sm1_getting the right stock market strategies at the right time (1)
DESCRIPTION
Stock MarketTRANSCRIPT
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Mr. Ooi Kok Hwa
13 September 2014, Golden Screen Cinema, One Utama
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The Securities Commission established under the Securities
Commission Act 1993 (Commission) reserve all proprietary rights to the contents of this Presentation. No part of this Presentation
may be used or reproduced in any form without the
Commissions prior written permission.
This Presentation is provided for information purposes only.
Neither the Commission nor the Presenter make any warranty,
express or implied, nor assume any legal liability or responsibility
for the accuracy, completeness or currency of the contents of
this Presentation.
It is your responsibility to verify any information before using or
relying on it.
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The Speaker
Mr. Ooi Kok Hwa is currently the Managing
Partner of MRR Consulting, dealing mainly with
Business Appraisal, Investment and Financial
Training. He is a CFA charter holder and also a
licensed Investment Advisor by Securities
Commission of Malaysia. He is specialized in
offering business valuation for private limited
companies.
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Value vs Growth Investing
Market Oriented vs Small Cap Investing
Fundamental Analysis
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Agenda - Stock-Picking Strategies
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Value vs Growth Investing
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is concerned with the current price and the price component of the ratio.
cares much less about the future earnings growth of the company.
Look at low PER. Reason:
perhaps due to an overly pessimistic assessment of the companys future; and
The PER will revert to normal or market levels when others realize that prospects are not as
bad as thought.
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Value Investing
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Look at lower price-to-book and low price-to-sales ratios
Rely on movement in price, rather than earnings, to be the reward.
Anticipates PER will rise with no increase in earnings
Risk:
The stocks cheapness is misread
The markets concerns about the company are indeed correct
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Value Investing
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Value 3 Substyles
3 YIELD
2 CONTRARIAN
1 LOW PER
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Low prices relative to current, normalized or discounted
future earnings
Focus: defensive, cyclical or out-of-favor industries
1 LOW PER
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Low valuations relative to their tangible book value
Depressed cyclicals or firms with no current earnings or
dividend yield
Hope that a cyclical rebound or companys earnings turnaround will result in
substantial price appreciation
Quality of companies is usually below average because
earnings are depressed and
financial leverage is relative
high
2 CONTRARIAN
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The most conservative value managers
Focus: companies with above-average yields that
are able to maintain or
increase their dividend
payments
3 YIELD
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is concerned with the earnings component of the ratio.
Anticipate higher companys future growth rate will contribute to higher earnings higher stock price
(assuming the PER remains constant)
Attempt to identify companies with above-average growth prospects
Focus: growth not reflected in the current price, regardless of the current PER
Growth Investing
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Focus:
higher-quality companies, an emphasis on
consumer, service, health care and technology
stocks; lighter weightings in deep cyclicals and
defensive stocks
The key risks:-
the future growth does not occur as expected
the PE multiple declines for some unanticipated reason.
Growth Investing
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Biosensors Intl Group
(US'mil) 2007 2008 2009 2010 1H11
Sales 34.35 44.32 118.96 116.18 156.59
PBT -35.05 -27.96 8.86 33.68 49.10
ROE
(%) -52.41 -32.03 -1.08 22.16 11.43
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Growth
Consistent growth
Emphasize high-quality, consistently growing
companies
Business have very predictable earnings and
extensive records of superior
profitability, valuation multiples
are frequently well above the
market
Choose consumer-oriented industries and underweight
cyclicals
Earnings momentum
Prefer companies with more volatile, above-average growth
Purchase companies in anticipation of earnings
acceleration
Choose companies in any economic sector as long as the
equities offer the best potential
earnings growth
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Value investor is the earlier buyer of a stock
This may or may not be accompanied by earnings increases
As the price increases, the value investor becomes uncomfortable with and sells. Now the growth
investor has noticed the improving fundamentals of
the company.
