The stock market proves to be a volatile entity time and again. The global pandemic, extended by new strains of the virus, further tested the stability of financial markets throughout 2021. Investors and traders alike were subject to the vagaries of the movement in stock prices and indices, to a larger extent than pre-pandemic times.
Regardless, it is important to acknowledge that volatility is what makes investing both practical yet exciting. Practical because, without much movement in the stock market, investors would find alternative asset classes better suited in achieving financial goals; exciting because investors’ prospects of being able to realise their case regarding the stocks acquired.
Of course, both these reasons are contingent upon the fact that stocks as an asset class provide investors with necessary and freely accessible tools to understand and analyse companies and businesses before investing in them.
The Edge Singapore’s global stock picks and virtual portfolio was introduced in 2020 to help and guide our readers with varying investor profiles on the criteria to look out for when investing in the selected business archetypes.
The investor profile consists of two parts — the investor’s capacity to take risks and the investor’s willingness to take risks. Ideally, the investor’s willingness to take risks should match their capacity to take risks. On the other hand, the businesses or stocks have different categories of risk to suit investor profiles such as dividend yield stocks, high growth stocks, stable and mature stocks, undervalued cheap stocks, and speculative and turnaround stocks.
To recap, our 2020 portfolio of 10 stocks was incepted on Jan 24, 2020, which returned 98.1% for the year (see Issue 917). These 10 stocks were equally allocated to the US$100,000 virtual portfolio to reflect a balanced portfolio, in terms of risks, based on our discretion. These 10 stocks were sold on Jan 25, 2021, following which on Feb 18, 2021, our 10 stock picks for 2021 were added to the portfolio (see Issue 972). The 10 stocks were allocated equally, if possible, as shown in the table (see Table 2a).
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To make the virtual portfolio more practical, instead of having a fixed timeline of a one-year holding period, we decided to buy and sell stocks based on our discretion. The rationale for this is that some stocks, for example riskier ones, are better off sold once target prices have been met as opposed to long-term stable dividend-paying counters.
The Edge Singapore’s 2021 global stock picks and portfolio returned 13.1% for the period of Feb 18, 2021, to Jan 26. Chart 1 shows the individual stock performances for the active virtual portfolio, with SAN Holdings being the top performer, netting 36.4% returns; while Tianneng Power International was the worst performer with –47.4% returns. For the full portfolio, we sold off Kier Group and Ted Baker for significant gains of 94.2% and 54.4% respectively. The best-performing benchmark was the FTSE 100, with 16.7% returns for the period, while the worst performer was the Hang Seng Index with –18.5% returns. Chart 2 illustrates our portfolio’s performance relative to the major indices of countries which we have acquired stocks in.
All things considered, our 2021 portfolio performed decently for the year. It must be noted that the developments in the pandemic recently have caused wild swings in share prices and benchmark — like how the Nasdaq fell roughly 15% in just over a month.
On the other hand, owing to a low-base effect, the FTSE 100 and Straits Times Index (STI) were the top-performing benchmarks for the 2021 portfolio period but were two worst-performing benchmarks for the 2020 portfolio period with –9.5% and –4.4% returns respectively.
Perhaps, for passive investors, this information could be helpful before buying index-based ETFs or funds. Regardless, as shown in Chart 3, The Edge Singapore’s global portfolio is well ahead of any benchmark since inception, from the period of Jan 24, 2020, to Jan 26.
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Hong Kong-listed Tianneng Power International was our worst performer in the 2021 portfolio with a return of –47.4%. The stock severely underperformed the benchmark Hang Seng Index, as shown in Chart 4. Tianneng Power is a large high-tech energy group focusing on the manufacturing and provision of services of environmentally-friendly products, particularly batteries for electric vehicles, in China. The company is an important player in the value chain of China’s goal of becoming environmentally friendly in the future. However, the share price did not perform as expected due to a significant increase in raw materials costs which impacted profitability. The large drop was also caused by a negative operating cash flow due to an increase in inventories and increase in accounts receivables.
Nasdaq-listed CrowdStrike Holdings was one of the bigger losers in the 2021 portfolio with a return of –47.4%. The stock significantly underperformed the benchmark Nasdaq as shown in Chart 5. CrowdStrike is a leader in the cloud security space that provides cybersecurity to meet the needs of rapidly expanding cloud computing. The company’s business strategy centred around improving value through the network effect by building its customer base. Unfortunately, the share price performed poorly due to the prospects of rising interest rates, which triggered large selloffs and also adversely affected much of the technology stocks particularly the Nasdaq.
Hong Kong-listed New Oriental Education & Technology was among the bigger losers in the 2021 portfolio with a return of –22.9%. The stock slightly underperformed the benchmark Hang Seng Index, as shown in Chart 6. New Oriental covers online education in its business and is one of China’s most recognised brands in private education. But the Chinese government recently enacted restrictive policies on education services providers — both online and offline — which led to a crash in their share prices. However, we assessed that the damage to its financial numbers in the worst-case scenario were much lesser than the impact to the share price and saw it as an opportunity to buy. Still, its share price have only rebounded slightly before falling further.
