SINCE the Covid-19 outbreak, rubber glove makers and technology stocks have by far been the clear outperformers on Bursa Malaysia. The two market rallies were largely fuelled by global shortages of rubber gloves and automotive chips.
Shares of rubber glove makers and semiconductor-related firms were chased by institutional investors and retailers, as they were seen as beneficiaries of the pandemic amid strong sales and severe undersupply.
Looking at the share price trends and price-earnings ratio (PER) trend of glove companies over the past 12 months, it has been nothing but a thrilling and terrifying roller-coaster ride.
Their shares were trading on PERs of more than 100 times, and some investors enjoyed the adrenaline rush, while others found the excitement too much to handle.
In comparison, the euphoria over the current tech rally is somewhat less than that during the glove mania. The increase in share prices of semiconductor-related companies was relatively slower and steadier compared with rubber glove stocks.
After hitting a record high in January this year, the tech stocks saw a minor correction between late-February and early-March. Even so, their valuations remain high.
For instance, despite the share price retracement, Inari Amertron Bhd, Malaysian Pacific Industries Bhd (MPI), Unisem (M) Bhd and Globetronics Technology Bhd — the Big Four outsourced semiconductor assembly and test (OSAT) companies — are still trading at historical PERs of between 30 and 50 times.
Meanwhile, the Big Four automated test equipment (ATE) manufacturers — ViTrox Corp Bhd, Pentamaster Corp Bhd, Mi Technovation Bhd and Greatech Technology Bhd — are trading even higher, at historical PERs of 60 to 80 times.
As for the likes of Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd — three of the Big Four glove makers — as well as their smaller rivals, they are currently trading at single-digit PERs, as compared to over 100 times at their peaks. Market sentiment aside, few would dispute that glove manufacturers will remain highly profitable this year, or maybe even next year, as global demand for gloves is expected to stay strong.
Likewise, most would agree that semiconductor players will continue their robust growth in the coming years, thanks to emerging technologies such as autonomous driving, artificial intelligence (AI), 5G technology and the Internet of Things (IoT).
Like it or not, the rubber glove and semiconductor sectors are still the most closely watched by the investment fraternity today. The question is, would you rather buy a cheap glove stock or an expensive tech stock?
Pheim Asset Management Sdn Bhd founder and chief strategist Dr Tan Chong Koay says being a value investor, he would buy a stock offering a strong value proposition.
“By that, I mean, the stock has to possess good growth potential, low gearing, good management, and is trading at a price that is attractively low compared with historical prices. I would apply these criteria when considering whether to buy a stock, be that a glove stock or a tech stock,” he tells The Edge.
Singular Asset Management founder and chief investment officer Teoh Kok Lin says it is difficult to judge whether glove stocks are cheap or tech stocks are expensive purely based on their PERs.
“Within both the glove and tech spaces, there is a lot of differentiation among companies in terms of management capabilities, competitive advantage, customer profiles, as well as their financial positions. We remain selective in our investment approach and continue to evaluate when risk-reward profiles turn attractive. Investors should also keep in mind the need to weigh against other alternatives, including non-glove and non-tech stock opportunities,” he stresses.
UOB Kay Hian Malaysia head of research Vincent Khoo acknowledges that there are similarities, or rather, some overlap between the two rallies.
While the tech sector is benefiting from raging hot demand and enjoying good pricing power, he believes that its structural demand growth could also imply robust earnings growth for the foreseeable future.
Khoo admits, however, that component shortages and production bottlenecks may dilute some of the pricing power down the supply chain, although some of these issues can be resolved in the near term.
“Glove stocks are cheap and may provide a very short trading opportunity. But prospects beyond 2021 are uncertain as newcomers jump on the bandwagon and regional capacity ramps up. Tech stocks would therefore appeal to a broader spectrum of investors, though investors would need to be longer-term-oriented, as tech stocks’ current lofty levels have significantly factored in the good growth prospects,” he tells The Edge.
Fortress Capital Asset Management (M) Sdn Bhd investments director Chua Zhu Lian is of the view that a growth stock will certainly demand a higher valuation compared with mature stocks with lower growth rates.
“I think it is wise, as an investor, to pick stocks that are undervalued vis-à-vis their intrinsic value while ensuring that your downside is well protected if the judgement was not a right one,” he comments.
What have we learnt from glove mania?
Suffice to say that glove stocks have gone through a full cycle of trough and peak, but tech stocks seem to remain in bull territory, for now. Will tech stocks go the way of glove stocks?
What lessons should investors learn from the glove mania of last year and, more importantly, what are the mistakes to avoid in the tech rally this year?
Singular’s Teoh reiterates that PERs are only one of many indicators of a company’s valuation — low PERs do not necessarily mean that the stock is cheap, and vice versa. One will usually consider prospective PERs and look beyond just one year.
Therefore, investors should consider a wide range of factors to determine a company’s valuation — the cash flow that will accrue to shareholders, the probability of the company attaining these future streams of cash flow and its sustainability.
