KUALA LUMPUR (Oct 12): In pitting the best stocks to invest in the long term from every sector, CIMB Research has highlighted five with the best upside potential in three to five years: Only World Group Holdings Bhd (OWG), My E.G. Services Bhd (MyEG), GHL Systems Bhd, Hovid Bhd and RHB Capital Bhd (RHBCap).
The research outfit's selection criteria for the long-term investment stocks were listed as: management capability, financial strength, relative valuations and earnings prospects.
Based on last Friday's (Oct 9) closing prices, the average upside for all the sectors' best came to 74.6% for 2018 and 125.5% for 2020. CIMB Research said the five aforementioned stocks' prices could range between 114% (for RHBCap) and 281.9% (OWG) higher through 2018, while the upside range for the stocks in 2020 was 149.3% (RHBCap) and 545.8% (OWG).
CIMB Research's head of research Terence Wong, who issued a strategy note this morning, said that while analysts typically have three-year earnings forecasts for the companies they cover, "it is standard practice to have price targets of only six-to-12-month time horizons".
"It is our challenge to develop a methodology that will help determine which stocks to choose for (the) relatively long three-to-five-year investment horizon, and to estimate their share price upsides," he added.
According to Wong, the greatest upsides come from companies that are smaller in size, have an ambitious and aggressive management team, and trade at attractive valuations. RHBCap, therefore, was an exception to the rule as he said the third-largest Malaysian bank was trading at low valuations and that the research outfit was "excited about (its) long-term prospects".
"The upsides to share prices for the top stocks in each sector ranges from 40% to 50%, to a few hundred percent. Not surprisingly, stocks from the larger and more mature sectors suffer lower growth prospects, and therefore will likely offer investors lower upside too.
"RHBCap is perhaps the only exception, as despite its large market cap and position within the mature and highly competitive banking sector, the group is trading on low valuations, and we are excited about (its) long-term prospects," Wong said.
There was a caveat lodged in this note. Wong said that these long-term assumptions were made with a bias towards a "more positive macro(economics) outlook without any major company-specific negative shocks". Therefore there could be a downside to CIMB's target prices for these companies if any unforeseen development takes place.
Theme park operator and hospitality-related services provider OWG was given a 2018 target price of RM6.67 and 2020 target price of RM14.66. This compared with its RM2.25 price as at 11.25am.
MyEG, which was CIMB Research's top pick for "small caps" sector, had a 2018 target price of RM6.65 and 2020 target price of RM9.65. At 11.27am, its share price nudged up one sen to RM2.74.
The research outfit's outlier for technology sector, GHL, had a 2018 target price of RM2.40, which was more than double the counter's price of RM1.12 at 11.27am. The stock's 2020 target price was set at RM3.65.
In the healthcare field, CIMB Research plucked Hovid to have the best long-term earnings upside. The stock's 2018 target price was RM1, while its 2020 target price was RM1.30. At 11.27am, Hovid was trading at 45 sen.
RHBCap had a 2018 target price of RM13.12, which was more than double its share price of RM6.22 at 11.29am. Its 2020 target price meanwhile was RM15.28.
Some of the best stocks from various sectors included automotive sector's Berjaya Auto Bhd (2018 target price: RM3.58; 2020 target price: RM4.17), construction giant Gamuda Bhd (2018: RM6.40; 2020; RM7.20), property developer Eco World Development Group Bhd (2018: RM2.47; 2020: RM3.37) and glove-maker Hartalega Holdings Bhd (2018: RM7.30; RM8.30).
(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)