Are these outstanding stocks - what to consider? (Other Stock Exchanges)

Tips B - Other Stock Exchanges. This is a quick guide to diversification concepts as well as case study companies listed in other countries (from a Malaysian perspective).  Look here if you want to see the infographics of Bursa Malaysia case study companies.  BTW I would like to clarify that the post is not about investment advice but rather teaching you how to invest. If you were enrolled in an educational institution to learn about investing, these would be your quick revisions notes.  Revision date:  14 April 2021.


The first thing that all investors learn is that you have to think in terms of the risk-reward ratio when looking at a particular investment. While every investment has its upside, there is also a potential downside.

One way to take care of the downside when you invest in the stock market is to have a diversified portfolio. I have several infographics here that look at issues related to diversification - from how to assess risks to portfolio management.

There are several perspectives to diversification.
  • You can diversify by spreading your investment to different industries and different market caps.
  • I also spread my investments based on the various business economic situations faced by companies eg turnarounds and compounders.
  • Another common diversification plan is to invest in both local and global companies.

Geographical diversification can be quite nuanced. It is not necessarily about investing in companies that are listed in stock exchanges other than those in your country.

For example, if you are in the US and you invest in NYSE-listed The Coca-Cola Company, you are actually investing globally as a significant part of The Coca-Cola revenue are from non-American sources.

Accordingly, while the infographics in this post covered companies that are listed in other stock exchanges (from a Malaysian perspective), it does not necessarily mean that they do not have operations in Malaysia.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.



Contents

  • Baby steps in assessing Permanent Loss of Capital.
  • Baby steps in Asset Allocation for a Value Investor.
  • Baby steps in constructing a stock portfolio.
  • Baby steps in maintaining a stock portfolio.
  • UOA
  • Steel Dynamics
  • New Toyo International
  • Wing Tai
  • Boise Cascade


Case Notes

When I value a non-Malaysian company, I have to use a different of data for computing the cost of capital.  The differences are for the following parameters:

  • Risk-free rate. It is obvious that the risk-free rates for the US would be much lower than those in Malaysia.
  • Rating and coverage ratio. I use the rating and coverage ratio from Damodaran to determine the cost of debt. Damodaran has a different set of data for the US compared to the emerging markets.
  • Equity risk premium.  This is a function of the country's stock market performance and different countries will have different premiums.
  • Beta. Although I adopt the build-up Beta approach, Damodaran has a different set of Beta data for the US and the emerging markets. 


So you should not be surprised to see a different cost of capital for a US company compared to a Malaysian company even if both companies are in the same industry, of the same size with the same debt to equity level, and have similar risks.

For beginners, it can be challenging to take into account these differences when valuing companies from different countries.  If you still want to invest in companies in other countries based on fundamentals, and you are not familiar with the adjustments to be made it may better to rely on third-party analyses. 

There are several financial advisers who provide such analyses. Those who do this well include people like The Motley Fool. Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis, valuation, and risk assessment.  Then as you become more experienced, you can phase them out. 



Baby steps in assessing Permanent Loss of Capital

There are 2 schools of thought when it comes to risks
  • Those that view it as volatility.
  • Those that view it as a permanent loss of capital.

There are various ways you can suffer a permanent loss of capital. They can be due to stock market changes, portfolio construction, wrong estimation of intrinsic value, and deterioration of the intrinsic value. 

A risk management framework can be used to assess the likelihood and impact of each of the threats. This was then used to compare the relative risk of different stocks

The risk management framework was also used to identify the various measures to adopt to mitigate a permanent loss of capital

You can then use the framework to compare the risks between different companies. 

Baby steps in assessing permanent loss of capita


Baby steps in Asset Allocation

There are 3 questions when it comes to asset allocation 
  • How many asset classes?
  • How to determine that amount for each class?
  • How do you rebalance?

Furthermore, any asset allocation plan should satisfy at least 2 goals:
  • Perform well under various economic situations. There are 4 main economic scenarios that we live through.  These are the results of the combination of inflation vs deflation and economic growth vs depression.
  • Provide you with peace of mind. Peace of mind comes from having an asset allocation plan that you can stick with and sleep peacefully at night.

At its core asset allocation is about risk mitigation and should take into account your investment style. My asset allocation plan taking these into consideration covers the following:
  • Have 3 groups - liquid, safe and risky assets.  Within each group, you can have a few different types of investments.
  • View the asset allocation through several lenses - 3 Buckets, FAA, and All-Weather.
  • When starting out young and at the accumulation phase, have an equal amount for the safe and risky assets. As your wealth increases cap the amount for the safe assets so that more is channeled to the risky assets.
  • At the withdrawal phase, have an equal amount in the safe and risky assets 

Baby steps in asset allocation


Baby steps in constructing a stock portfolio

A stock portfolio is merely a collection of stocks. 
  • Having a portfolio of stocks is part of the risk mitigation plan.
  • You can identify the stocks in the portfolio by either a top-down or bottom-up approach.  The important thing is to focus on individual stocks rather than the economy or industry. 
  • Target to have at least 30 stocks uncorrelated stocks in the portfolio.  This is a good balance between maximizing returns from concentration and minimizing risks with diversification.
  • Allocate more to those stocks with the most conviction. From a Kelly Formula perspective, this is better than allocating the same amount to all the stocks.
  • Scale in and scale out of a position rather than buy or sell in one lump sum.

