First of all, we would like to wish everyone a Happy New Year and do well in investment. On this new year, we would like to setup some virtual portfolios to experiment with several investment strategies and ideas. We are strong believers of Fundamental analysis and Value investing. Our stock selection is based on 3 quantitative criteria: company’s fundamental, cash generation capability, and Margin of Safety. We prefer company with good fundamental that has low/no debt, reasonable profit margin, and also good management efficiency based on ROIC. Secondly, we believe that the ultimate goal of a business is to earn money from its operation, which means profitable business should be able to generate cash for the company. Finally, we believe that mistakes are inevitable in the investment world, hence, we would like to have sufficient Margin of Safety to protect us against the downside of an investment.
Other than investing approach, the portfolio management plays significant role in the real investment world. Therefore, in 2017, we would like to experiment between two distinct portfolio management: Active and Passive investing approach, to find out how much will it affect the performance of the portfolio.
Both portfolios start with the same point as below
• Having initial capital of RM 100k, equally distributed across 10 same stocks as starting.
• Stock selection is based on quantitative approach (Financial Analysis)
• Aims to beat the market by at least 10%
• Most importantly, they do not involve any buy/sell call and any real money.
Our idea is that value investing portfolio can be managed differently, i.e. Actively managed & Passively managed.
Active Portfolio – requires investors to spend more time in reviewing and seeking for better potentials to maximize the returns. Therefore, in managing our Active Portfolio, even though started with the same 10 stocks, the list of stocks are subject to change as we review the portfolio and identify better opportunities over time.
Passive Portfolio – requires lesser management to maximize returns. It doesn’t sound intuitively right but this portfolio was constructed on the belief that the less you do, the less mistakes you could make, as frequent investment decisions make us exposed to emotional traps. In our Passive Portfolio, the 10 stocks will remain the same over time.
The best way to describe the idea of this experiment is with the following scenario. For instance, there is a stock invested by both active and passive portfolio managers at the same time. Given the certain holding period of time, the stock price has gone up to its fair value. Active portfolio manager will think of selling off the stock, and looking for next investing idea to reinvest the profits. As for the passive one, he/she will take into consideration of the dividend yield over his/her buy in capital, and decided to hold on to the stock for its passive dividend income.
We do believe both approaches have their own pros and cons. After all, we can’t skip the effort of doing our own homework before investing our hard earned money. Last but not least, we hope everyone including ourselves are able to learn something from the virtual portfolios.
Top 10 Stockpicks (Quantitative)
Here are the brief introduction of the 10 companies that we have selected to form our initial portfolios:
JAYCORP (EV/EBIT 6.87, ROIC 17.2%, CROIC 21.2%)
Engaged in various business segments, which include: rubberwood furniture manufacturing, carton packaging, rubberwood processing, trading and others. The company has shown drastic improvement in profit this year. The generosity of the company on paying out high dividend has making it an attractive candidate for passive investment. Based on current status of the company, we selected it to be included in our experimental portfolio.
TGUAN (EV/EBIT 5.2, ROIC 19.3%, CROIC 16.8%)
Engaged in manufacturing of F&B, plastic & paper products, machinery and consumable products. The operation of the company is mainly based in China and Malaysia. The company has been showing steady growth in their operation with healthy level of leverage. Current EV/EBIT at 5.2 with ROIC of 19.3% has caught our eyes to include it in our experimental portfolio.
OKA (EV/EBIT 5.2, ROIC 18%, CROIC 23.8%)
A company that engaged in manufacturing and supplying of precast concrete products and ready-mixed concrete. Operating in cyclical environment that strongly influenced by construction sector, the company has always kept themselves to no/low debt level. Consistent generation of cash from its operation has steadily increased the cash in hand of the company throughout the years. The dividend payout of the company has increased, which makes it a good candidate for passive investing.
LIIHEN (EV/EBIT 4.9, ROIC 42%, CROIC 26%)
Johor based manufacturer of rubber wood and timber furnitures. In 2015, 78% of its revenue is derived from exports of its furniture products to US. Before the drastic strengthening of USD, the company has been keeping itself at net cash position with healthy cash flow. As compared to other public listed furniture companies in Malaysia, LIIHEN has always being generous in paying out dividends to the shareholders for the past years.
MFCB (EV/EBIT 4.2, ROIC 33.4%, CROIC 26.6%)
Engaged in 5 business segments: power, property, limestone, engineering and investment holding. The company has been maintaining its net cash position for the past 5 years with high CROIC. Current EV/EBIT at 4.2 with high ROIC at 33% has made us to choose it to be part of our experimental portfolio.
HEVEA (EV/EBIT 6.4, ROIC 26.3%, CROIC 28.7%)
A particleboard and ready-to-assemble (RTA) furniture manufacturing company. The company mainly produces low formaldehyde emission particleboard and RTA furniture. Most of the company’s sales are derived from exports to Japan, China, and other foreign countries. As a beneficiary of strong USD/MYR, the company has greatly reduced its debts during this period, and turned into net cash position.
FLBHD (EV/EBIT 2.9, ROIC 31.6%, CROIC 14.8%)
A plywood, veneer and Laminated Veneer Lumber (LVL) manufacturer based in Sabah. Most of the company’s revenue is derived from exports of their products to overseas. Its plywood products are used for Recreational Vehicle (RV) in US. The company has faced sell down from the market, mainly due to the stronger RM against USD in the first half of 2016 and also losing the benefits from double tax deduction, which led to significant reduction in their net profit. Worth to notice that, the company has been in net cash and debt free position for the past 5 years, with healthy cash flow.
CSCSTEL (EV/EBIT 5.11, ROIC 18.2%, CROIC 17%)
A cold rolled and galvanised steel products manufacturer. Its products ranged from hot-rolled pickled and oiled steels, cold-rolled steels, hot-dipped galvanized steels and pre-painted galvanized steels (PPGIs). Since the business is heavily depending on steel commodity, due to the recent steel price movement, the company is able to turnaround in 2015 and improved its net profit by 140% (YoY) to 62.5 mil (TTM) in 2016. Over the years, the company is at net cash position and debt free despite of the cyclical nature of the business .
FAVCO (EV/EBIT 2.42, ROIC 19.7%, CROIC 12.8%)
A crane company, which involves designing, manufacturing, supplying, servicing, trading and leasing. Four main crane products of the company are: tower cranes, offshore cranes, crawler cranes and wharf cranes. Their business activities are mostly involved in construction projects related high rise structures, O&G offshore platforms, shipyards, etc. In the recent years, the downturn of O&G industry has given significant impact on the company’s crane business, which makes it undeniable a Magic Formula candidate. The company has been in net cash position and healthy cash flow for the past 5 years.
HEXZA (EV/EBIT 5, ROIC 26.4%, CROIC 37.5%)
A company that operates in 3 business segments: investment holding, manufacturing and sales of formaldehyde based adhesives and resins, and others segments in property developments and trading. Over the past 5 years, the company has been keeping itself at low and zero borrowings, with healthy cash generation from operation. Dividend yield at current price has made the company an attractive candidate for dividend income investing. Hence, it is the last candidate to be included in our initial portfolios.
Both portfolios are created according to the closing price as in 30/12/2016, the last trading day of this year.