Taking stock in a volatile world

Taking stock in a volatile world

Volatility seems to be the name of the game lately, with one event after another shaking markets across the world.

Take Brexit, which shook global markets last month, when the prospect of Britain leaving the European Union suddenly became a reality.

The dust has settled for now and markets have recovered - London's FTSE 100 has gained about 10 per cent since the vote on June 23, while the Dow Jones Industrial Average is up around 8 per cent - but even experts are doubtful of where they are headed next.

And stocks can be affected by anything and almost everything: the augmented-reality mobile game Pokemon Go has helped Nintendo's share price more than double in recent weeks.

In his annual letter to the shareholders of his holding company Berkshire Hathaway last year, investor Warren Buffett raised a point about volatility: "Stock prices will always be far more volatile than cash-equivalent holdings.

"Over the long term, however, currency-denominated instruments are riskier investments - far riskier investments - than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions."

He noted that this point has not been taught in business schools, where volatility is almost always used as a proxy for risk.

"Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk."

But in times of volatility, what stock would you pick?

You often hear of people choosing stocks by size - of big firms that have a large market capitalisation and dividends, or penny stocks that experience extreme swings in prices.

Stocks can also be identified by style - value, income and growth. Frequent traders and regular investors share their metrics and methods for these three common styles.


The Financial Times (FT) describes a value stock as one that seems cheap in relation to the company's profits, earnings and so on.

Ms Teh Hooi Ling, head of research at fund manager Aggregate Asset Management, has said that value means paying just 60 cents for something that is worth $1.

Her firm looks at fundamental data about a company and the tangible assets within it, such as cash, real estate, machinery or inventory.

It also seeks firms with a long track record of paying consistent dividends. Those with high debt levels are a no-no.

Businessman and remisier Charles Chua identifies value stocks as those that nobody wants to buy out of fear because of a market rut. He notes the rut can be across the board or industry-specific.

Mr Chua also looks for firms that have been listed for at least a decade and which are leaders or the second in line in that industry. And he prefers that they have an essential product or service.

An example of a value stock with those qualities that he has identified and bought is conglomerate and rig builder Keppel Corp.

Hurt by oil prices in recent years, Keppel Corp has dropped from a high of about $10 to $5.45 in a five-year period, but investors like Mr Chua see value in the firm.

"I bought into Keppel Corp in stages for the value in the last 2.5 months and the buying is still in progress," he notes.

Mr David Kuo, Singapore chief executive of The Motley Fool investment advice portal, has a different way of looking at value stocks.

His portfolio goes like this: 70 per cent income stocks, 20 per cent growth stocks and 10 per cent speculative stocks, which he also considers as value stocks.

Mr Kuo, who has written regular columns on stocks and investing for The Straits Times, explains: "I group value and speculative in the same category. I see value shares as those that have been unappreciated by the market. The speculation is that they may continue to be unappreciated."

He looks at whether the stock has a valuation below the market average, a dividend yield around the market average, a price-to-book ratio of less than one and low or no debt.

He notes that banks are somewhat speculative because their fortunes hinge on their ability to cope with a low-interest-rate world.

This is also the case for oil companies as their fortunes depend on the price of crude oil, over which they have no control.


The FT's definition is: "A stock that is expected to rise in price over time, outperforming the overall market, because of future earnings gains or due to other factors, such as a rising trend in the market value of its products."

Trading trainer Ronald K, who prefers to use stock charts as he trades, says they are stocks where the price remains relatively stable despite market downturns.

"A potential growth stock can prove to be resilient during unfavourable market conditions, with minimal correction, and subsequently continues to appreciate," he adds.

He feels that such stocks can reward investors with generous capital appreciation in the same timeframe, compared with under-valued and income-yielding stocks.

"It depends on the individual investor's investment portfolio objective of what he seeks to achieve. Personally, I am looking for a growth stock that provides capital appreciation as I have a keen eye for spotting such stocks."

The trainer says he has allocated 50 per cent of his funds to growth stocks and the rest to an undervalued stock.

He prefers to focus on only a few stocks at any given time as he is confident of his choices after spending four to six months researching the stocks he invests in.

The company may not necessarily declare a dividend or bonus but the reward from its capital gain can be significant as "the premium outweighs the risk within a shorter period of time", he notes, adding that the company often would have a unique business model and be in a unique sector.

Such stocks can remain "hidden" as they are overlooked by the public, but their resilience offers investors security, especially during market downturns.

He names Catalist-listed content producer mm2 Asia and seafood restaurant operator Jumbo Group as examples of growth stocks that have risen exponentially since their initial public offerings last year.

Investor Samuel Wong's growth stocks are mainly in technology.

One way he identifies them is by using the enterprise-value-to-revenue multiple - referring to comparing a firm's enterprise value with its turnover.

Mr Wong says: "For high-growth stocks without much profits, the multiple depends on the industry.

The "software as a service" companies, as they are called, have an average multiple around eight. An example of such a firm is cloud computing business Salesforce, which has a multiple of six.

He also studies revenue growth, and says that for mid- to large-cap stocks, he looks for growth above the average of 15 to 20 per cent. Salesforce has a growth of about 20 to 25 per cent, he notes.

Operating cash flow is also important, and it should grow at the same rate as revenue, or even higher.

He adds that if cash flow growth is lower than revenue growth, it means the quality of the company's new customers is weaker, which reflects a weaker quality of earnings.

Mr Wong bought LinkedIn, which had a sales growth of more than 20 per cent, after it plunged from US$240 to US$110.

"It was quite an attractive investment, and I made a decent return on it after Microsoft offered to buy it out in June and I sold it at US$194."


These are shares that pay high dividends on a consistent basis, said the FT.

Mr Chua's criteria include stocks that give at least a 6 to 8 per cent yield a year, that have an essential product or service and a slight capital appreciation of about 5 to 10 per cent year on year.

He has picked Keppel Infrastructure Trust (KIT), a stock he has held since June 2014.

Business trusts like KIT and real estate investment trusts (Reits) tend to be popular income stocks.

Reits must distribute 90 per cent of taxable income to qualify for tax breaks, and so provide the stability of a regular income.

SGX My Gateway, Singapore Exchange's investor education portal, said: "A Reit allows individual investors to access real property assets and share the benefits and risks of owning a portfolio of properties, which typically distributes income at regular intervals."

Mr Kuo says Reits are good income shares in the Singapore market. "Look for those with stable occupancy if they are commercial Reits, and high footfall if they are retail Reits.

"Over the last couple of years, my portfolio of Singapore Reits has delivered an annual total return of around 4 per cent. The total return includes reinvested dividends and capital growth."

However, Mr K notes that investing in these could mean investors are limited to a minimal percentage gain annually, and are still exposed to the risks of the overall market sentiment.

"Also, the dividends declared are still subjected to the profitability and discretion of the company," he says.

Mr Wong offers an alternative to income stocks for flexibility. He uses options to create a constant flow of income via a strategy known commonly as a "covered call".

He says this involves taking a long position in a stock and writing - selling - call options, which result in an increased constant yield of 2 to 5 per cent, and "a decreased upside potential on stocks".

Mr Kuo adds: "In theory, younger investors who have a longer investing horizon might be able to tolerate a higher proportion of growth stocks. Older investors might prefer more income shares.

"But the best test is the 'sleep test'. If you can't sleep at night because you are worrying about your portfolio, then consider changing the portfolio mix or maybe your mattress."

This article was first published on July 24, 2016.
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