Bargain deals in the Singapore stock market for value investors

A cursory glance at the Business Times, dated March 26, 2011, reveals some very interesting companies that are potentially going cheap.

The criteria for 'cheap' would be a low price earnings ratio (P/E) of say below 7 times coupled with a high dividend yield of say 7% or more.

A P/E of 7x would indicate an earnings power of 14% on invested capital.  We love to look at earnings power (EP) because as investors, in line with Warren Buffett's philosophy, we regard all of the companies' earnings as our earnings regardless of whether they retain it or distribute it in the form of dividends or share buy backs.

Sure beats the fixed deposit rate we get from a bamk, as well as the inflation rate of 3%.

And why we like dividend paying companies is because that is income for us without needing to create it artificially by selling a part of our stock holding while the market still pays us pennies on the dollar for it.

So, here we go:

• Chip Eng Seng - yield 8%, EP 35%
• BRC Asia - yield 8%, EP 22%
• Casa Holdings - yield 9%, EP 25%
• Elec & Eltek - yield 11.9%, EP 13%
• Cogent - yield 23%, EP 11%
• Food Junction - yield 24%, EP 10%
• Global Yellow Pages - yield 12%, EP 26%
• Dapai - yield 7%, EP 29%
• FSL Trust - yield 14%, EP 14%
• Macq Int Infra - yield 13%, EP 26%

This list can go on. It is easy for most investors to flip to the stock listings of Business Times to discover these gems. Of course, this is just the very first step in studying and filtering the companies we want to invest in based on other factors such as cash flow track record, debt levels and competitive advantages. Last but not the least, it is how well we simply know or like the company - its management, its culture, its products, and its customers. And even after this exhaustive sieving process, we thoroughly consider the entire portfolio as well as the needs and objectives of the investor i.e. a financial planning review before we decide how much to allocate in what securities and for how long.

The premise of this piece is simply 80/20. As with life itself, more than 80% of research, analysis and selection can be achieved by looking at less than 20% of the information. In my experience, it is often skewed as far as 95/5. This author can almost wager that a basket of stocks each bought into using equal dollar amount would yield handsome returns for the investor over a 5 plus year time horizon. Diversification is key as is holding power. Of course, there would be some lame ducks but even a few multi-baggers would make the portfolio highly profitable.

Dear investors, you don't need to put a person on the weighing scale to tell if she is fat. Let us go for the obviously attractive 'no brainers' that give us ample margin of safety without needing to split hairs in our analysis.

Cheapest Asian Markets - August 2010

According to information published in the Wall Street Journal dated 23 Aug, 2010, Indonesia is the cheapest market in Asia today. This is based on at least one commonly relied on indicator.

The price earnings ratio of an overall market is a good indicator of whether companies listed on that market are available at attractive valuations. A good way to read the price earnings ratio (P/E) is by "inverting" it. Example, if the price earnings ratio is 20 times, the earnings yield** is 100/20 = 5%.  The higher the earnings yield, the better.


With this rationale, it makes sense to buy into companies / markets* which have low P/E ratios and at the same time which are stable enough, transparent enough and have adequate growth potential.

The news is that the P/E ratio of the Indonesian market is just 6 (earnings yield is 13% and growing). 

And let us not forget that Indonesia

• is a fast growing emerging economy 
• has the 4th largest population in the world with a large consuming middle class
• has a GDP higher than China's
• has relatively young population with almost 50% under the age of 25
• has a labour cost significantly lower than China
• has vast mineral resources
• is a functioning democracy

The next few cheapest markets are Thailand (P/E 10) and Korea (P/E 11). 


Ask your financial adviser or give us a call to find out how to invest cost effectively, keeping your big financial picture in mind. 

* It makes sense to invest in markets especially at attractive valuations, because of the advantage of diversification and hence lowering of risk. Also when one invests in a market as a whole, there is usually a sizeable representation of blue chip large organizations. The best way to invest in a market for the retail investor is through funds that track the representative index for that market. It helps if the fund manager is able to sieve out the least attractive companies  from time to time and thus beat the index performance with a filtered portfolio. 

** Earnings yield is the amount a company earns (immaterial of whether it retains its earnings or distributes it to shareholders) for every dollar you invest in it. And usually one expects the company to have a growth in earnings year on year. Even if the earnings are not immediately distributed to shareholders in the form of dividends or share buybacks, the shareholders will gain by the increase in stock price due to growth in the company's net assets.  To that extent, it is often beneficial to the shareholders of the company to retain most of its earnings and invest it to grow in the business. This is true if the compounding growth rate of the company's investments is faster than the rate at which the shareholders would be able to grow the capital on their own.