Choosing the Right Share through Fundamental Analysis and Comparative Quantitative Analysis of the Figures

We have chosen SingTel, Starhub and MobileOne as companies for comparison.

COMPARING THE FIGURES

Let us apply the concepts.

Table 1 shows the ROE, ROA, PE, NAV and dividend yield of the 3 companies. 

• In comparison, StarHub has the highest ROE as it is highly leveraged with debt whereas MobileOne has the highest ROA. 
• In terms of PE and dividend yield, MobileOne offers an attractive PE of 10.1x and StarHub gives out the highest yield. 
• As service provider companies, all 3 telcos offer a NAV lower than their traded share price due to their low asset investment.

OUR PREFERRED CHOICE

Based on the findings, we would choose MobileOne as our preferred choice of investment. 

Mobile One

• MobileOne also has the lowest PE while giving out a healthy 5.5% dividend yield. 
• The low PE indicates that MobileOne’s share price can still rise higher to between 14-15x PE to catch up with its peers. 

StarHub

• StarHub may have the highest ROE but it depends too much on debt to fund its operations. 
• Even though StarHub offers a higher dividend yield, its PE shows downside risk as the share may slide to match its competitors.

SingTel

• SingTel’s dividend yield, ROE and ROA are the lowest among the 3 companies but it has the highest share capital and NAV. 
• High volume of transactions involving large number of shares are required for SingTel’s share price to appreciate. 
• SingTel is a good choice to invest in times of uncertainty due to its huge share capital and strong business foundation but its share price is the highest among the 3 telcos and could be an expensive choice to invest.

MobileOne, being the smallest player in the market, still has a lot to offer and would benefit the most from the Next Generation National Broadband project (NGN) as it would be provided with the necessary infrastructure to compete with the other big boys in the network industry once the project is completed. The high-barrier industry prevent others from jumping into the bandwagon and the expertise of MobileOne in the local market would encourage foreign partners to tie up with it.

CHOOSING THE RIGHT SHARE

Choosing a share to invest requires a lot of research on the background of the company and its potential to expand further. 

• Always compare companies from the same industry and in a similar business as you can never compare apples with oranges. 
• If you are looking for a share for long-term investment, always look for one with a stable dividend payout that adheres to your requirement. 
• Both fundamental and quantitative analysis are basic means to fully understand the potential of a company. 
• Remember to use the various forms of fundamental analysis before choosing your next rewarding share.

Read:

Understanding Fundamental Analysis (Part 4)

Understanding Fundamental Analysis

The Intelligent Investor: A Comparison of Eight Pairs of Companies

This is really a “put the principles into practice” chapter, above all else. The premise is really simple: Graham simply picks eight pairs of companies off of a list of stocks available on the stock exchange. He simply chose ones that were adjacent to each other in name on a long list of publicly traded stocks.

So what’s the value in reading these comparisons?

The value comes in seeing what things Graham looks for when comparing two companies. If you carefully read this chapter, you can tease out a lot of interesting basic concepts that Graham seems to rely on in his analysis. Let’s dig in.

Chapter 18 - A Comparison of Eight Pairs of Companies
So, what “basic concepts” am I talking about? Here are five things that stood out to me in Graham’s comparisons.

Companies that stick to their core businesses are generally better values. Companies that dive into mergers and make big splashes into other businesses get all the attention, but if you’re looking for value, look for companies that focus in one area and do it well.

Investing on what you think will happen in the future is almost always a bad idea. No one can predict the future. If you’re investing for value, don’t bet on a company because of what they’ve done very recently. Look for a long track record.

Overvalued stocks tend to stay overvalued, while undervalued stocks tend to stay undervalued. Why? Conventional wisdom tends to rule the day. If a company is seen as “hot,” it takes a lot for that facade to go away. Similarly, if a company is seen as “boring,” it’s very hard to lose that stigma. That’s why selling short really only works well in certain specific situations where a company is clearly losing something of value, not just merely the fact that it seems overvalued.

A company in a highly competitive market is almost never a value. If a company has a lot of strong competitors, you should never view that stock as a value stock. Most good values sell products in niches where there isn’t much competition - hence the perception that such stocks are boring.

Price volatility is usually a bad sign. If a company is experiencing far greater price fluctuations than the market as a whole is seeing, particularly when it alternates between going up rapidly and going down rapidly, avoid the stock. Such events happen only in companies that are either unstable or are involved in something else going on in the market, both of which are good to avoid.

Commentary on Chapter 18
Zweig attempts to do eight similar comparisons with more modern companies, looking at them as they sat in 2002 and early 2003.

Again, most of these comparisons are really products of their times - they aren’t valid looks at the companies today. However, these comparisons do reinforce most of the principles taught in this book - nice, quiet, steady, stable companies with steady dividends and earnings growth are the ones that make for a great value.

Most importantly, it establishes that Graham’s principles are all about the long term, not the short term. If you’re interested in day trading and selling short, Ben Graham’s philosophy isn’t the right one for you.


Ref: The Intelligent Investor: Four Extremely Instructive Case Histories