Thursday, June 25, 2009

Analysing Companies Before Investing

In investing; the three most fundamental aspects are research, research and research! says Securities Industry Development Corp.

IN REAL estate, the three most important factors are location, location and location whereas in investing; the three most fundamental aspects are research, research and research!

In a bearish market, the stock prices for many fundamentally good companies can drop to a very low level. It is during times like these that investors should search for good quality companies that can be invested in for the long-term.

As an investor, one of the most critical steps in identifying good stocks is the understanding of the business. The ever famous investment guru, Warren Buffett has clearly stated that there is no fundamental difference between buying a business and buying shares in the business. In fact, there is a clear link between the two as "if a business does well, the stock eventually follows". These were Buffett's words.

In keeping in tune with Buffett's sentiments, investors need to make stock purchasing decisions by approaching it from the perspective of a business person. You need to have the same mindset as a business person when it comes to evaluating stocks.

Here are some guides on what to look for in a business:

In analysing a business, there are a number of key factors that you need to scrutinise and these can be categorised into two main areas; the company itself and the people who run the company. (Remember,the secret in business today is not about money, technology or ideas alone but its people - really good people!) .

The company

* Product: Single or diversified?
You need to know what a company's business is if you intend to invest in that company. Knowledge of what the company produces is crucial in giving investors an insight into the company's potential and ability to perform. If a company relies purely on a single or very narrow range of products, then you have to evaluate the product carefully in terms of its market dominance, economic characteristics, cost of production and entry barriers. A company focusing on a single product has the ability to tap on its strength. However, despite this edge that such companies have, there is a downside as you will have to analyse whether the product is positioned strongly enough in the market to fend off competition. The risk that companies focused on a single product have to face comes from competitors. The possibility of other products taking over its market position is extremely high, especially in the realm of fast changing technology or fashionable items.

As an investor who intends to avoid such risk, companies with diversified products and long history of successes will be more favourable. Such companies will have the ability to sustain themselves despite the presence of substitutes for one or a few of their products. The availability of substitute goods introduced by competitors may take away a portion of the company's share in the market, but it will have other products that are still strongly positioned in the market to keep itself steady.

A company's future prospect is also highly dependent on the type of products it has. If a company provides a product that is an essential item, one that is needed during good or bad times and it is highly differentiated, then its future prospect is most promising. Such companies will thrive on the fact that substitutes are not readily available, thus not jeapordising their market share. This type of business usually has the power to command the price in the market even when the demand is flat.

* Operating history: New or seasoned?
"Wisdom comes with age". While this is commonly said about people, the same can apply to a business as well.

Companies that have been around for years will be able to provide you with a track record of their performance. With that, you can zoom in to companies that have managed to produce consistent results and those that have weathered tough economic situations. Companies such as these coupled with the ability to manage cost effectively are companies that come with lower risk as compared to their younger counterparts; companies that are still new or have been experiencing changes in business directions and are trying to turn around.

* Ability to grow: Organic or stagnant?
Ability to grow: Organic or It is when the economic situation is weak that investors get the chance to judge whether a company is a growth company or not. Normally, if a company is able to maintain or grow its sales during a weak economic situation, it will very likely be able to grow its businesses even further during an economic recovery. In fact, if a business has been able to grow organically, through innovative products and sensible business strategy, then it has shown that the business itself has the room for future growth. However, if the growth has been achieved through mergers and acquisition, then you will have to be careful as historically, the success rate in marrying two companies with different cultures has been poor. Ideally, you best look out for a company that is able to grow organically and at the same time make strategic acquisitions to strengthen its market position and product offerings.

The people behind the company

* Ability to act in shareholders' interest
A successful company inevitably depends on its management team. Ideally, the management must be able to make strategic decisions in increasing shareholders' value. Their ability is reflected in their track records, performance in their previous companies or investment decisions being made in the current company. When companies retain earnings for the purpose of re-investment, the type of projects they invest monies in and the return on such investments will tell you whether they are putting priority on shareholders' interests or not.

Decisions to hit unrealistic short-term earnings targets might please the market and make the current management team look good, but, in the long-run, this move may hurt the company's prospects, which will in turn affect shareholders.

* Ability to control cost
Exercising tight cost control at all times is something that management needs to practice. However, members of management sometimes have the tendency to build up costs over time. These sometimes fly out of control, and will result in them taking a one-time action to reorganise and restructure. This action will also mean that the shareholders will have to suffer exceptional asset write-offs and severance costs due to redundancies, which might not have happened if careful planning on hiring and capital expenditure control were exercised at all times.

