As volatility in global equity markets extends into the second week, there is plenty of anxiety to spread around. According to Bloomberg, some US$23.8 billion was pulled from equity funds, the bulk from exchange-traded funds (ETFs), from the 1st to 7th of February alone. That’s one of the largest weekly outflows on record.
Valuations are back in focus, something that investors have largely turned a blind eye to as long as markets were rallying. Yes, the economy is humming along, consumer and business confidence is high and
corporate earnings are beating expectations. But share prices have ran ahead of underlying fundamentals lifting benchmark indices to record after record highs – levels that are, even now, still above their long-term averages.
One of the most vulnerable sectors in this current selloff has been technology, the darling for so many investors for so long and amongst the most expensively priced stocks, at least in price-to-earnings (PE) terms.
Having lead the rally over the past year, these stocks are now leading the way down. Some even draw parallels to the dot-com bubble in the late 1990s.
Six of the largest tech companies in the world – Apple, Amazon, Facebook, Microsoft, Alibaba and Alphabet – have collectively lost more than US$288 billion in market cap since the DJIA and S&P 500 index closed at record highs on January 26th.
There is no doubt that these tech stocks have performed remarkably well. The real question is “Are they trading at bubble valuations?”
True, most are trading at PE multiples that are well above market average. But as I have said before, the absolute level of PE in abstract is next to meaningless. They have to be read in context, that is, relative to the company’s prospective growth and future incomes.
Here is my favourite EV/EBITDA and 5-year EBITDA growth chart (see Chart 1). The six tech stocks (mentioned above) are trading at rich EV/EBITDA multiples – averaging 21.2 times but it’s also important to note that their average 5-year EBITDA cagr is a high 35.2%.
Indeed, this is even more apparent when compared to the current DJIA component stocks (see Chart 2). Twelve of the 30 stocks actually recorded negative EBITDA growth over the past 5 years whilst those with positive growth, rates are mostly below 10%. Yet, they are trading at EV/EBITDA of 13 times, on average. And how does this compare to historically?
Back in 2005, the DJIA component stocks were trading at a lower 10.6 times EV/EBITDA on the back of higher operating profit growth of 4.1%, on average (see Chart 3).
For the 20 stocks that have remained a fixture in the DJIA over this period; 15 were trading at lower valuations back in 2005. Their EV/EBITDA averaged at just over 10 times while 5-year EBITDA cagr was 6.1%.
Clearly, the numbers are telling us that, if anything, it is the non-tech stocks that are currently overvalued! And that this was not the case in 2005.
Why is this so? The most obvious answer is passive funds, whose popularity skyrocketed over the past decade. The amount of money invested into ETFs more than doubled since 2009, after the global financial crisis.
As I mentioned previously, passive funds like ETFs chase stocks in the underlying indices without regards to valuations, earnings, business risks or outlook. That is the definition of a bubble in the making.
As long as markets are rising, investors will keep throwing more money at these funds, attracted by their cheap costs. Gains beget more gains.
As with most bubbles, we will not be able to predict when the bubble will burst or what will be the trigger. It could be the relatively obscure (and little understood) volatility-linked ETF products that collapsed so spectacularly last week. Or it could be some other events in the future.
The point, the risk is real. Once the trigger event happens, investors will all rush to the exit at the same time. Because of the concentration of risks in those ETF-held stocks, prices will drop sharply when liquidity (driven by passive funds themselves) disappears. There will be a snowball effect; the falling indices will lead to more redemptions and further selling.
As with the case when prices are rising, the selling will be indiscriminate and made without regards to underlying fundamentals.
Table 2 shows the collective shareholdings of the 10 biggest ETFs in the longstanding 20 DJIA stocks, which has risen many folds in little over a decade. And these figures are actually an understatement since we only added holdings for 10 funds. The actual shareholding of ETFs will be larger as there are plenty of smaller-sized funds in the market.
My Global Portfolio fell 1.8%, for the second straight week, mirroring the continued selldown in markets. This pared total portfolio returns to 2.5% since inception. Nevertheless, we are still outperforming the benchmark MSCI World index, which is now down by 1.2% over the same period.
I took advantage of the recent selloff to buy more shares in Shanghai Haohai Biological Technology. This raised our total amount invested to levels similar as the rest of the stocks in the portfolio. We took a smaller bite earlier as we are investing in a smaller, lesser-known company and are therefore more cautious on its potential.
But Shanghai Haohai has been doing well, expanding into the ophthalmology high-value materials industry to drive topline growth and maintaining relatively high gross margins. Hence, we decided to up our stake in the company.
Stocks in the Malaysian Portfolio ended a holiday-shortened week marginally higher, recovering somewhat from the selloff in the previous week. The FBM KLCI, on the other hand, closed down 0.3% for the week to Tuesday.
