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27-01-2013, 09:40 AM
The Straits Times
www.straitstimes.com
Published on Jan 27, 2013
Charting stock performance
Comparing stock price now to 10-year average earnings yields insights
Let's recap some of the things I have talked about in this column. I discussed how we can value stocks by comparing the stock price to the stock's earnings per share and its net asset value per share.
Then I showed that buying a basket of stocks with the highest dividends relative to their book value appears to allow investors to capture the biggest returns among the few strategies that were discussed.
This strategy has only two negative years in the last 30 years - in 1997 and in 2008.
In the 12 months to March 1998, it fell by 22 per cent and in the year to March 2008, it plunged 38 per cent.
Despite the two downturns, the strategy still yielded 21.6 per cent compounded over 30 years.
Assuming a transaction cost of 5 per cent for the rebalancing of the portfolio each year, the return is still a rewarding 15.5 per cent a year.
Last week, I looked at market timing - how to tell when the market is irrationally over-exuberant and that perhaps in such times you should consider getting out of the market completely.
I compared the market price relative to its past 10 years' average earnings to gauge over- or under-valuation. The 10-year average earnings is used so as to smooth out the effects of business cycles.
The chart presented last week showed that indeed there would be depressed periods as well as periods of exuberance.
Using that indicator, one might be able to have had the conviction to stay out of the market in 1997-1998 and in 2008.
That would significantly boost the returns on the already high dividends-to-low book value strategy.
On the flipside, one could also miss out on some of the returns in some years as an over-valued market can stay over-valued, or get even more over-valued.
This week, let's apply the concept of comparing the current stock price to the 10-year average earnings on individual stocks. I shall let the charts do most of the talking.
The first two charts are of the banks - OCBC Bank and DBS Group Holdings.
As you can see, the earnings per share of both banks - smoothened over the past 10 years - have been on a steady climb. DBS's earnings is a bit more choppy than OCBC's.
Their stock prices relative to that earnings, however, are at the lower end of the 18-year range. This suggests that the banks are not excessively valued by the market at the current moment.
Next, let's look at Keppel Corp and Frasers & Neave.
Keppel's earnings growth has been phenomenal, especially after its rig building business took off. After the spike in its price-to-10 year average earnings in 2007, its valuation has come down to saner levels.
Meanwhile, F&N has also seen a steady climb in its earnings. But as you can see from the chart, its valuation has also been climbing - thanks to the recent bidding war for its shares.
The next two charts - those of Singapore Airlines (SIA) and Venture Corp - are interesting.
Unlike the earlier charts, the ones here show that the earnings are coming down.
This is due to the structural change in the industries that both companies are operating in. Our national carrier now has to compete with the numerous budget airlines that are traversing the skies.
Venture, meanwhile, is up against the Taiwanese manufacturers which have gobbled up loads of market share.
For SIA, its valuation - based on the metric I look at - is higher than back in the 1990s.
As for Venture, the strastospheric valuation it enjoyed back in 2000 has come down to more earthly levels. If it can maintain this kind of earnings, current valuation does not appear to be too bad a level to get in.
Next week, I will look at the arguments for and against holding a concentrated portfolio versus a diversified portfolio.
hooiling@sph.com.sg
www.straitstimes.com
Published on Jan 27, 2013
Charting stock performance
Comparing stock price now to 10-year average earnings yields insights
Let's recap some of the things I have talked about in this column. I discussed how we can value stocks by comparing the stock price to the stock's earnings per share and its net asset value per share.
Then I showed that buying a basket of stocks with the highest dividends relative to their book value appears to allow investors to capture the biggest returns among the few strategies that were discussed.
This strategy has only two negative years in the last 30 years - in 1997 and in 2008.
In the 12 months to March 1998, it fell by 22 per cent and in the year to March 2008, it plunged 38 per cent.
Despite the two downturns, the strategy still yielded 21.6 per cent compounded over 30 years.
Assuming a transaction cost of 5 per cent for the rebalancing of the portfolio each year, the return is still a rewarding 15.5 per cent a year.
Last week, I looked at market timing - how to tell when the market is irrationally over-exuberant and that perhaps in such times you should consider getting out of the market completely.
I compared the market price relative to its past 10 years' average earnings to gauge over- or under-valuation. The 10-year average earnings is used so as to smooth out the effects of business cycles.
The chart presented last week showed that indeed there would be depressed periods as well as periods of exuberance.
Using that indicator, one might be able to have had the conviction to stay out of the market in 1997-1998 and in 2008.
That would significantly boost the returns on the already high dividends-to-low book value strategy.
On the flipside, one could also miss out on some of the returns in some years as an over-valued market can stay over-valued, or get even more over-valued.
This week, let's apply the concept of comparing the current stock price to the 10-year average earnings on individual stocks. I shall let the charts do most of the talking.
The first two charts are of the banks - OCBC Bank and DBS Group Holdings.
As you can see, the earnings per share of both banks - smoothened over the past 10 years - have been on a steady climb. DBS's earnings is a bit more choppy than OCBC's.
Their stock prices relative to that earnings, however, are at the lower end of the 18-year range. This suggests that the banks are not excessively valued by the market at the current moment.
Next, let's look at Keppel Corp and Frasers & Neave.
Keppel's earnings growth has been phenomenal, especially after its rig building business took off. After the spike in its price-to-10 year average earnings in 2007, its valuation has come down to saner levels.
Meanwhile, F&N has also seen a steady climb in its earnings. But as you can see from the chart, its valuation has also been climbing - thanks to the recent bidding war for its shares.
The next two charts - those of Singapore Airlines (SIA) and Venture Corp - are interesting.
Unlike the earlier charts, the ones here show that the earnings are coming down.
This is due to the structural change in the industries that both companies are operating in. Our national carrier now has to compete with the numerous budget airlines that are traversing the skies.
Venture, meanwhile, is up against the Taiwanese manufacturers which have gobbled up loads of market share.
For SIA, its valuation - based on the metric I look at - is higher than back in the 1990s.
As for Venture, the strastospheric valuation it enjoyed back in 2000 has come down to more earthly levels. If it can maintain this kind of earnings, current valuation does not appear to be too bad a level to get in.
Next week, I will look at the arguments for and against holding a concentrated portfolio versus a diversified portfolio.
hooiling@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
