We are in a bull market



We are in a BULL market - Just to clear the air, if there was ever any doubt.

FBM KLCI RETURNS

While the top 30 stocks on Bursa, the FBM KLCI only rose modestly by 7.6% through end-Dec 2016 to end-July 2017, the broader market (every company listed and tradable on Bursa Malaysia) increased by a simple average of 25%!

By definition, a bull market is a 20% gain in stock prices - which means that 2017 has been clearly, a year in favour for the bulls!

Back to our description of the FBM KLCI returns being just modest. Our analysis shows that as of July, the 7-month gain of 7.6% was the highest since 2009 (which registered a 7-month period gain of 34%, due to low-base effect of the 2008 crisis).

Over the past 3 years between 2014 and 2016, the 7-month period saw an average decline of -1.4% while the 3 years preceding that between 2011 and 2013, the average 7-month gain was 4.5%.

Compared to the last 6 years, the performance of the FBM KLCI has been pretty darn good so far in 2017. Interestingly, leading the gain of FBM KLCI stocks is CIMB Bank, which recorded a massive year-to-date gain of 47%! Who said investing in mega caps is a losing strategy?

BROADER MARKET RETURNS

Now about the broader market gains. We analysed the share price returns (excluding dividends) of 874 counters listed on Bursa, which excludes warrants and securities that were untraded or suspended (which we will now refer to as the “broader market”).

Our findings show that 75% or 658 securities posted positive year-to-date returns while 25% or 216 were losers. That is a 3:1 ratio of winners vs losers!

If you knew nothing about the stock market and simply chose 10 stocks to buy, chances are, more than 7 of those stocks would yield positive returns. With that kind of odds, who needs professional fund managers, analysts, stock gurus or even us? Just close your eyes and punt lah!

Considering that the broader market yielded an average return of 25%, where does that put you, your fund manager or your stock guru? Are you above or below the average?

We are just teasing. Heck, most people would be very happy with returns exceeding 10% if they were told they could achieve that at the start of the year.

TOP AND BOTTOM PERFORMERS

Looking at the top 10 performers, which posted returns of between 230% and 354%, the list seems to be dominated by two kinds of stocks – technology and others (we call them others because we are not sure what they do). And looking at the bottom 10 which lost its owners between -34% and -70%, the list is filled with oil & gas counters and of course, ‘others’.

You might notice that the data is positively skewed, i.e. winners have much % gains while losers have lower % declines. That is because investing in companies is asymmetrical to the upside, where gains can be unlimited while losses are limited to 100% (the caveat being margin financing).

AUGUST 2017 STRATEGY

We rationalise that 3 factors drove markets up in the past 7 months: a) increased liquidity, b) good earnings and c) expectations of upgrades in GDP forecasts.

And as we move into August, how will the markets fare? For starters, much of the gains in the stock market occurred in the beginning of the year and consolidated over the past 3 months. Hence, if you invested during the earnings reporting period of Feb 2017, your 6-month return would be 18.5% while if you invested in the earnings season of May, you would have gotten a flat performance of -0.01%.

Why? Because companies benefited from (a) and (c) in Feb 2017, i.e. higher liquidity and potential upgrades in forecasts. While in May 2017, there was an absence of new liquidity and potential upgrades. Market participants merely shuffled around existing liquidity from stock to stock.

We are just about to kick off another round of earning announcements in August 2017. What we foresee is a repeat of what happened in May 2017 - companies that announce good results will continue to see an inflow of liquidity at the expense of companies that perform badly.

Our strategy on how to navigate the month of August – buy companies that a) are laggards in terms of share price appreciation, b) likely to announce results that is better yoy and qoq, c) have decent valuations and d) may declare dividends that are higher than the previous FY. What we want, is to position ourselves to capture the market reaction to the positive earnings before it happens, as an entry point to hold into the coming months.

AUGUST 2017 STOCK PICK

Our first stock pick is TGUAN, a plastic packaging manufacturer. Our thesis on the stock is simple:

a) The stock has barely budged from the RM4.20 level, starting the year at RM4.23.

b) We see growing revenue from increased production capacity met by good demand resulting from domestic and global manufacturing, trade and consumption. The USD/MYR is 8% higher yoy for the Apr-June 2017 period, good for an exporting company and resin cost is lower by -4.7%qoq and -2.8%yoy, helping lower down its COGS and increase its gross profit margins.

c) Trailing PE valuation is in the sub 10 range or low-teens if fully diluted, pretty attractive for a growing company with expansion pipeline and lower than many of its peers.

d) The company announced a RM0.06 dividend last year in August, and we think that it could repeat a dividend payment this year at possible a higher rate, considering it raised its dividend payments consistently through the years.

We initiate a position in TGUAN at a cost price of RM4.20, purchasing 3,000 shares. Our total investment is RM12,600. We shall review the investment in about a month’s time.

Signing off,

KT

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