“These in turn will hinge on the management quality of a company as well as industry dynamics, which require a longer-term perspective and diligent monitoring. To us, the most valuable lesson in investing is that buying is easy, but knowing when to lock in gains or cut losses is just as critical,” Teoh says.
Pheim’s Tan highlights that the lesson from last year’s glove rally is that one should keep a cool head when assessing a stock’s potential and its valuation, even during a frenzy when stocks are chased up to previously unimagined highs.
“To be sure, assessing a company’s future performance and its stock’s future price level is never easy. There are many factors and imponderables that may impinge on such projections. Hence, in my view, a healthy dose of scepticism is good to have. And, possessing long experience does help in better understanding market sentiment and psychology,” he says.
While it is nice to sell at the peak, based on Tan’s experience, it is almost impossible to achieve that.
“It would be good enough to be able to sell at a good price, even if it is some distance below the peak, and that would be enough to do wonders to your investment return on the stock. For example, we managed to sell some of our positions in Supermax at RM21.55 (before bonus), and the highest the stock touched was only RM23.90 — although brokers were very bullish on the stock, with some saying that it would go beyond RM30. Supermax ended 2020 at only RM5.97 (cum RM11.95), nearly 50% off from its peak,” he recaps.
Fortress Capital’s Chua concurs that his biggest takeaway is to avoid trying to time the market.
“Most investors will find that they can do well more consistently if they adopt a fundamental approach to investing and spend time and effort to pick strong stocks that will outperform in the long run, instead of trying to ride the short-term volatilities,” he says.
Dotcom bubble versus tech rally
Oftentimes, industry leaders from the semiconductor sector would point out that the tech stocks of today — especially over the past decade since the iPhone was launched — are very different from the tech stocks of the dotcom bubble in the late 1990s.
That is because they are mainly involved in the semiconductor value chain, whereas the tech stocks of 20 to 30 years ago were mostly overhyped software and internet companies.
Nonetheless, certain quarters insist that the “storyline” of the two tech rallies is quite similar, in that “everyone will be using more technology products in daily life, and hence, tech stocks will have a bright future”.
So, is the current tech rally similar to that during the dotcom bubble? If that is the case, should investors be careful?
Singular’s Teoh admits that stock bubbles happen from time to time. In general, investors should be cautious, especially when investing in “concept” stocks in a bull market.
“Concept stocks are those recognised by the market as based on a certain theme, opportunity or characteristic. In a rally, early and exuberant speculation in the growth of concept stocks can create a hotspot in the stock market, fuelling potentially inflated prices; but when the bear market comes, investors must be prepared for share prices to fall back,” he warns.
Teoh says investors should differentiate between companies that are truly competitive and those that are simply jumping onto the latest bandwagon.
“Back in the 1990s, there was a frenzy in glove investments, with companies (which were unlisted) racing to set up rubber glove factories. This eventually became a boom-and-bust situation, but the key takeaway from this lesson from 30 years ago is that the players with the best fundamentals survived and went on to become stronger,” he remarks.
Tan opines that the current tech rally is quite similar to that during the dotcom bubble, as seen by the substantial jump in the share prices of companies in the sector. However, what is driving the tech rally now are some of the biggest tech companies, such as Apple, Alphabet, Amazon and Microsoft, which, apart from being huge, are also very profitable.
“While they are still trading at valuations that can be regarded as still high on traditional measures, they are seen as benefiting from having sustainable growth business models. Additionally, they are continually morphing and expanding into related and new areas that would add to and help entrench their business growth,” he says.
Tan elaborates that the tech space is a very diverse universe. There will be some, even many, tech companies whose business models may appear to be innovative, but are still trying to prove to the world that they are sustainable.
“Some will not succeed. Some of them may not be unlike those seen in the dotcom era. Nevertheless, the positive investment sentiment in the market in general, and in the tech sector in particular, and the unprecedented flood of liquidity in the market would have rubbed off on such stocks, leading to them trading at valuations that would be regarded as extreme by traditional measures,” he says.
Tan goes on to say that while investors should look at the current tech rally with a healthy dose of caution, they should also recognise that the technology index in the US is underpinned by quite a number of good companies, which are doing very well and are likely to continue doing so for quite some time.
Fortress Capital’s Chua, however, sees the two tech rallies differently.
“If we dive into the history of the tech bubble, the bubble was filled with companies that had no intrinsic value and real earnings. The dotcom bubble consisted of companies that sold big ideas and dreams without a real business model and fundamentals. On the other hand, the recent tech rally is driven by companies that provide products and services to support the technological advancements of the world; in this context, the semiconductor businesses,” he explains.
Chua believes investors can still find opportunities in the current tech rally, as there are still laggards and companies with high growth potential that, in his opinion, have not been fully priced in yet.
“The main driver for semiconductor companies is the imbalance in supply and demand. Investors can be optimistic that the world is moving rapidly into IR 4.0 (Fourth Industrial Revolution), so huge usage of semiconductors is indispensable in achieving that. E&E (electrical and electronics) components are one of Malaysia’s top exports, so I believe we will have more companies in Malaysia enjoying a season of strong earnings,” he concludes.