Baby steps in constructing a stock portfolio

Baby steps in maintaining a stock portfolio

Review your stock portfolio quarterly to ensure that it is still in line with the return and risk objectives.
  • There are 2 critical review areas - the portfolio returns and the portfolio risk.
  • There are 3 ways to assess the portfolio returns - absolute basis, compared with benchmarks, and risk-adjusted basis.
  • To assess risks, compare the current diversification against the portfolio diversification criteria

Baby steps in managing a stock portfolio


UOA Ltd

UOA Ltd is listed on both the Australian (ASX) and Singapore (SGX) stock exchanges. At the same time, the majority of its operations are in Malaysia undertaken by 2 companies listed on Bursa Malaysia - UOA Development Berhad and UOA REIT. 

In order to get a sense of the crowd’s valuation of UOA Ltd, you need to look at these 3 markets as well as the valuation of all these 3 listed entities in comparison with the infographic.

For details of the analysis and valuation in the infographics, refer to the 3-part series of 2 Aug 202016 Aug 2020, and 30 Aug 2020.  

The conclusion that UOA Ltd is not a value trap is based on the following: 
  • At the current market price of AUD 0.63 per share, there is an ample margin of safety
  • The analysis has not suggested that there will be any impairment of the assets.   There is a low risk of reducing its intrinsic value
  • While growth will be challenging, the Group would be able to sustain its performance.  This means that the Earning Power Value is a reliable indicator of the intrinsic value.  

Since value traps and bargains are opposite sides of the value investing coin, it must mean that the market has mispriced UOA Ltd.


No

Resources based on the 1st Page of Google Search

 

Reference company

Remarks/types of analysis

 

1

Yahoo Finance


UOA Ltd

Share Price, multiples

2

Strawman


UOA Ltd

Community valuation

3


MorningstarUOA LtdMultiples





4

Finbox


UOA Dev

Price, fundamentals

5

Simply Wall Street


UOA Dev

Financial ratios, and multiples

6

RHB Research


UOA Dev

Analyst report - RNAV





7

KLSE.i3investor

 

UOA REIT

Share price

8

Value Invest Asia


UOA REIT

Research piece - multiple

9

Simply Wall Street


UOA REIT

Financial ratios, and multiples



Note: Because of 3 listed companies in 3 different stock exchanges, I listed the top 3 sites for each of the listed entities. 


Stock tips: UOA Ltd is not a Value Trap


Steel Dynamics

Nasdaq listed Steel Dynamics Inc (SDI or the Group) is an iron and steel Group that can be considered as a good company because of the following:
  • It is financially strong.  The Group has the industry average debt to capital ratio while having a higher than industry cash position.
  • Both the Steel and Steel Fabrication segments are generating returns that appear to be higher than the cost of funds.  While the Metal recycling segment has not performed, it may have contributed to the Steel segment performance.
  • SDI physical steel external shipment has grown at a CAGR of 7.4 % over the past 10 years compared to the USA steel consumption CAGR of 2.3 %. SDI has increased its market share of the USA market. 

At the current market price, it is obvious that SDI is not a value trap as it is not cheap from the perspective of the past 12 months' prices. What is the investment thesis then?
  • This is Group with a strong growth track record and a leadership team that is a good operator and capital allocator.
  • The Biden administration will unfold an economic stimulus plan that will spur the demand for steel. I expect the trade protection measures to continue to provide import replacement opportunities. 

The main investment risk at the current price is that even for a 7% margin of safety, you have to assume that SDI can grow according to the long-run US GDP nominal growth rate.

However, I believe that SDI will report a declining profit in 2021/22 with the opening of the new mill.  I do expect the market to have a knee-jerk reaction that will provide you with a better buying opportunity.

The table below lists some resources to get alternative views of the value of SDI so that you can form your own view.

No

Resources based on 1st Page of Google Search

Remarks/types of analysis

 

1

Yahoo Finance

 

Multiples, Analysts estimates

2

Simply Wall Street

 

DCF valuation

3

Morningstar

 

Financial, Multiples

4

Y Charts

 

Multiples, Technical

5

Seeking Alpha

 

Analysis, Ratings, Financials

6

Investors Observer

 

Analysis, Financials

7

Guru Focus

 

Analysis, Financials

8

Wall Street Journal


Ratings, Financials


Is Steel Dynamics a reverse value trap?