Nasdaq-listed Electronic Arts was one of the double-digit losers in the 2021 portfolio with a return of –11.4%. The stock underperformed the benchmark Nasdaq as shown in Chart 7. Electronic Arts is a global interactive entertainment company that primarily develops, publishes and distributes branded games and software. The company is not solely reliant on licensing rights for its earnings but also has its own creative portfolio of games to ensure the value of the business grows, which was our case behind buying the stock. However, delayed games and lower comparable earnings caused the share price to tank in the most recent announcements.
Tokyo-listed Nexon Co was the smallest loser in the 2021 portfolio with a return of –0.9%. The stock outperformed the benchmark Nikkei 225 Index as shown in Chart 8. Nexon develops online games for PCs and other devices, along with offering consulting related services for online games, mostly in Korea and China. At the time of purchase, the company’s share price fell due to delays in one of its game releases. Our case was that this delay was just a short-term speed bump in the share price — as the company has a pretty strong moat in Korea and China. The most recent earnings announcement was relatively mediocre on the company’s guidance front, hence the company’s share price has remained relatively same from our buying price.
Nasdaq-listed Intuitive Surgical was one of smallest gainers in the 2021 portfolio with a return of 3.4%. The stock outperformed the benchmark Nasdaq as shown in Chart 9. Intuitive Surgical is a global healthcare company that develops, manufactures and offers robot-assisted surgical technology systems and solutions. The company’s business model is centred around minimally invasive care, which is crucial for patient care, especially in surgery and other acute medical interventions. The company’s share split boosted the stock price significantly, only to be reversed by the company’s latest earnings, which underperformed expectations and further exacerbated by rating downgrades from analysts.
Nasdaq-listed Vertex Pharmaceuticals was among the gainers in the 2021 portfolio with a return of 3.4%. The stock outperformed the benchmark Nasdaq as shown in Chart 10. Vertex Pharmaceuticals is a global biotechnology company that innovates and creates transformative medicines for people with serious diseases with an expertise in cystic fibrosis. The company’s business model is to specialise, which entails having a dominant presence and huge market share through the development of patents. The company’s share price gain was only recent, as it outperformed expectations and guided bright prospects for the company in the upcoming quarters.
New York-listed Altria Group was among the larger gainers in the 2021 portfolio with a return of 21.9%. The stock outperformed the benchmark S&P 500 as shown in Chart 11. Altria Group is a holding company of multiple wholly-owned large subsidiaries that make and sell cigarettes. The company’s business generally has inelastic demand as its products are habit-inducing, as seen through its smoke and tobacco portfolio. Altria’s strong dividend yields have attracted investors seeking stability from the volatility in the stock market caused by the pandemic. Long-term growth prospects remain unchanged for the company and its capacity to pay lucrative dividends remain.
Deutsche Boerse-listed Deutsche Post was one of the significant gainers in the 2021 portfolio with a return of 27.4%. The stock outperformed the benchmark Deutsche Boerse as shown in Chart 12. Deutsche Post is one of the largest logistics companies in the world and Europe’s leading postal and parcel services provider. The company’s large scale enables it to provide a variety of services along the logistics value chain is key in developing a brand name and building a competitive moat. Deutsche Post has performed well over the year given the strong demand for logistics caused by the pandemic, resulting in the company’s strong performance in its recent financial periods. Analysts’ rating upgrades also aided in the company’s strong share price performance for the period.
Tokyo-listed SAN Holdings was the top performer in the 2021 active portfolio with a return of 36.4%. The stock significantly outperformed the benchmark Nikkei 225 Index, as shown in Chart 13. SAN Holdings is the largest funeral services provider in Japan. It is also the leading player in a market that has both short-term catalysts and long-term prospects for growth, and the company is adapting well to pandemic-related challenges. As such, in its most recent earnings, the company outperformed its comparable financials from the previous pandemic-hit year. It is also to be noted that SAN Holdings was one of the worst performers in the 2020 portfolio and though the low-base effect is attributable to the share price outperformance, it was mostly driven by the company’s ability to adapt to pandemic-related challenges.
London-listed Kier Group and Ted Baker were turnaround stocks and represented the highest-risk stocks in the portfolio. We sold off both these stocks for 94.2% and 54.4% returns respectively with a six-month holding period as the target prices were achieved. Both the companies also were facing business-related pressures such as labour shortages for Kier Group and the lack of demand for Ted Baker, which was further justification to sell off these stocks. Since the sale of the stocks, the stocks have dropped 18.1% and 37.7% respectively.
As we have come to realise, it is important for investors to monitor their portfolio for certain stocks more frequently, and if necessary, make changes to it. An important takeaway is that some stocks are generally more time-sensitive than others, which means they are usually riskier and more volatile stocks. Investors should therefore have the discipline to execute these changes if the need arises.
We acknowledge that we failed to make changes to certain stocks in our 2021 portfolio even as we adapted quickly and were disciplined about other stocks, particularly the riskiest ones. This is a shortcoming we must be wary of in our 2022 portfolio, which we will unveil in our next issue.
