GLOBAL FINANCIAL MARKETS recovered lost ground this week. However, investor anxiety — over much-talked about issues such as slowing global growth, reversal of easy monetary policy in the US, the threat of Ebola as well as geopolitical tensions — is likely to stay, as are market gyrations.
It is understandable if the recent run of volatility in financial markets and uncertainties have some investors taking pause. Daily trading volume for the holiday-shortened week was, on average, lower from that in previous weeks. And we may well see renewed price weakness in the coming days.
Nevertheless, I am not overly perturbed. As mentioned previously, for this Value Investing Portfolio, companies are selected based on criteria such as sustainable business model, improving productivity, unique products, low valuations, good growth and strong balance sheet.
My intention is to hold these stocks for the longer-term and as such, I am not too concerned over short-term market volatility. In fact, I am adding to my investments this week. I bought 22,000 shares in Fitters Diversified at 76.5 sen per share. I have also decided to buy another 9,000 shares in Willowglen, adding to my existing 10,000 share holdings, at a cost of 84 sen per share.
Willowglen has performed very well since I first acquired the stock on Oct 14 — gaining 16.4% based on its closing price of 85 sen last Friday.
Indeed, the entire Value Investing Portfolio has performed smartly in the two weeks since inception.
Shares for OceanCash Pacific have gained 13.3% since I acquired the stock on Oct 10. We also made a smaller but decent 1.1% gain on Crescendo Corporation. In all, the portfolio is up 7.2% based on the total invested amount of RM63,730.
Including the RM136,270 of yet to be invested cash, the portfolio return stands at 2.3% since inception, outperforming the FBM KLCI, which has fallen 0.6% during the same period.
The annualised return for the portfolio is 55.6%.
Here is the key takeaway, even if the broader market stays in consolidation mode — waiting for earnings to catch up to valuations — investors can still make money by being selective.
All the stocks in my portfolio are bought based on the Stock Pick of the Day by InsiderAsia, which is posted daily on www.theedgemarkets.com.
A quick summary of the business and underlying fundamentals of the featured companies are published in The Edge Financial Daily.
All registered users of www.theedgemarkets.com will receive a digital copy of the Financial Daily — for free — via email before the start of each trading day.
My Value Investing Portfolio will only buy the featured InsiderAsia’s Stock Pick of the Day after it has been posted on www.theedgemarkets.com. In short, readers have time to make their decisions and still mirror my portfolio’s gains.
Just as I am not overly concerned by day-to-day gyrations of the market, I will also not attempt to predict or wait for a price bottom. Value investing is premised on finding stocks that are currently undervalued relative to future earnings prospects. A price difference of a few cents against the expected returns in the long run would, essentially, be of little relevance.
This is the reason why I bought more shares in Willowglen, even though its share price has risen from my original purchase cost. Edge Research gives this company a fundamental score of 3 out of 3.
Valuation score has deteriorated, unsurprising since its share price has gone up. Nevertheless, the stock is still trading at only 10 times P/E — lower than its trailing 12-month earnings growth of 11.8%.
To be sure, price-to-book is higher-than-market average at 2.25 times. Bear in mind though, Willowglen runs an asset-light business. It is a technology company that provides systems and solutions for Supervisory Control and Data Acquisition (SCADA) — a computerised system for gathering and analysing real time data. Indeed, 60% of total assets comprises of cash.
In addition to double-digit growth prospects, it also pays a pretty decent yield of 2.4%.
Fitters, similarly, satisfies our investing criteria. Edge Research rates this company a 1.7 out of 3 on fundamentals and strong 2.4 out of 3 on valuations.
As with Willowglen, Fitters’ P/E is low relative to growth — at just 8.8 times compared to trailing 12-month profit growth of 20.5%. Plus, it gives shareholders a net yield of 3.2%. Earlier this year, the company unveiled a minimum 30% payout dividend policy.
Fitters started off, and built its reputation, as a one-stop fire protection specialist. In recent years, it has diversified into property development, renewable energy and manufacturing of PVC pipes. And it is contributions from these new businesses that spurred turnover and earnings growth.
Last year, property accounted for 60% and 94% of the company’s turnover and earnings before interest and tax (EBIT), respectively. Its maiden project was the ZetaPark in Setapak, comprising of SoHos and residences. The company also owns 50 acres of land in Rawang, slated for 650 units of landed residential development with an estimated GDV of RM280 million.
It has just completed a RM90 million plant to manufacture PVC pipes and will commence commercial operations next year. Fitters expects revenue of RM150 million in the first full year of operations — more than 30% of last year’s total turnover of RM472 million — and intends to soon double existing capacity.
Meanwhile, the company plans to list its renewable energy division (mainly producing energy from waste) on Singapore’s Catalist market to raise some S$20 million to S$25 million. It is investing RM14 million in three biomass-gas generators (with total capacity of 1.2mw) and plans to sell power to those currently using more expensive diesel generators.
Evidently, Fitters’ diversification strategy has served it well over the past few years, underpinning the double-digit earnings growth. But it also raises a point of concern for me. The diverse nature of the businesses suggests a lack of focus.
For instance, the fire services division, on which it has built its reputation, is no longer the key earnings generator. That would be the property arm but Fitters is, at best, a niche developer.
And the company is venturing into two new industries — PVC pipes and renewable energy — where its competitive advantage and success are still to be proven.
Until the company decides on a core business and where its strength lies, the existing business model may not be sustainable in the long run.
This article first appeared in The Edge Malaysia Weekly, on October 27 - November 2, 2014.