New Toyo International

New Toyo International Holdings Ltd is a specialty materials packaging group listed on the Singapore Stock Exchange (SGX).
  • New Toyo is undergoing a turnaround. Part of the losses in the past few years was due to the impairment and retrenchment costs.
  • The packaging printing industry is not a sunset industry and globally the market is projected to grow at 4.7 % CAGR till 2024. This would be positive for the New Toyo turnaround plan.
  • The Group has ceased and restructured the loss-making operations and has seen the first signs of improvement in the 1H 2020 results. The challenge for New Toyo is venturing into new areas for any quantum leap.

However, there is ample margin of safety at the current price when compared to the Asset Value and Optimistic Earning Power Value. The conclusion is that New Toyo is not a value trap. This is because
  • I do not expect further impairment of PPE.
  • The current businesses have the potential to deliver a steady return.

However, there are some concerns so that New Toyo may be a cigar-butt type opportunity. The table below lists some resources to get alternative views of the value of New Toyo so that you can form your own view.

No

Resources based on the 1st Page of Google Search

Remarks/types of analysis

 

1

Infront


Financial ratios, and Multiples

2

Simply Wall Street


DCF valuation

3

Share Investor

 

Financials, Share price

4

Morningstar

 

Financials, Multiples

5

Stockopedia

 

Financials, Multiples

6

Financial Times

 

Financials, Share price

7

Wall Street Journal

 

Ratings, Financials


Is New Toyo International a value trap?


Wing Tai

Wing Tai  Holdings is a leading Singapore property and lifestyle retailing group with 3 main business segments:
  • Property Development with both residential and commercial properties.  Current projects are in Singapore and Malaysia.
  • Property Investments with serviced residences, office buildings, data centres, and hotels. These were developed across several geographical locations.
  • Lifestyle Retail. The Group has many branded stores in Singapore and Malaysia with many lifestyle brands as Uniqlo, Topman, and Dorothy Perkins.

Wing Tai is undergoing a turnaround with a past 3 years average returns of 3 % compared to the 3 years average return of 9 % a decade ago. 

Part of the losses in the past few years was due to the fair value loss from investment properties. Another part is due to the slowdown in the property development activities.

As any impairment of the investment properties in Hong Kong will be about 8% of the Total Assets, I would conclude that Wing Tai is not a value trap.

For a long-term value investor, there would be enough margin of safety for any investment in Wing Tai. 
  • The Group is financially strong and will be able to meet the challenges of a prolonged soft property market. 
  • Its operations have been diversified to several countries and have recent expansions to new markets (eg Japan, Australia)

The current market price is more than a 50% discount to the Book Value, the normal Earning Power Value, and the Look Thru Earning Power Value.  

The table below lists some resources to get alternative views of the value of Wing Tai so that you can form your own view. 

No

Resources based on the 1st Page of Google Search

Remarks/types of analysis

 

1

Yahoo Finance


Financial ratios, and Multiples

2

Share Investor


Financials, Share price

3

Simply Wall Street

 

DCF valuation

4

Stockopedia

 

Financials, Multiples

5

Morningstar

 

Financials, Multiples

6

CGS CIMB

 

Analyst report

7

Nikkei Asia

 

Financials


Is Wing Tai a value trap?


Boise Cascade

Boise Cascade (BCC) is a US NYSE listed company in the Lumber & Wood Production Industry that I classify as a good company.

It is financially strong with the industry average debt to capital ratio while having a higher than industry cash position. Revenue is trending up through a combination of organic growth and M&A exercises.

Management has been able to perform better than its peers from an operational perspective. However, there are issues with capital allocation. Over the past 8 years, the Wood Products segment investment has been doubled the segment operating income for the same period.

At the current price, BCC is overpriced. The investment thesis is that while waiting for the price to decline to below the EPV level, BCC must also improve the business economics.  Otherwise, there is no margin of safety at this level. 

This requires both a change in the capital allocation approach as well as improvements in the returns. Or else it could be a potential value trap.

The table below lists some resources to get alternative views of the value of BCC so that you can form your own view. 


No

Resources based on the 1st Page of Google Search

Remarks/types of analysis

 

1

Morningstar


Financials, Multiples

2

Yahoo Finance


Financial ratios, Multiples

3

Macroaxis


DCF valuation

4

YCharts

 

Technical

5

Simply Wall Street

 

DCF Valuation

6

Forbes


Multiples

7

CSI Market


Multiples


Is Boise Cascade a growth stock or a value stock?


END



Investment books that I have read.

Books


Comments




A must-read book for value investors as it shows you how your competition thinks. This is the go-to book for the Efficient Market school to challenge value investing. 

 

 

 

You need to understand the quality of a company's earnings before you use the numbers for your valuation.  This book will teach you what to look for.



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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.




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