Sunday, May 19, 2013

Invest like Benjamin Graham in Malaysia stocks

Benjamin Graham is the father of  investing and his way of value investing was to search for net-net stocks where he will construct a basket of stocks as his portfolio. His method of value investing is still being widely practiced by value investors such as Seth Klarman, Third Avenue Management etc. Following my blog post a month ago on Singapore stocks via a report by CLSA, I would like to feature a similar report by CLSA on Malaysia stocks. 

Ben Graham stated 10 rules for stock selection, the first five measuring “reward” (price relative to earnings) and the second five measuring “risk”  financial soundness and earnings stability). Ben Graham's 10 criteria are:

  • Is PE ratio less than half the reciprocal of the 10yr government bond yield?
  • Is the PE ratio less than 40% of the 5yr average?
  • Is the dividend yield at least 2/3rd of the 10yr government bond yield?
  • Is the share price below 2/3rd of tangible book value per share (BVPS)?
  • Is the share price less than 2/3rd of net current assets per share?
  • Is the net gearing ratio (net debt/equity) less than 100%?
  • Is the current ratio (current assets / current liabilities) greater than 2x?
  • Is total gross debt less than 2x net current assets?
  • Has EPS growth over the last 5 years averaged more than 7%?
  • Has EPS growth been negative no more than 1 year out of past 5 years?

Mirroring these 10 “value” requirements, CLSA Asia screened our ex-financials coverage universe: 13 of 31 stocks score 5/10 and above – big-caps are Genting, PGas, Tenaga, Gamuda, Genting(M) and KLK. Small-caps top the list, with Padini scoring 7 (highest) and rubber glove stocks Top Glove, Hartalega scoring 6. At the bottom of the list, we are underweight Astro, BumiArmada and Maxis. Stocks showing value and dovetailing with “base case” election outcome top picks are Tenaga, Gamuda, PGas, Genting(M), UEM Land, Top Glove and Padini.

For those interested to read more about the report by CLSA, please click here

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