If you could buy only one stock, then which? (BT: 06 Jan 2007)

If you could buy only one stock, then which?

By TEH HOOI LING
SENIOR CORRESPONDENT

AT THE last count, there were more than 700 stocks listed on the Singapore Exchange (SGX). It is almost impossible to monitor and be on top of all these companies.

Investors thus use various ways to help them pick the stocks to buy. Some use screening. Download the relevant data on all the listed companies and then rank them. For example, someone may decide to rank the companies based on their return on equity (ROE).

This is then compared with the stocks' price-to-book (PTB) ratios. Those with a high ROE but low PTB are deemed attractive. So, based on these criteria, the investor may narrow the selection to the top 20 or 30. Then, he or she will do more research on each of them and short-list the stocks to perhaps one or two which are worth buying.

This process is time-consuming. Further, it is only available to those who have access to the various data sources.

Another source of ideas, of course, is stockbrokers' reports as well as newspaper articles. As mentioned previously, managers of companies with bright prospects and solid plans are generally more willing to talk to the media than managers of companies that are going through a difficult time or a down cycle.

But of course, these articles serve only as alerts to potential stocks to buy. One has also to do one's own analysis and apply one's judgement as to the investment merits of the stock. Like investors, managers also have a tendency to be overly optimistic.

Irrational optimism

For example, in the United States, one of the questions in the Duke Survey of chief financial officers every quarter is how optimistic they are on the economy and on their own company; in every case, managers were more optimistic about their own company than they were about the economy as a whole.

And in the earlier days of the Duke Survey, CFOs were asked if they thought their stock was undervalued by the market. On average, 63 per cent thought so, while 32 per cent thought their stocks were correctly valued. And here's the appalling bit: at the peak of the Internet bubble, nearly 90 per cent of CFOs of tech companies were of the opinion that their stocks were undervalued.

So understand what their market strategies are, and measure that against your own valuation yardstick.

These first two methods have brought a few stocks - which subsequently turned out to be super performers - into my radar relatively early on.

Among them are Asia Food and Properties, Golden Agri, WBL, Ezra, Inter-Roller, and more recently Rotary Engineering, and many of the stocks which were trading at deep discounts to their book value.

Another method, of course, is to track the smart money and smart investors. Recently I've discovered another method to shorten one's selection process, and one which has proven to be quite effective.

I'd ask those who have their fingers on the pulse of the economy and stock market - these could be chief executives of companies, deal-makers, fund managers or people you know have a knack for picking winners - one question: 'If you could buy only one stock (in the whole market, in a particular sector, or whatever), which would it be?'

To get a better understanding of their choice, the obvious follow-up question would be: 'Why?'

This remotely resembles the 'scuttlebutt' approach as advocated by Philip Fisher, writer of the must-read investment book, Common Stocks and Uncommon Profits.

Scuttlebutt is a colloquial word, meaning rumour or gossip. In essence, Mr Fisher suggests getting information about a company from not just the company, but also its clients, suppliers and competitors.

He explains the importance of scuttlebutt in the book: 'The business grapevine is a remarkable thing. It is amazing what an accurate picture of relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who, in one way or another, are concerned with any particular company.

'Most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged and will talk rather freely about their competitors.'

I interviewed a major shareholder and chief executive of a Singapore-listed company in late June last year.

All the company's operations are in China and so the CEO made frequent trips there.

In fact, he spends more than 50 per cent of his time there, travelling to various provinces, dealing with many government officials and Chinese companies. Hence he has a very good feel and understanding of the market conditions there.

At that time, there were many initial public offerings by Chinese companies on the Singapore Exchange and one was barely able to keep track of all of them.

So after the interview, I asked the executive: 'Of all the China companies listed here, which do you think has the greatest potential?' After a few moments of consideration, he said: 'Yanlord.'

Yanlord Land, of course, is the developer of high-end residential properties in cities such as Shanghai, Tianjin, Chengdu, Suzhou and Guiyang in China.

At that time, Yanlord had just come on to the market and was still trading around its issue price of $1.08. In a mere six months after that, the stock more than doubled to around $2.40.

Yanlord's credibility as a developer in China is further reinforced when it was announced last week that it has set up a joint venture with GIC Real Estate (GIC RE) to acquire a piece of land worth $473 million in Nanjing to build residential as well as commercial space.

GIC RE already has stakes in Chinese property developers Beijing Capital Land, Super Shine and China Vanke.

Meanwhile, last October, I asked a dealer/deal-maker - he who generated more than 50 times return on his portfolio in the last four years by astutely holding on to two winning stocks - the same question. His pick: Midas Holdings. Between then and now, Midas has gained some 50 per cent.

After visiting Midas's operations in October and understanding what Patrick Chew, the chief executive, is steering the company towards, I've come to share his bullishness about the company.

It's also my one stock to have - which was my response when someone whom I asked that question turned the tables on me.

The writer is a CFA charterholder. Her email: hooiling@sph.com.sg

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