Excerpts from Phillip Securities Research report
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 @ Dutech's factory in China: Gun safes ready to be shipped out. NextInsight file photo.Does value investing work in Singapore?
» Large caps rule. 72% of the SGX-listed stocks since 2004 have underperformed STI
» Don’t forget cyclicals. Low PE and PB portfolios outperformed broader market partly due to cyclicals
» Low PB/high ROE stocks did best. Time to look at Roxy, Civmec (Buy), Wee Hur, Sino Grandness, Valuetronics, 800 Super (Buy), China Sunsine, Penguin, Dutech, and Hock Lian Seng?
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Back-testing value investing. Singapore’s equity benchmark is the Straits Times Index, which is a market-cap weighted index of large cap stocks. Did value stocks outperform the STI over the long-term?
We took a long time period to avoid short-term sentiment. Year 2014 just ended, so we looked at 2004 to now.
2004 was after SARS-affected market sell-off, so value stocks were plentiful. Also, it was the beginning of a four year economic bull-run, so value stocks would have the opportunity to recover.
We analyzed every stock that was listed at the end of 2004 and noted their stock performance from the beginning of the year (or whenever it was listed) to now.
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Our test samples: low PE & low PB
We took two populations of “value stocks”, one with a low PE and one with a low price/book. We identified 82 stocks that had a single digit PE (ie, year end price divided by trailing EPS of between zero and 9.5) plus 27x stocks below 0.7x PBR.
Low PB & PE portfolios did:
·Worse than STI.Both low PB and low PE portfolios significantly underperformed the STI both on a mean and median average. The Straits Times Index members were much financially stronger and competitively positioned. The STI’s contract manufacturing sector did not perform well, but it still had far fewer and less acute problems. And as professional investors know, good performance perhaps is based more upon avoiding problem stocks than picking superstars.
·Better than broader market.Low PB/PE stocks modestly outperformed the broader market on mean and median average. The broader market did worse for numerous reason, but we highlight that expectations for SChips were still high and they had not yet suffered the problems that would later come.
·Cyclicals.Another reason for the superior performance of the low PB/PE portfolio to the broader market is that it tended to have more cyclicals. The market tends to be somewhat short-sighted and will avoid stocks that have weak near-term outlooks. The key take-away point for investors is to consistently look at cyclicals that have weak outlooks, but are probably not in any danger of going bankrupt (eg, the commodity sectors, shipping, Singapore residential property developers, energy producers).
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Looking forward… While we don’t cover most of these stocks and do not recommend investment into them, we do highlight the following stocks as needing more due diligence because they currently have low PB and high ROE. While these companies are not all saints, the ones highlighted in blue seem like they might be worth a second look.
