With more than a thousand companies listed on Bursa Malaysia, to look for companies that are deeply undervalued is as hard as searching for a needle in a haystack. Are there more efficient and effective ways to discover or uncover the hidden gems?
Frankly, what I am seeing today is information overflow rather than not having enough information many years ago. One could find lots of stock recommendations or research reports from research house, social media, blogs or subscribed to research reports, whatsapp group, etc, etc. As a result, most of the companies have been "researched" - big companies by research houses and medium to small companies by stocks sifus, bloggers, forums, etc except for some "dead" stocks where not many will notice, either the company is dying or boring. (Please don't get me wrong - no...being contrarian in this scenario may not be the right approach because these companies could continue to remain as such for many many years.)
A recent chat with a friend has alerted me to look closer at his current approach - bottom fishing. The rationale for the change in approach from searching for undervalued stock with growth/high yield to bottom fishing is due to most stocks have gone up quite substantially and the fear of not much upside always linger in our mind. Of course, one must be able to separate wheat from the chaff when bottom fishing as there are reasons why these companies are at their low while market is almost at its peak - resulting in such a big divergence.
Hence, I have set some basic guidelines for bottom fishing when going through companies information and avoid taking unnecessary risks - it must provide some margin of safety at least from asset backing, no excessive gearing and the operating cash flow has to be reasonably healthy.
Some of the other information I look for that may have caused the share price drop :-
1. it becomes unfavourable due to one off event eg write off of assets (eg JTiasa - asset write off from loss making plywood business)
2. is the company in the middle of transformation/major change in business direction/substantial capital spending which has cut its dividend or impact its profit (eg Evergreen - going through what Hevea has gone through 5 years ago??)
3. change of government policy that may impact the business ( is it temporary or has long lasting impact - Tune Protect, Hexza ??)
4. major expansion, acquisition/disposal that have short term -ve impact are not well received by investing community ( APM, SOP, 3A??)
5. merely due to cyclical factors - when the cycle reverse, it will be a totally different scenario eg plantation, glove, cement, shipping?? (Good example will be steel industry- it has seen its up cycle since last year due to combination of factors - government policy change, closed down of country's biggest steel mill and cyclical effect and most of the steel stocks have doubled, tripled or even more - yes, I miss it, I don't have any steel stock at all)
6. the big project is still not completed yet and risks and uncertainty may be high or most investors have no patience to wait till its completion ( WCE??)
I believe there are many more reasons/factors and hence, it is worthwhile to start searching and analyse carefully the potential of these out of favour stocks - whether those factors affected its share price are temporary, whether the company has strategy to counter it, whether it is only a matter of time that the new development will bring results, whether the uncertainty will subside over time, etc. Can some of these stocks that are sitting at the bottom of the sea be discovered or brought up to shore by the next tide, only time will tell. Why? Fishing requires lots of patience, more so as this is bottom fishing!!
A recent chat with a friend has alerted me to look closer at his current approach - bottom fishing. The rationale for the change in approach from searching for undervalued stock with growth/high yield to bottom fishing is due to most stocks have gone up quite substantially and the fear of not much upside always linger in our mind. Of course, one must be able to separate wheat from the chaff when bottom fishing as there are reasons why these companies are at their low while market is almost at its peak - resulting in such a big divergence.
Hence, I have set some basic guidelines for bottom fishing when going through companies information and avoid taking unnecessary risks - it must provide some margin of safety at least from asset backing, no excessive gearing and the operating cash flow has to be reasonably healthy.
Some of the other information I look for that may have caused the share price drop :-
1. it becomes unfavourable due to one off event eg write off of assets (eg JTiasa - asset write off from loss making plywood business)
2. is the company in the middle of transformation/major change in business direction/substantial capital spending which has cut its dividend or impact its profit (eg Evergreen - going through what Hevea has gone through 5 years ago??)
3. change of government policy that may impact the business ( is it temporary or has long lasting impact - Tune Protect, Hexza ??)
4. major expansion, acquisition/disposal that have short term -ve impact are not well received by investing community ( APM, SOP, 3A??)
5. merely due to cyclical factors - when the cycle reverse, it will be a totally different scenario eg plantation, glove, cement, shipping?? (Good example will be steel industry- it has seen its up cycle since last year due to combination of factors - government policy change, closed down of country's biggest steel mill and cyclical effect and most of the steel stocks have doubled, tripled or even more - yes, I miss it, I don't have any steel stock at all)
6. the big project is still not completed yet and risks and uncertainty may be high or most investors have no patience to wait till its completion ( WCE??)
I believe there are many more reasons/factors and hence, it is worthwhile to start searching and analyse carefully the potential of these out of favour stocks - whether those factors affected its share price are temporary, whether the company has strategy to counter it, whether it is only a matter of time that the new development will bring results, whether the uncertainty will subside over time, etc. Can some of these stocks that are sitting at the bottom of the sea be discovered or brought up to shore by the next tide, only time will tell. Why? Fishing requires lots of patience, more so as this is bottom fishing!!
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