There is always fun in speculation. But as our benchmark-beating portfolio of 10 global stocks have shown, as long as investors are savvy enough to pay the right price for the right stock — the returns will follow.
For investors, it was a volatile 2020 and the beginning of 2021 — owing to market anomalies like a global pandemic and retail investors pumping up selected stocks to challenge Wall Street. If nothing else, we have learnt that the way how the stock market moves is susceptible to additional factors we may have never considered previously.
Regardless, it is also important to understand that fundamentally and financially strong companies will thrive over the long run. This theory still holds after over 200 years of stock market history. Why? This is because companies with good fundamentals will grow in business value — and the average, reasonable investor would want to get their hands on it.
Above all, it is important to pay the right price for the stock as fundamentally good companies might be expensive or overvalued based on its trading price. Good stock picks, though key in being a successful investor, is arguably only as good as portfolio allocation. Investors who put all their eggs into one basket that is either way too risky or conservative will not be able to fully maximise their returns for every unit of risk that they take, hence it is important to have a well-balanced portfolio.
In recent times, environmental, social and governance (ESG) issues also have the potential to make or break the growth of value of a company. This is regardless of any industry they are in through regulatory action such as laws or regulations or social action such as collective retail investor action, such as the one seen recently with main street investors against hedge funds.
Our top 10 global stock picks encompass all the mentioned factors, theories and indicators that a reasonable investor would consider before investing their money into the stock market. We picked 10 stocks from outside Singapore last year with the conviction of this portfolio of stocks delivering handsome returns for a one-year holding period.
In Issue 917 (released online on Jan 24, 2020), we recommended 10 companies from different industries, ranging from consumer electronics to bereavement services, listed on different exchanges with differing geographical business exposure and appealing to a range of investor profiles, ranging from yield seekers to value investors.
To the average investor, a balanced portfolio of these 10 stocks would suffice, and the performance of this portfolio of stocks was used to compare against regional and global benchmarks. All benchmarks and stock returns include capital adjustments and dividends for a fair comparison, with the one-year holding period ending on Jan 25, as the previous day was a non-trading day. It is important to note that the alternative to investing into stocks would be fixed deposits or other asset classes such as commodities and property. Fixed deposits, though giving almost guaranteed returns, is extremely unattractive at low single digit yearly returns.
We achieved a return of 98.1% for the one-year period. We did not have Tesla nor Bitcoin, but our portfolio of ten stocks, picked based on their fundamentals, did relatively and reasonably well against stock benchmarks. Chart 1 illustrates the performance of The Edge Singapore’s Top 10 global stocks against other global stock benchmarks. The best performing benchmark was none other than the Nasdaq Composite Index at 47.8% — of which we beat more than twice. The global MSCI World Index saw a 14.1% gain for the period, of which we beat seven times. Not forgetting, our domestic Straits Times Index (STI), which saw a 4.4% decline for the period. Breaking down the 10 stocks in our portfolio, seven of them gained for the period while the other three made losses — with individual returns ranging from –19.4% to 661.9%. Chart 2 shows the individual performance of the stocks in our portfolio.
Japan-listed funeral services provider San Holdings was our worst performer in the portfolio of stocks with a return of –19.4%. The stock severely underperformed the benchmark Nikkei 225 Index and MSCI Japan Index as shown in Chart 3. Our recommendation of the company was on the rationale that it has solid fundamentals and a stable growth trajectory, given its exposure to the death services industry. However, the company was adversely affected by the Covid-19 pandemic, as consumers spent less on funerals due to social distancing measures and policies. The company suffered negative cash flow for the first time in almost five years in its most recent reported financials, leading to a plunge in share prices. Clearly, this company was one of the bigger losers of the pandemic and we have learnt that social distancing measures play a key role in funeral services companies apart from mortality and birth rates.
Hong Kong-listed Shangri-La Asia, the hotel chain controlled by the Kuok family, was another loser in our portfolio of stocks with a return of –10%. This stock significantly underperformed the benchmark Hang Seng Index and MSCI Hong Kong Index as shown in Chart 4. Our recommendation of the company was based on its cheap valuations, along with its deepening moat through the focus on its luxury brand. Markedly, the pandemic was not favourable for the hospitality industry. This resulted in a poor financial performance for the company in its latest results, along with a sustained drop in share prices. We have learnt that it is important to switch out companies with bleak prospects, and will keep this lesson in mind moving forward for our future stock picks.
London-listed construction services provider Kier Group was the other loser in the portfolio of stocks with a return of –6.7%. Though this stock’s price declined over the period, it relatively outperformed the benchmark FTSE 100 Index and MSCI UK Index as shown in Chart 5. We expected Kier to be a turnaround play, along with higher-than-average volatility in its share price, which turned out to be the case. Kier is a company riddled with debt, and its turnaround strategy was focused on three prongs: Reducing net debt, better allocation of its capital resources and improving cash generation. The company initially showed some progress, but this seemed quite stifled in the company’s most recent reported financials as the UK construction sector was adversely affected by the pandemic. In hindsight, given that it is the riskiest stock in our portfolio, we should have been timelier and monitor the share price closely — and locked in gains the moment it showed signs of turnaround instead of waiting for a full turnaround.
Nasdaq-listed social media giant Facebook performed decently in our portfolio of stocks, with a return of 27.6%. This stock also did well against the benchmarks S&P 500 Index, Dow Jones, and Nasdaq as shown in Chart 6. We recommended Facebook on the rationale of strong fundamentals, a growing population and the company’s venture into e-commerce. Fortunately, Facebook has mostly weathered Covid-19 induced lockdown measures — as with most tech companies. If it was not for the series of privacy scandals which rock the company from time to time, Facebook’s earnings growth would be much smoother. Given that Facebook is part of the elite FAANGs club and that tech companies have the highest value and weightage in indices such as the S&P 500 and Nasdaq, which makes it rather predictable to the general market’s movements — this company’s performance was well within our expectations.
