If you do not already know, here's our public service announcement of the day: investors can now trade SGX-listed stocks on the FSMOne platform! As we throw down the gauntlet on Singapore's stockbroking industry with competitive fees and sophisticated research tools, our sights are on the longer term horizon to be an integrated investment products distribution platform, helping investors around the world invest globally and profitably.
In line with this vision and our SGX launch, FSMOne will be introducing a series of focus lists designed to showcase some of our best stock investment ideas. Investors can utilise these lists as a source of idea generation, to refine their stock portfolios, or as a base on which to build their desired portfolios from scratch. Here's a sneak preview of the three different types of focus lists that investors can expect to see.
'Growth' Focus List: Pursuing Long-Term Growth
Our stock picks for the 'growth' focus list will share these common traits: their profits are expected to accelerate at significantly faster rates as compared to the overall market or the industry, they have strong growth prospects, and their current share prices offer substantial upside to prospective investors. These growth stocks tend to be small-cap companies that are in the earlier stages of development, or operate in rapidly expanding industries, such as those related to new technology.
While there is no one-size-fits-all method of evaluating growth stocks, our selection methodology encompasses common areas that a growth investing strategy would usually entail. We will first study the company, its competitors and industry dynamics to gain a complete understanding of the operating landscape. We will also assess if a particular stock has strong historical earnings growth. While past performance is not necessarily indicative of future returns, a stock with a strong historical earnings growth is likely a reflection of a well-run company. It is also important to consider a stock's expected future earnings growth as a growth stock that is approaching its market limits can see its fast growth come to an abrupt end.
A closer look at profitability ratios such as return on equity (ROE) and return on invested capital (ROIC) will also give us clues on how efficient a company is at generating profits using shareholders' equity or invested capital. Valuation is an important component of every investment decision, and we will consider a wide range of suitable valuation metrics to ensure investors do not overpay for the stock.
Investors who have stuck their necks out for growth stocks over the years were rewarded with stable growth overtime albeit with bouts of extreme volatility at times (Chart 1). Growth stocks, however, typically carry substantial risks, given that they usually have high valuations and stock prices can be quite volatile, the 'growth' focus list may not be everyone's cup of tea. The list will be more suitable for growth-seeking investors with a long-term investment horizon and a stomach for above-average levels of volatility.
Chart 1: Growth Stocks Offer Long-Term Growth But With High Volatility
'Income' Focus List: Rock-Solid Dividend Stocks
The 'income' focus list will feature an array of dividend-paying stocks whose dividends yields are above the market average. Dividend sustainability and the potential for future dividend growth are also characteristics of stocks that are selected for this list. Dividends are an important contributor to portfolio returns overtime. Since its revamp, the Straits Times Index has generated annualised total returns of 2.9%. Excluding dividends, investors would have been sitting on annualised losses of -0.4% – a difference of 3.3 percentage points per annum (Chart 2)! This is a powerful phenomenon, and one that indeed illustrates the importance of dividends.
Chart 2: Reinvested Dividends Have Enhanced STI Total Returns
Is our selection methodology as simple as just investing in companies with high dividend yields? Not so straightforward! While dividend yield is certainly a criteria that we look at when assessing a stock, we will also perform due diligence to ensure that dividend payments are sustainable in the future. No matter how profitable a company is, it must have cash on hand in order to pay dividends to its shareholders. A profitable company that runs into cash flow problems will eventually have trouble paying out stable dividends at the end of the day. For this reason, we look only at companies that can generate a sustainable stream of positive free cash flow. Another indicator that is useful for assessing dividend sustainability is the pay-out ratio, which measures the percentage of earnings paid out to shareholders as dividends.
The 'income' focus list will appeal to investors looking to generate a regular stream of dividend income from their stock holdings. The dividends can be reinvested to harness the power of compounding to accelerate portfolio growth, such that the passive income from their stock holdings will be able to fund their spending needs in their retirement days.
'Value' Focus List: Quality Stocks Selling At Bargain Prices
Stock prices do not always incorporate and reflect all relevant information – they can sometimes be overvalued or undervalued, as investors over-react to market news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. The 'value' focus list tries to identify quality stocks that are trading at prices significantly below their intrinsic values, much like how we often shop for goods when they go on sale at prices much lower than what they are actually worth.
The focus of our selection methodology is mainly on fundamentals and intrinsic value – to identify good and well-run companies that are trading at reasonable prices. We will evaluate a company's financial health, making forecasts of its future earnings, and arrive at a reasonable estimate of its intrinsic value using a suitable valuation method. If the current market price of the stock is significantly below its intrinsic value and offers a comfortable margin of safety, the inclusion of this stock on our 'value' focus list may be justified.
Value stocks can be extremely rewarding but they come with their fair share of risks as well, given that investors can sometimes fall prey to value traps. A company can appear cheap due to its low valuations, but if it fails to generate meaningful and consistent profits in the future, its share price can continue to fall. Investors that were initially lured by the stock's attractive valuations will end up with losses instead. As such, the 'value' focus list will perhaps appeal to investors who think about stock investments for what they actually are – to be owners of durable and well-managed businesses.
Making The Focus Lists Work For You
While stocks have historically offered the greatest potential for investment returns, it may not be suitable for all investors as there many considerations involved. For one, stock investments carry a greater level of risk as compared to other asset classes, and investors can potentially lose a substantial amount of their investment capital during stock market crashes, which are far from unprecedented. Before shelling out cash on the stocks selected for our focus lists, investors should consider their investment horizon, risk appetite, whether the potential stock investment fits into their overall portfolio, as well as other considerations. The focus lists do not guarantee investment success, but they are certainly a good place to start for idea generation.
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