Reminiscence of a Thai stock Value Investor.

Most all of you answered that you get the alert mails correctly. Mails sent out when a new member article is posted or when there is a new comment is posted in the member forum.  Oddly so 3 of you stated you do not get these?  No sure why as it seems to be working for the others.   Perhaps they end up in your spam folder?  I have asked my IT guy again on this but no answer received so far.

Sometimes I make a change at one of the static pages here and oddly so this prompts a mail to all of you with a link to some arbitrary old article.  Not sure why this is so?  Please just take this as a total random article pick from the past which just might be of interest around a “stroll down memory lane” on something of passing interest looking back. Click, see and delete.

Most all of you of course are interested in new actionable stock ideas.  I understand and strive for that as well.  As one member wrote back:

“Investing is more than picking stocks. The thought behind every selection require broad knowledge and insight. Any things you come across in your works or leisure can be shared with members.”

There are lots of investor traps out there.  Just throwing out ideas for the purpose of generating tips is not helpful.  Many years ago when I was a broker a client once asked me for more ideas, I tried hard and came up with a few more suggestions.  But later, none did as well as my first tranche.  Surely, I did not do him any favors just getting more ideas, for the sake of more names… 

Nobody has a monopoly on good ideas which is why its silly for even experienced & seasoned investors in not being a member here.   It is also equally silly for members not to share their thought and research into a stock they like –ideas not mentioned here.  Others of us may see something wrong or good about it, or point out something nobody thought of yet.  Nobody is as smart as all of us!   At the very least more investors may become interested around and it may prompt me to do my own checking.  Like AIT (65) mentioned by a new member recently which evidently did not catch the interest of others here?  Or similarly. TTW mentioned by the same person with his short ideas why he likes it.  Of course, I understand most members are busy with their own life and one key reason to be member here is to get ideas from here, sans plus.

Here are some thoughts to those whom invest for income as you are or nearing or already retired.  Income, income, income is the name of the game vs. capital appreciation, which is the secondary objective. But consider a stock which has a decent but not great current dividend income (like example DEMCO and some others), we must not only consider the current/present income -but the likelihood of higher/growing dividends in future years!   Too many novice investors only consider the current income but pay less attention if their investment has potential to raising dividend income down the road. The portfolio of Thai growth stocks I try to pick provide a decent current income along with a realistic probability of these growing over the coming years!  This is the difference as compared to a bond or property fund where the current income will just stay static, or near the same.  

So called fixed income investments do not provide any inflation hedge as the years go by. They are also risky in times of low interest rates.  It is so one key reason why retired investors should also select as part of their overall retirement investor strategy choices whose combined future dividends are likely higher then now.   Again, just as the example we all know well, consider DEMCO.  A strictly income oriented (retired) person may not pick this stock as the current and last year dividend income shows around 4% and less, or uninspiring.  Surely there are higher yielding choices around.  But in DEMCO’s and many other of my choices’ case the expected dividend increases to come in the years ahead, are rather impressive.  I can see its dividend being at or over 10% on current price of DEMCO 3.56,  by year end 2013.  And if we can find 7 different “DEMCO”’s, where the dividend is likely to rise over the next 2-3 years, you can be sitting on a diversified portfolio of current good and increasing yielding stocks!  In Thailand the current inflation rate is still still tame at around 3.5%, my long objective are stocks where future dividends beat the inflation rate. 

Hence the key is not just high current income, but the likelihood of these rising more over the near/medium/distant future.  Example, I don’t see the new Tesco-Lotus property fund (TLGF, 11.80) to have much higher market price or dividend potential, unless Thai interest rates drop more -which I doubt.  Property funds are a bit different then a bond, as their rental income can increase over time and so the dividend paid to unit holders.  But these are likely to be minor, barely keeping up with inflation.  Members should be reminded again that if/when interest rates increase here, there will be new headwind against all these. Continued Thai economic growth rates along with a global recovery now progressing will only lead to higher interest rates.

Retirement investing has to be more then just high current income. It has to offer some inflation hedge as well.  It has to offer good current dividend payments (say twice a year) and a chance, with a balanced portfolio, which will produce higher returns as the years goes by.  We are lucky in Thailand as on the SET/MAI we can find growth stocks with high dividends and growth rates!  The considerable drawback is lack of information by the brokers as noted along with business newspapers, not being much help in this.

A SET regulator (K. Chanitr) recently stated many growing Thai listed stocks pay-out too much in cash dividends and instead should be re-investing more for future growth.  I think this is an incorrect view -as if smaller companies did this, their present low stock valuation would drop even more. The real culprit is:  Thai growth stocks get an undeserving low p/e because both brokers, institutions, traders and the press mostly ignore these, strictly due to smaller market cap.  Larger market cap commands a tremendous and undeserved premium here which is mind boggling.