Nasdaq-listed Intuitive Surgical, a key global player and pioneer in robotic surgery technology, did relatively well in our portfolio stocks with a return of 27.6%. This stock saw very stable price growth for the one-year period and from the March 2020 lows, and did reasonably well against the benchmarks S&P 500 Index, Dow Jones, and Nasdaq as shown in Chart 7. We recommended Intuitive Surgical because of its solid business model, which was centred around recurring earnings and exposure to the healthcare industry through general surgery. We acknowledged that although the company seemed a bit expensive at the time of recommendation, its unique business model and longer-term prospects were too good to ignore.
The company suffered a small hiccup due to a drop in surgery volume from the pandemic, but is strongly recovering in its latest earnings report. Intuitive Surgical’s share price outperformed our expectations but rightfully so as the adoption of its flagship product was better than expected.
Frankfurt-listed Isra Vision is a developer and manufacturer of software and systems for the image processing and machine vision industry. The stock, with a return of 28.3%, significantly outperformed the benchmark Deutsche Boerse Index and MSCI Europe Index as shown in Chart 8. The rationale behind recommending the company was based on its attractive financials, and solid fundamentals reflected by its strong track record even during unfavourable general economic periods. The company was taken over by a Swedish global industrial group Atlas Copco last June after the announcement of the public takeover bid in February. The takeover offer was favourable as the share price gained significantly following the offer — and we should have locked in and reinvested gains from this stock — a lesson to be learnt moving forward.
Nasdaq-listed Electronic Arts (EA), a leading developer and publisher of electronic and online games, performed well in our portfolio with a return of 30.4%. As shown in Chart 9, the stock’s performance was good against the benchmarks S&P 500 Index, Dow Jones, and Nasdaq — boosted by the Covid-19 pandemic. We recommended this stock on the rationale of the company’s business model shift to one with more predictable revenue and higher margins, aside from solid fundamentals. Pandemic induced global lockdown measures, along with the release of gaming consoles from Microsoft’s Xbox and Sony’s PlayStation positively impacted EA’s business as the demand for its games significantly increased. The share price of the company aptly reflected this, and our view that gaming stocks are high growth was reaffirmed.
ASX-listed Harvey Norman, a household name that operates and franchises retail stores, performed strongly in our portfolio, despite brick-and-mortar retail being negatively impacted by the pandemic. Harvey Norman gained 32.4% for the period, well outperforming the benchmark ASX 200 Index and MSCI Australia Index as shown in Chart 10. We recommended this company mainly for its dividends — of which its yield has been close to 7% on average for the past 10 years, and our conviction that it can afford to continue paying dividends at this level given its significant balance sheet reserves. Despite having one of its worst business periods due to the pandemic, the company paid special dividends, though at half the initially proposed interim dividend. Harvey Norman’s share price shot up after its strong performance in its most recent financial report — mainly due its strategy of adapting and focusing on the digital aspect of the business along with home deliveries. We have learnt that companies that are able to adapt quickly to changes in the business environment will eventually be winners — as shown in the case of Harvey Norman.
Nasdaq-listed gaming accessories company Turtle Beach was one of our top performers in the portfolio, with a whopping return of 208.7%. The returns of this stock dwarfed the benchmarks S&P 500 Index, Dow Jones and Nasdaq’s performance (as shown in Chart 11). Our conviction for this stock stemmed from the company’s focus on growing its cash flow, which turned positive in FY2018, alongside the company’s improving fundamentals. The company was able to capitalise on the surge in demand for gaming equipment stemming from increased gaming from lockdown measures. Turtle Beach’s move to partner with leading influencers in the e-sports industry and diversifying its portfolio of gaming products also paid off, as mentioned in its latest earnings report. As such, the company’s share price soared and our thesis that gaming industry is a high growth one over the short-and medium-term was affirmed.
Hong-Kong listed Hainan Meilan International Airport, which operates the Meilan Airport in China’s Hainan province, was the top performer in our portfolio, with an astronomical return of 661.9% over a 12-month period. Chart 12 illustrates the relative outperformance of this stock against the Shanghai Composite Index and MSCI benchmarks. We recommended this stock because it ticked all the boxes for a fundamentally good company, including extremely cheap valuations. We figured the reason why the stock was so cheap was the association with the debt-riddled HNA Group, but the group did not have a majority stake in the company which made the stock an attractive grab. The company’s share price took off when investors looked past its association with HNA Group, along with favourable duty-free policies in the Hainan region and plans from the state government to turn Hainan into a free trade zone and the airport an international aviation hub. The airport operator’s PE ratio now is reflective and similar to regional peers at its current share price. We have learnt that sometimes, really cheap companies might be overlooked by investors.
Now that we have done with the recap for our 2020 picks, we will discuss our stock picks for this year in the upcoming issue 972 (Feb 22). Given the nature of each stock is different, a practical investor would be able to adapt by buying and selling stocks when they become undervalued, overvalued or reach the fair price.
However, we are making some tweaks. We will no longer recommend the 10 stocks for the entire year or a fixed period, but until we think the price reflects the fundamentals of the company. We will add, reduce, buy, sell and hold stocks based on our view — which will be articulated whenever there is a change to our stock picks.
To make things easier and transparent, we will also have a trackable portfolio for our stock picks. This will enable our readers to switch up the portfolio promptly if they wish to mirror our stock picks and portfolio. Our performance for a one-year period will be based on this portfolio’s value at the start date, just like any other fund’s performance tracking measure. Stay tuned!
