | Current | Change | Relative Portfolio Outperformance | |||
FBM KLCI | 1,829.7 | 1,730.7 | (5.4%) | 61.4% | |||
FBM Emas | 12,700.4 | 12,083.9 | (4.9%) | 60.9% |
Footnote:
*Current price is as at February 21, 2019.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.
*Current price is as at February 21, 2019.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.
STOCKS SOLD IN THE LAST 12 MONTHS (Currency: MYR)
SHARES SOLD | DATE BOUGHT | DATE SOLD | QUANTITY | AVERAGE COST | COST OF INVESTMENT | PRICE SOLD | SALES PROCEEDS | GAIN / (LOSS) | GAIN / (LOSS) |
---|---|---|---|---|---|---|---|---|---|
PANASONIC MANUFACTURING MSIA | 21-Jan-16 | 27-Jul-17 | 400 | 26.125 | 10,450.0 | 37.100 | 14,840.0 | 4,390.0 | 42.0% |
ELSOFT RESEARCH BHD | 30-Mar-17 | 24-Aug-17 | 8,000 | 1.844 | 14,750.0 | 2.650 | 21,200.0 | 6,450.0 | 43.7% |
JOHORE TIN BERHAD - WA 12/17 | 04-May-17 | 24-Aug-17 | 17,000 | 0.655 | 11,135.0 | 0.680 | 11,560.0 | 425.0 | 3.8% |
FOCUS LUMBER BERHAD | 03-May-17 | 30-Aug-17 | 6,000 | 1.660 | 9,960.0 | 1.530 | 9,180.0 | (780.0) | (7.8%) |
WILLOWGLEN MSC BHD | 23-Nov-16 | 30-Aug-17 | 7,000 | 0.768 | 5,377.0 | 1.430 | 10,010.0 | 4,633.0 | 86.2% |
WILLOWGLEN MSC BHD | 23-Nov-16 | 28-Sep-17 | 7,000 | 0.770 | 5,377.0 | 1.180 | 8,260.0 | 2,883.0 | 53.6% |
LII HEN INDUSTRIES BHD | 14-Dec-16 | 28-Sep-17 | 5,000 | 2.820 | 14,100.0 | 3.720 | 18,600.0 | 4,500.0 | 31.9% |
COMFORT GLOVES BERHAD | 28-Aug-17 | 08-Dec-17 | 25,000 | 0.960 | 24,000.0 | 0.930 | 23,250.0 | (750.0) | (3.1%) |
JOHORE TIN BHD | 08-May-17 | 08-Dec-17 | 9,000 | 1.600 | 14,400.0 | 1.180 | 10,620.0 | (3,780.0) | (26.3%) |
THONG GUAN INDUSTRIES BHD | 12-Dec-16 | 08-Dec-17 | 5,000 | 4.243 | 21,215.0 | 4.100 | 20,500.0 | (715.0) | (3.4%) |
KERJAYA PROSPEK GROUP BERHAD | 12-Jan-17 | 15-Mar-18 | 11,000 | 1.025 | 11,280.0 | 1.540 | 16,940.0 | 5,660.0 | 50.2% |
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/2023 | 08-Mar-18 | 15-Mar-18 | 3,000 | 0.000 | 0.0 | 0.330 | 990.0 | 990.0 | - |
LUXCHEM CORPORATION BHD | 30-Aug-17 | 15-Mar-18 | 16,500 | 0.732 | 12,072.5 | 0.720 | 11,880.0 | (192.5) | (1.6%) |
WILLOWGLEN MSC BHD | 14-Dec-17 | 22-Mar-18 | 20,000 | 1.010 | 20,200.0 | 1.260 | 25,200.0 | 5,000.0 | 24.8% |
MUAR BAN LEE GROUP BERHAD | 26-Oct-17 | 22-Mar-18 | 13,500 | 1.240 | 16,740.0 | 1.170 | 15,795.0 | (945.0) | (5.6%) |
CHOO BEE METAL INDUSTRIES BHD | 07-Sep-17 | 16-May-18 | 8,000 | 2.190 | 17,520.0 | 2.440 | 19,520.0 | 2,000.0 | 11.4% |
CHOO BEE METAL INDUSTRIES BHD | 07-Sep-17 | 21-May-18 | 8,000 | 2.190 | 17,520.0 | 2.300 | 18,400.0 | 880.0 | 5.0% |
SUPERLON HOLDINGS BHD | 01-Dec-17 | 21-May-18 | 6,000 | 1.175 | 7,050.0 | 1.550 | 9,300.0 | 2,250.0 | 31.9% |
OKA CORPORATION BHD | 14-Dec-17 | 28-Jun-18 | 12,000 | 1.541 | 18,488.0 | 1.270 | 15,240.0 | (3,248.0) | (17.6%) |
SUPERLON HOLDINGS BHD | 01-Dec-17 | 28-Jun-18 | 6,000 | 1.175 | 7,050.0 | 1.210 | 7,260.0 | 210.0 | 3.0% |
WILLOWGLEN MSC BHD | 14-Dec-17 | 28-Jun-18 | 100 | 0.500 | 50.0 | 0.540 | 54.0 | 4.0 | 8.0% |
PANTECH GROUP HOLDINGS BHD | 17-May-18 | 02-Aug-18 | 43,000 | 0.580 | 24,940.0 | 0.560 | 24,080.0 | (860.0) | (3.4%) |
KERJAYA PROSPEK GROUP BERHAD | 10-Jan-17 | 06-Sep-18 | 11,000 | 1.020 | 11,225.0 | 1.400 | 15,400.0 | 4,175.0 | 37.2% |
LUXCHEM CORPORATION BHD | 25-Aug-17 | 06-Sep-18 | 16,500 | 0.717 | 11,825.0 | 0.655 | 10,807.5 | (1,017.5) | (8.6%) |
HOCK SENG LEE BHD | 19-Apr-18 | 06-Sep-18 | 14,500 | 1.520 | 22,033.0 | 1.370 | 19,865.0 | (2,168.0) | (9.8%) |
GENTING MALAYSIA BERHAD | 06-Sep-18 | 28-Nov-18 | 3,800 | 5.070 | 19,266.0 | 3.060 | 11,628.0 | (7,638.0) | (39.6%) |
TOP GLOVE CORPORATION BHD | 06-Sep-18 | 06-Dec-18 | 3,600 | 5.500 | 19,800.0 | 6.030 | 21,708.0 | 1,908.0 | 9.6% |
MAH SING GROUP BHD | 28-Jun-18 | 14-Jan-19 | 19,000 | 1.005 | 19,095.0 | 0.930 | 17,670.0 | (1,425.0) | (7.5%) |
WILLOWGLEN MSC BHD | 14-Dec-17 | 14-Feb-19 | 19,900 | 0.500 | 9,900.0 | 0.464 | 9,236.0 | (714.0) | (7.2%) |
A Note to Readers
It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.
Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.
Tong Kooi Ong
http://www.theedgemarkets.com/aa/tong/portfolio
No comments:
Post a Comment