* Corporate governance and uncompromised integrity
A management team with uncompromised integrity means that you can be sure that the management team is always acting in shareholders' interest and they will not be breaking any codes just to satisfy their own interests. Management who share these values are highly valuable to a business and they are the ones you want managing the company you're interested in.

At the end of the day, the results of the factors that have been mentioned above will be reflected in the company's financial performance, which matters most to all investors. Knowing the business will help you to understand the financials better when you move on to the next step of valuing the stock itself.

Tuesday, June 23, 2009

Malaysian Stocks To Start 'Catching Up'

MALAYSIAN stocks, beaten by regional peers this year, will start “catching up” as the exchange introduces a new benchmark index and the government eases curbs on foreign investment, CIMB Investment Bank Bhd said.

“Malaysia will not lag behind for long,” Terence Wong, an analyst at CIMB, said in the report. “For investors that have missed out on the big gains made by higher-beta regional markets such as Hong Kong and Singapore, Malaysia provides a second opportunity to get exposure to the regional rebound.” Beta is an indicator of volatility.

The Kuala Lumpur Composite Index has risen 17 per cent this year, trailing behind Southeast Asian benchmark indexes. Prime Minister Datuk Seri Najib Razak, who took office on April 3, announced stimulus plans valued at RM67 billion (US$19 billion) to restore economic growth as the nation nears its first recession in a decade.

Investors should buy so-called “high beta bombed-out sectors” such as construction, property and building materials and oil and gas, the report said. Gaming and rubber glove stocks are also “still attractive,” it said.

Malaysia’s stock exchange said on June 16 that Najib will make “significant announcements” related to his plans to ease restrictions on foreign investment at an annual investor conference on June 30 and July 1.

On July 6, Bursa Malaysia Bhd, the country’s stock exchange manager, will cut the number of companies in its Kuala Lumpur Composite Index to 30 from 102, in the measure’s biggest overhaul aimed at removing the smallest and most tightly held companies to attract investors.

The FTSE Bursa Malaysia KLCI will comprise the largest companies by market value with at least a 15 per cent free float, or the portion of shares publicly available for trading.

Funds in Singapore, Hong Kong and Europe are “mostly underweighted in Malaysia,” Wong said. “Malaysia’s status as a laggard market that will catch up with regional peers in this rally as investors ‘rediscover it’ has been reinforced,” Wong said. -- Bloomberg

Monday, June 08, 2009

Buying Momentum To Pick Up

Investors can expect buying momentum to pick up significantly in the weeks ahead, with oil & gas stocks the picks, says a research head

Bullish external leads - from China's manufacturing expansion for a third straight month to Australia's better-than-expected economic growth and surge in oil prices towards the US$70 a barrel mark - helped lift the local stock market to settle at a nine-month high last week.

The Kuala Lumpur Composite Index (KLCI) surged 31.4 points, or 3 per cent, last week to close at 1,075.5, the highest since September 9 last year, with strong gains in Maybank (+7.08 points), Genting Bhd (+3.71), BCHB (+2.61), Lafarge Cement (+2.47) and Axiata (+1.69), representing more than half of the index's rise. Average daily trading volume and value improved to 1.78 billion shares worth RM1.59 billion respectively, compared with 1.58 billion shares worth RM1.61 billion in the previous week.

Signs of waning pessimism are flashing across global economies and different asset classes. Key global and regional currencies have risen to near pre-crisis levels as funds move out of dollar-based assets to other high yielding investments. Equities and commodities in emerging markets, including Malaysia, are the beneficiaries. The impact from these external factors explains why the KLCI performed well last week during what is usually a quiet period.

On a positive note, last week saw many important economic indicators in the US signalling recessionary pressures are abating and a recovery is in motion, albeit at a slower pace, after the massive government spending, liquidity injection and monetary loosening. Personal income and personal spending rose more than expected, core inflation remained low at 0.3 per cent to accommodate prolonged monetary loosening, ISM manufacturing rose more than expected, pending home sales, construction spending and vehicle sales grew beyond expectations.

US job losses in May came in less than expected at 345,000 against a projected 520,000 and more than half the peak of 741,000 in January. Although the unemployment rate stood at 9.4 per cent, higher than the average forecast of 9.2 per cent, this lagging indicator is expected to peak above 10 per cent before trending down next year as economic recovery takes hold. US consumers are expected to loosen their purse strings as confidence improves although the latest report shows consumer credit fell at a 7.4 per cent annual rate.