The cost of capital of a firm is very much determined by the valuation of its stock price.  Clear and present undervaluation of Thai growth stocks with smaller market cap’s is a huge and ongoing market inefficiency, a tragedy which some are now hopefully addressing?  More then a few increasingly realize this pricing in-efficiency, while devastating to capital formation, can be a hidden plus to us rational investors.  If the Thai stock market ever grows up and starts pricing companies as they should be  (i.e  no more p/e discounts on higher then average growth & dividend rate stocks), there will be a gradual but significant upward valuation in time.  And some companies’ stock prices will soar with higher market cap., fueling even higher p/e ratios.  Not so sure but maybe finally things are changing for the better on that.  The Thai Finance minister may be determined to do something about it? Then again he is a former SET president. Only time will tell.

When asking brokers here about the cheapness of Thai smaller cap growth stocks these just brush it off as “a Thai thing”.  Like, Thai food is spicy so it’s a culture thing.  Or they answer that is how “Thai’s want to play their market”, and so they keep up nurturing those through churning transactions.  The attitude is “give the customer what they want.. and fact is most want to trade”.   But they ignore the 99%, whom still don’t show up, nor invest in Thai stocks -for exactly all those silly entrenched industry reasons.  Its more then a Thai thing, it is a grave and ongoing financial pricing market inefficiency and when you understand economics this creates the trap/savings tragedy of poor savings intermediation.   As I have explained in the just previous article.  Its not a Thai thing, its a broker nurturing churning thing which has resulted in most Thai's not investing in their stock market and many foreigners being twice shy in doing so.

The mission here is to continue to be a group of alert and informed Thai stock investors which take advantage of those abnormalities and so, as shown since 1997, most of the time beat the SET averages -with lower then market volatility.  Had these abnormalities changed over the years there would be more members, but then again, there would be less good stocks to pick from.  If there were more members signing up here, I would be glad to full time visiting companies in Bangkok -and you all know I can find allot more good ideas!  Alas, so it is.

“A bargain which remains a bargain is no bargain”, this is the old investor warning on Wall Street.  But here this is a bit different, as a portfolio of stocks with high current yield high and increasing dividends, one can afford to await until the wakes up call.  And wake up these bargains often do, making up and more for the laggards.  I realize in times of market bullishness like just now this can be frustrating.

It will be interesting to watch and see and learn which will be the next to gets its wake up call?  (Like PYLON recently and many others did in the past).  While we can never know nor predict this (because the SET itself is so often irrational), we can own a few good ones, monitor them, and await until one soars. The more risky alternative on plowing most into one seemingly superior choice is yet another form of more risky/reward investing. Clearly that would be a venture investment, not a diversified portfolio strategy I must advocate here.

More active investors here should consider trading a stock they hold, after it wakes up.  If you own say a block of 400,000 shares, there is nothing wrong to try to trade a few times, say 40,000 shares on the way up. Sell on a surge and re-enter a lower buy limit order to try to get it back with a limit order.  My rule is don’t do this on the first price surge as there is likely more and if not, it often pays to just wait.  Also as mentioned often, I always view taking some money off the table, whenever you have a 50% profit.

One could say/ask: if a group of stocks will keep paying higher dividends over they years and overall, why take profits at all?  The reason is because markets are chaotic, often sentiment and speculative driven especially near a major price top!  This is also when trading volume soars which means it is never difficult/slow to sell out.  The rational value investor sells into the euphoric on overvaluation even at the risk on being early, just as he buys once under valued, over neglected high income stocks. 

It is very difficult to know what overvaluation is.  One has to compare it with now and likely in the future.  Example, why are Thai retail stocks p/e so pricey now, and for so long already?  With MAJOR now above 18, I would take some profits.  Surely they also have potential earning setbacks if anything happens to politics, royal succession or other unexpected domestic events.  Don't forget a good old fashion market correction often hits the best performers most.  I have at times been too early in selling out (but not with TICON, LVT, CRANE and others), but then again we here have a fairly good regular flow of new good ideas.  Just recently re-visiting SYNEX and also now CITY.

CITY (2.46), if you missed it on my first mention in the lounge, is a stock I like on the price correction since. This after its wake up call/surge to 2.76 a couple of weeks ago.  The company has reported two good quarterly earnings and if this continues, CITY is trading at a rather very low 2012 p/e ratio.  New investment and economic resurgence in Thailand this year is good for CITY!  The company, which has a very good dividend record, also owns a subsidiary which they plan to list in the market this year. So consider CITY my latest idea which I am adding to the model portfolio today.

The best gauge on success is if the industry p/e expanded while the companies earnings itself are growing.  The price of the stock is almost secondary -as that is made up by the follie of the market for which we have no control.   Like example cited, why does GUNKUL have such a higher valuation vs. DEMCO?  The best thing an analyst can deliver is to be near target on his/her future earnings estimates.  As in the longer term nothing like earnings drive stock prices and Thailand is no exception.  This is another reason one must take the risk and prudence in being a longer term investor which requires patience.  Patience is viewed as smart and wise when our stocks hold up better in a down market. It is often viewed with antsyness (ants in the pants) when stocks broadly move up as of late.

Still, we had at least one larger cap. big winner, (not to mention some property stock picks last year), MAJOR (18) which increased near 50% in value, dividend adjusted, since I first wrote it up here last January 17 2011.

Best Regards,

Paul A. Renaud.
www.thaistocks.com