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Picking A Consistent Portfolio Of Winning Stocks
Featured, Perspective | 24 September 2014
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By: Peter Ng
Articles (81) Profile

An investor’s main objective is to assemble a portfolio of winning stocks. Since most of us have differing views towards what constitutes a winner from just another stock, the question is how does one know whether he or she has picked the right stock?

The answer is no one truly knows.

Although this does not mean that an investor should pick stocks like a game of roulette, however, there are certain signs and characteristics which investors can look out for in a stock to increase their probability of finding the winners.

This topic was discussed in a three hour seminar with Gabriel Yap, a veteran in the financial markets with 19 years of experience, where he has listed four main points to help an investor in his or her quest to construct their portfolio of stocks.

1) Times Of Crisis And Embracing Of Market Volatility

While some advocate that it is impossible to pick up certain stocks since their prices have been historically trading beyond their desired entry levels, however, this is unlikely the case during times of distress when funds are massively pulled out from the stock market.

For instance, during the peak of the Euro and US debt crisis which took place in 2011, the Straits Times Index (STI) plunged 20.4 percent to 2,528 points from 3,177 points, all within a three-month period between 2 August 2011 and 5 October 2011.

As a result, even the largest companies listed on the STI took a huge hit in their share price during this period, presenting the golden opportunity for investors to pick up companies on bargain. Some called that an extension to the annual great Singapore sale.

2) Embedded In Strong Businesses

To a large degree, a company’s stock price depends on its earning ability which is measured by the amount of profits a company can make.

On the grand scheme of things, a company which possesses a sustainable competitive advantage is more likely to grow its business without much disruption from competition, generating returns for its shareholders and eventually commanding a higher valuation on its share price.

An example of such a business would be the Singapore Exchange (SGX). The company is the only stock exchange in Singapore and does not have to compete with anyone else, therefore allowing the company to consistently generate a net profit margin of more than 50 percent. This is higher than 85 percent out of about 800 companies listed on the SGX.

3) The Transformers

This point mainly relates to companies undergoing a transformation to improve the underlying performance of their businesses.

In the case of Otto Marine, the former shipbuilder was previously in losses for two years in FY10 and FY11, and subsequently transformed itself into a ship charterer as the segment provides a more recurring revenue stream. Upon its transformation, the group has turned the corner and recognised a profit of $17.8 million in FY13.

More can be read here.

Investments like these are not only harder to spot but also require an investor to understand a company’s business to a very large extent, as such an investor should not consider such investments until ample homework and analysis has been done on the company.

4) Companies-specific Disastrous Events

Just like any human beings, companies do commit mistakes at times. Depending on the severity and degree of mistakes committed, such events could present entry opportunities for investors.

One such example would relate to BP, one of the largest oil companies in the world in terms of daily oil production. In 2011, the company has committed the largest accidental maritime oil spill where 4.9 million barrels of oil was leaked into the Gulf of Mexico.

The incident has led the oil giant to record a loss of US$3.7 billion in FY10 resulting its share price to crash more than 50 percent to a low of GBP304.60 in the same year.

Known as the largest haphazard oil spill in history, BP suffered huge losses in FY10.

Apart from the revenue loss in FY10 and the potential hefty fine, nevertheless such incidents are considered one-offs and do not affect the existing business of BP.

Subsequently, from FY11 onwards, profits returned, BP’s shares recovered to GBP460.50 by the end of 2011, a 51.2 percent gain excluding dividends within a span of one and a half years.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

Singapore Exchange  8.400 +0.18 +2.19%   
Business: [FY18 Turnover] Equities & fixed income (48.2%), derivatives (40.2%), mkt data & connectivity (11.6%).

Insight: Jan-19, 1H19 operating revenue increased 5.7% to $... Read More

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