The bullishness of icapital.biz, must have caught many people by surprise. Well, as we have repeatedly advised, think through our analysis and see if it makes sense. This week, we start our explanation in our column on the NYSE, where we give our first reason why we think the US economy would not be another Japan. As we promised, there will be more analysis to come. Many of them will contain very original analysis and insight.
As we engage in the top-down, market-timing type of analysis, icapital.biz would also want to remind subscribers that investing is not buying the KLSE Composite Index. Investing is buying the shares of a company or investing in the business of a company. Even as we grapple with the many economic issues that would affect economies, industries and companies, one should not lose sight of this.
The current reporting season has been a delight to icapital.biz. In recent weeks, earnings of the many companies analysed by us have been heartening. PPB Group came out with an excellent set of interims. We expect its dividends to be raised. Sime Darby was more or less on the dot with its fiscal year 2002 performance. But it was our selections of the less well-known stocks that really shone.
Crest continued to show earnings growth. OYL's earnings for fiscal year 2002 were in line with our forecast, giving us confidence to retain our buy rating. Shell and Petronas Dagangan are performing according to expectations. Shell gained from firmer crude oil prices with Petronas Dagangan suffering. As we see oil prices holding up in the medium-term, we revised our rating on Petronas Dagangan last week. However, the 3 stocks that caught our eyes were Toyochem, Kris and Inti.
At the interim stage, Toyochem continued to deliver a marvellous performance. At this rate, its 2002 PE would be less than 7 times. Despite lower sales, Kris is delivering an excellent set of earnings -with a current PE of less than 7 times. The latest interim results of Inti show why it remains our top pick. Despite fears of too many colleges, Inti reported respectable growth in both sales and earnings.
Anthony Chai Wee Siong, a subscriber from Penang, wrote in on 18 Aug and requested that we write something about Hume Cemboard and Hume Industries. In answering him, we would take this opportunity to share with our subscribers some of our thoughts in selecting stocks.
When we select stocks, there are a number of factors that we take into account. i Capital actually spotted the attractions of Hume Cemboard when it was selling around RM3.00. As part of our analysis, we wrote to them, requesting for a meeting with their management, which they agreed to. We also requested a visit to their factories, which they did not agree to. Although not compulsory, visiting the plants helps in analysing a company. When they said no, we did not proceed with our analysis. The same thing happened with YLI. icapital.biz spotted its potential a long time ago (below RM1.00) but as they did not agree with our request for a plant visit, we could not proceed.
Just because a company allows plant visits does not mean that the company is suitable for investing. There are other factors involved. One is the transparency of the nature of the underlying business. The alert subscribers may notice some unique features about our stock selections. First, besides Loh & Loh, there are no construction or infrastructure stocks in our list, in stark contrast to the other analysts and advisers. What we are not able to figure about the construction or infrastructure companies is how they win contracts. Unlike selling a hamburger or selling a place in a college, construction or infrastructure contracts, by their nature, involve big sums of money, inevitably running into tens or hundreds or even thousands of millions. This makes the people involved in the construction or infrastructure business vulnerable to many kinds of monetary temptations. Does a company win the contracts because of political or other connections ? Were there unethical practises involved ? To be sure, there are certainly many decent construction or infrastructure companies around. It is just that we do not have the confidence to differentiate those that win the contracts based on their performance from those companies that do not. Loh & Loh appealed to us mainly because of its relatively high level of cash assets. If the contracts are won on a transparent, competitive open bidding basis, we could change our mind. Basically, we have to know why and how a company fails or succeeds. The recent arrest of Colin Skellett, CEO of Wessex Water, has further confirmed our fears.
In addition, we are wary of companies with political links, whether direct or indirect. There are currently numerous companies listed on the KLSE that are politically connected. Based on our definitions, this would include those that obtain concessions or licences because of political connections. As far as possible, we try to stay away from them. We were lucky in our pick on Renong many years ago. We rated it a sell before the price plunged. They always look good until problems surface. As a result of our criterion, we have excluded many counters, including some major established ones, from our list of stocks.
Our approach certainly does not guarantee profits every time. The next 100 counters that we select would certainly contain numerous non-performers. As we are bound to make future mistakes, we just do not want to repeat mistakes made by ourselves or by others. As for Mr Chai's other question, OYL is a substantial contributor to Hume. We would prefer OYL instead of Hume.
The major equity markets, particularly from the US, are up to their bad behaviour again. Well, as icapital.biz had advised early on, we anticipated the US markets to move in separate directions from the US economy and to watch the economy rather than the stock markets. But one could counter argue that the US economic recovery is now faltering. Once again, icapital.biz would share with its subscribers a valuable and important insight (one that you cannot get from other advisers or publications). What have been weaker are what we call "soft" indicators like consumer confidence, index of leading indicators, ISM's manufacturing index etc. What have been strong are the "hard" indicators like car sales, housing sales, durable goods orders, exports, money supply, etc. These real indicators are all showing strength. Again, icapital.biz would advise that the next direction for US interest rates is up, not down.