Locally, the measures taken by the government so far are indicative of a strong resolve to break away from policies that led to inefficient use of resources and were stumbling blocks to achieving the country's long-term growth potential. The attempt to devise a new economic growth model that relies on high value-added products and services is positive.

On the corporate side, the recently concluded first-quarter 2009 earnings season showed a potential reversal in earnings momentum after four consecutive quarters of quarter-on-quarter contraction in earnings. Excluding MAS, net profit grew by 3 per cent quarter-on-quarter and cost pressure has abated with operating margin started trending upwards after three consecutive quarters of decline. These positive signs are expected to be more prevalent in the second half of 2009 and next year, lending credence to an earnings recovery story as indexed earnings are expected to grow by 15.1 per cent in 2010 after contracting by 6.4 per cent this year.

Thus, expect the huge liquidity and positive momentum on account of improving external economic climate, especially in the US, and strengthening corporate earnings to drive the KLCI to hit 1,200 by year-end based on a three-year average PER of 15.4x. Technically, do not discount the possibilities of it testing the 1997 high of 1,278.9.

Investors are advised to increase their exposure to oil and gas, construction, building material, gaming, infrastructure and high beta stocks to ride on the upside potential.

Technical outlook
The local stock market coat-tailed sharper rallies in the region last Monday after manufacturing in China surged for a third consecutive month in May, fuelling hopes that the worst of the global recession is over. The KLCI rose from an opening low of 1,047.62 to break out and close above 1,060 on that day. However, stocks gave back early gains the next day, as North Korea's plan to fire more medium-range missiles rattled investors. Consequently, the index dipped from a fresh eight-month high of 1,072.07.

The market extended losses mid-week, as further profit-taking offset the firm showing in the region on the back of a rebound in Australia's economic growth and stronger US home re-sales data, forcing the KLCI to close at the day's low of 1,055.40 on Wednesday. Nonetheless, buyers returned the next day to lift the index despite weaker regional markets. The local market ended the week on a high note after an overnight rebound on Wall Street.

The daily slow stochastics indicator for the KLCI is inching deeper into the overbought region following last Friday's sharp rally (Chart 1), but the weekly indicator hooked up and is set to trigger a buy signal at the extended bullish zone. The 14-day Relative Strength Index (RSI) meanwhile has just crossed above the bearish divergence downtrend line, which is a bullish breakout signal. The 14-week RSI however is just below the 70-point mark and is poised to rise into the overbought zone.

The daily Moving Average Convergence Divergence (MACD) trend indicator, however, has recovered with a hook-up to indicate a return in bullish momentum, while the bullish expansion on the weekly MACD signal line suggests a stronger uptrend ahead. Moreover, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator have again expanded positively, with the ADX line flashing a bullish reading of 41.1.

The bullish breakout above the bearish divergence declining line on the 14-day RSI last Friday is key to promote further upside momentum on the KLCI this week. More bullish signals from daily and weekly trend indicators will offset short-term overbought signals. Hence, investors can expect buying momentum to pick up significantly in the weeks ahead.

Sector-wise, our top pick remains the oil & gas space, with stocks such as Petra Perdana, SapuraCrest Dialog, Kencana, KNM, Perisai, Tanjung Offshore and Scomi Group anticipated to surge further and please investors who are overweight this sector. The key reason for this is the strong uptrend in crude oil prices. Plantation stocks such as IOI Corp and KLK should also perform as CPO prices play catch-up to crude oil given the more attractive and cheaper biodiesel alternative fuel.

As for the KLCI this week, a convincing breakout above 1,078, the 38.2 per cent Fibonacci Retracement (FR) of the bear run from the all-time high of 1,525 to the pivot low of 801, will fuel upside towards next resistance from 1,100, which is purely psychological. Looking ahead, even higher levels can be challenged in coming weeks, with 1,138, the 2.236X extension of wave A, as next upside target on a breakout above 1,100. On the downside, immediate support is revised higher to 1,065, with 1,055 and 1,045 acting as stronger support platforms.

Source: Business Times

KLCI: V Shape or U Shape?

KLCI has been uptrend since early Mar'09 and it continous to show good performance and indeed did not dissappointed me trying to hit my 1st target at 1100 points (Refer Dec'08 Post). Base on the current trend I can said the KLCI has potential to forward to 1200-1250 level. BUT once reaching this level I can said we must confirm what recovery shape does KLCI apply. For V shape recovery the correction should not go below 1160 and if correction breakdown from 1160 it has potential to reach below 1000 points which will be in U shape category and the KLCI will trading range bound within the specified range and the uptrend momentum will be slow! So let us wait and see what type of shape our KLCI will be heading. :-) Happy Trading!

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