The growth investor will purchase the same stock the value investor viewed too
expensive
Price and Earnings Pattern:
Value vs Growth
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Below shows the different buying and selling
signals for value and growth investing
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Table 1 provides the key differences between
value and growth investing
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Table 1
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The historical earning per share (EPS) of
Company A and Company B
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EPS Average
Price
PER EPS Average
Price
PER
(Sen) (RM) (Sen) (RM)
2001 9.9 1.49 15.0 26.2 3.67 14.0
2002 13.6 2.18 16.0 24.6 3.44 14.0
2003 15.2 2.58 17.0 15.3 2.20 14.4
2004 18.2 3.09 17.0 -3.5 1.00 NM
2005 20.2 3.64 18.0 12.5 1.88 15.0
Past 5-year
average 15.0 15.0
Company A Company B
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Market Oriented
vs. Small Cap Investing
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Market-Oriented
Do not have a strong or persistent preference for the
types of stocks emphasized in
either value or growth
portfolios
Portfolio characteristics are closer to market averages
over a business cycle
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Market-Oriented
4 substyles:-
Value bias or Growth bias
Have portfolios with a tilt toward either value or
growth
But not sufficiently distinct to put them in either the
value or growth styles
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Market-Oriented
4 substyles (cont):-
Market-normal
Construct portfolios with growth and valuation characteristics that are similar to the broad market
over time
Make bets in growth or value stocks but no continued preference toward either
Growth at a price
Seek companies with above-average growth prospects selling at moderate valuation multiples
Do not offer wide diversification in portfolio structure
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Small-Capitalization
Focus on small companies which are less followed by
institutional investors
Characteristics of the portfolio:
Below market dividend yields
Above-market betas
High residual risk relative to broad market indexes
Thin following by analysts
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3 Subtypes within Small-Cap
3 MARKET-ORIENTED
2 GROWTH
1 VALUE
Seek under researched small
companies that sell at low
valuations relative to assets,
earnings or revenues
Focus on less seasoned companies
with above-average growth
prospects
Focus on small companies that over
time, exhibit growth and value
characteristics similar to the broad
small-cap marketplace
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Stock-Picking Strategies -
Fundamental Analysis
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8 Key Criterias
1. Price Earnings Ratio (PER)
2. Dividend Yield (DY)
3. Price to Book Value
4. Growth in EPS
5. Past 5-Year Price Range
6. Past 12-Month Price Range
7. Debt to Equity Ratio
8. Net Cash Per Share
3 Main Yardsticks
Potential Growth in Price
Health of the Company
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Economic Analysis Industry Analysis Stock Analysis
focus on individual stock regardless of market
outlook
Valuation Process
The top-down, three-
step approach
The Bottom-up, stock
valuation, stock
picking approach
2 General Approaches
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Fundamental Principles
Buy undervalued stocks
look for quality in earnings Good management Good profit margin
(use EBITDA margin)
look for growth and stability
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Focus on: Stability and Growth rate
Growth in
sales
earnings
Attention on EPS growth
Look for stability and growth rate
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Price Earnings Ratio (PER)
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PPB Group
Normalised PER = (16.8+22)/2 = 19.4 Intrinsic Value = 19.4 x 85/100 = 16.5 = 19.4 x 90/100 = 17.5
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Dividend Yield (DY)
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Price-to-Book Value
1) Net Tangible Assets (NTA) per share
NTA per share =
2) Price to Book Value
= Price / NTA per share
Selection:
a. reflect owner's cost
- No owner will sell to you at below NTA per share except
for certain reasons that you may not aware
Number of ordinary shares
Net Tangible Assets
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Liquid asset/share
Liquid asset = cash, bank balances and deposits
Liquid asset/share implies how much cash or cash equivalent the company has based on per share basis
Selection: higher number implies the company is cash rich and has the ability to pay dividend
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Debt/Equity (D/E) Ratio
D/E measures the ratio between the amount of
interest bearing debt a
company has and the
amount of shareholders equity
Selection criteria: D/E
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