Stock Selection

80% of the investors/speculators loss money in the shares market while only 20% of them make profit from it. So, which categories are you belong?

Everyone had their own method of stock selection, such as PE approach, DCF approach, NCAV approach and dividend approach. However for me, stock selection is only 40% important in investing. I will talk about the next half in next article. Nowadays, it is not hard to pick good fundamental stocks if you really put in effort to do some research. It does not need to be so complicated to select stocks. It can be either by theme or sector as long as you understand Malaysia market and economy. For example:

Export-oriented theme à Wellcall, Focus Lumber and Uchitech

Furniture counters à Homeritz, Pohuat, Liihen and Latitude

Semi conductor related counters à Pentamaster, MMSV and Unisem

However, we need to be aware that not all export oriented counter will benefit from depreciation of MYR. Tong Herr is a good example. Even though 77% of its products are export to other countries, however its USD loan is up to 164m! In fact, strengthen of USD against MYR will have a quite big impact on Tong Herr.

Besides that, not every good fundamental stock is suitable to invest for current situation. Malaysia economic is a very important factor to be considered. For example, implementation of GST will have an impact to the stocks which related to purchasing power. ECS ICT is the largest ICT distributor company in Malaysia. ECS had achieved a historical new high of revenue in FY15Q1. It is the period from Jan 15 to March 15, before implementation of GST. It is very likely due to boast of sales before GST. However, after April, it will be an initial slowdown in ICT sector due to the market's reaction to GST. So, ECS is expected to have an average result only in coming quarter. Hence after April, ECS’s price had started to move backward. FYI, ECS is a zero debt company with RM90m cash on hand. PE is 7+ with ROE of 14%.

Another example is Favelle Favco. Its principal activity is manufacturing of crane. Favco was making an improving profit for the past 4 years. It has excess cash of RM133m after deduct its borrowing. PE is 6 only with ROE of 18+%. Theoretically, it is a very good company but what’s happening to its price? Its price had been moving in the range of 2.90 to 2.65 for the past 5 months and moving down slowly.  The reason behind is most Favco’s customers are from Oil and Gas industry. When crude oil price remains unstable and continue dropping, it is expected to affect Favco’s book order as well. It is a bad factor for Favco.

In order to attract investor and successfully fly up a stock, it definitely needs a catalyst. It can be either good quarter report, acquisition of new business or company, bonus issue and special dividend. Of course, we still need to take other factors into account as well. For example, property sector is expected to slow down due to tightening of loan policy by bank and oversupply. So, I believe most of the investors will avoid property sector too.

As a conclusion, good fundamental company doesn’t always provide good return. A good company doesn’t mean it is cheap. Always remember, price is not value. Pick wisely!