Trading volume fell sharply on Monday and Tuesday, likely due to the long weekend and prevailing uncertainties in financial markets. Retail investors are likely to stay sidelined until a clearer picture emerges on the global market front. Indeed, they have been net sellers in the local bourse for the past three straight weeks. Incidentally, foreign fund outflows jumped sharply higher for the week ended February 9th, totalling RM1.75 billion. This corresponds to the fall in the ringgit, from 3.87 to 3.94 now.
Total portfolio value is now up 66% since inception, far outperforming the benchmark index, which is up by just 0.2% over the same period.
Finally, I would like to wish all readers a Happy and Prosperous Chinese New Year.
Performance Comparison Since Inception (%)
- Tong's Value Investing Portfolio
- FBM KLCI
|SHARES HELD||QUANTITY||AVERAGE COST||COST OF
|AJINOMOTO (M) BHD||12.278||18,417.5||20.200||30,300.0||11,882.5||64.5%|
|PANASONIC MANUFACTURING MSIA||24.955||9,982.0||33.400||13,360.0||3,378.0||33.8%|
|SUPERLON HOLDINGS BHD||1.185||14,220.0||1.580||18,960.0||4,740.0||33.3%|
|KERJAYA PROSPEK GROUP BERHAD||2.256||22,560.0||3.890||38,900.0||16,340.0||72.4%|
|Y.S.P.SOUTHEAST ASIA HOLDING||2.483||26,075.0||2.500||26,250.0||175.0||0.7%|
|LUXCHEM CORPORATION BHD||0.732||24,145.0||0.760||25,080.0||935.0||3.9%|
|CHOO BEE METAL INDUSTRIES BHD||2.190||35,040.0||2.480||39,680.0||4,640.0||13.2%|
|MUAR BAN LEE GROUP BERHAD||1.260||17,010.0||1.310||17,685.0||675.0||4.0%|
|FORMOSA PROSONIC INDUSTRIES||1.620||29,160.0||1.760||31,680.0||2,520.0||8.6%|
|HONG LEONG INDUSTRIES BHD||9.596||19,191.0||10.000||20,000.0||809.0||4.2%|
|OKA CORPORATION BHD||1.561||18,728.0||1.490||17,880.0||(848.0)||(4.5%)|
|WILLOWGLEN MSC BHD||1.010||30,300.0||1.060||31,800.0||1,500.0||5.0%|
|Total shares held||264,909.2||311,712.9||46,803.8||17.7%|
|Realised Profits / (Losses)||85,281.3|
|Change since last update Feb 8, 2018|
|Portfolio Returns Since Inception||200,000.00||332,085.0||132,085.0||66.0%|
|Portfolio Returns (Annualised)||19.7%|
|Risk Adjusted Returns Since Inception||123.4%|
|Performance Comparison||At Portfolio Start||Current||Change||Relative Portfolio Outperformance|
*Current price is as at February 13, 2018.
*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.
|SHARES SOLD||DATE BOUGHT||DATE SOLD||QUANTITY||AVERAGE
|BATU KAWAN BHD||15-Feb-17||03-May-17||200||19.500||3,900.0||18.960||3,792.0||(108.0)||(2.8%)|
|BATU KAWAN BHD||15-Feb-17||04-May-17||400||19.500||7,800.0||18.900||7,560.0||(240.0)||(3.1%)|
|UNITED PLANTATIONS BHD||13-Feb-17||08-May-17||500||26.150||13,075.0||28.420||14,210.0||1,135.0||8.7%|
|UNITED MALACCA BHD||08-Feb-17||09-May-17||1,000||5.800||5,800.0||6.200||6,200.0||400.0||6.9%|
|UNITED MALACCA BHD||08-Feb-17||11-May-17||1,000||5.800||5,800.0||6.190||6,190.0||390.0||6.7%|
|WILLOWGLEN MSC BHD||23-Nov-16||30-May-17||13,000||0.768||9,985.9||1.720||22,360.0||12,374.1||123.9%|
|YEE LEE CORPORATION BHD||12-Jan-17||29-Jun-17||6,000||2.500||15,000.0||2.487||14,924.0||(76.0)||(0.5%)|
|CLASSIC SCENIC BHD||26-Jan-16||13-Jul-17||4,000||1.413||5,651.3||1.815||7,260.0||1,608.8||28.5%|
|MIKRO MSC BERHAD||01-Dec-16||27-Jul-17||42,000||0.331||13,920.0||0.545||22,890.0||8,970.0||64.4%|
|CLASSIC SCENIC BHD||01-Dec-16||27-Jul-17||4,000||1.413||5,651.3||1.790||7,160.0||1,508.8||26.7%|
|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%)|
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