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BEING A MODERATELY risk averse retail investor with a medium term investment horizon of 3 to 5 years, I have chosen stocks that are diversified between blue-chips for stability and speculative stocks for upside. This means, my sell signal is when many people are saying a stock is going to show exceptional earnings growth the following year. Secondly, I wait for accumulation opportunities when the stock is sold down because of a negative announcement (provided the bad news does not change its long term business outlook). Here are my 3 current stock picks: |
DBS Group - Higher net interest income
AFTER FIVE years of support, the US Federal Reserve is finally winding down its Quantitative Easing program this year, reducing its bond purchases from US$85 billion to US$75 billion a month.
After all, the US unemployment rate (7% in November 2013) is at its lowest in 4 years. Meanwhile, the S&P 500 Index has risen steadily by 40% over the past two years to over 1750.
US unemployment has fallen from 10% in early 2010 to 7% currently. Bloomberg data
This bond-buying program, which was designed to depress long-term bond yields in order to stimulate the economy, has kept yields below levels where they would trade in a world without QE.
The Fed has said it is looking for a 6.5% unemployment and 2.5% inflation rate before ending the QE program, and most of its FOMC members believe the first interest rate hike will happen in 2015.
During 2013, the prospect of a reduction in the QE program caused bond yields to jump as investors began to anticipate the eventual end of the policy.
The 10-year US Treasury yield, for instance, rose from a low of 1.63% on 2 May 2013 to near 3% by the close of the year.
Singapore’s exchange-rate based monetary policy means that our interest rates are largely determined by interest rates of our major trading partners and competitors, such as the US.
A higher interest rate environment means high net interest margins for Singapore banks.
DBS Group Holdings is the top pick for brokers who have given an “Overweight” rating for this sector.
During the first quarter of last year, DBS broke its S$15 stock price resistance that coincided with the QE stimulus.
“We believe DBS is best positioned to take advantage of a rising interest rate environment, given its liquid balance sheet and strong deposit franchise with cheap funds accounting for 58.4% of total deposits. We have a BUY call on DBS with SGD19.70 TP, based on 14x FY14F core EPS, a slight premium to its rolling PER average since 2005.” - Ng Wee Siang, CFA (Maybank-Kim Eng, 2 Jan 2014)
DBS Group Holdings closed at S$16.98 on Friday.
Raffles Medical Group - Strong partners for PRC foray
Executive chairman and co-founder of Raffles Medical Group, Dr Loo Choon Yong. Company photo
HOSPITAL REVENUES in the Asia-Pacific region are expected to triple over the 5 years to 2017 to US$1.09 trillion (2012: US$377.9 billion), aided by rising incomes and prevalence of chronic diseases, according a report in June 2013 by Frost & Sullivan.
Raffles Medical Group (RMG) is Singapore’s second largest healthcare provider and currently generates most of its earnings from Singapore.
To tap on the rapid growth in the Asia-Pacific region, it signed a non-binding Letter of Intent and a framework agreement in 2013 for the proposed development of two integrated international hospitals, one each in Shenzhen and Shanghai.
The total capex is estimated to be about S$400 million and start-up losses are expected for the first 3 to 5 years of the green-field hospital project.
It has cash reserves of S$146 million to fund its projects, but what I like about RMG is its ability to tie up with strong project partners.
Its partner for the Shenzhen hospital is the PRC state-owned China Merchants Group. Its partner for the Shanghai hospital is Shanghai Liujiazui Development, another government linked conglomerate responsible for developing a new financial district in Shanghai.
Having state-owned conglomerates with property and banking groups under their wings as partners is a strong plus point, as I consider the major hurdles in hospital projects to be obtaining the land and operating licenses, as well as the need to burn much cash during their green-field years.
“We like RMG for its capable management team, robust growth prospects and strong brand equity. Our core EPS projections imply a CAGR of 12.7% from FY12-14F. Maintain BUY and S$3.61 fair value estimate on RMG, pegged to 29x FY14F EPS.”- Andy Wong (OCBC Investment Research, 9 December 2013)
Raffles Medical Group closed at S$3.10 on Friday.
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Rex International – Groundbreaking technology & strong management
Mans Lidgren, CEO of Rex International. NextInsight file photoOIL PRICES at about US$100 a barrel translate into strong prospects for the oil exploration and production sector but instead of heavy weights like Keppel Corp or SembMarine, I have chosen Rex International for its potential upside.
The start-up company is currently not profitable because it has yet to generate income.
Rex's business model involves selling original oil in the ground and recycling the sale proceeds as capital for stakes in new concessions.
I like the stock for its breakthrough technology, the management’s astuteness in deal-making and protecting its intellectual property rights, and its ability to execute.
(1) Breakthrough technology: Rex Virtual Drilling technology has proven to be more than 50% accurate compared to the global industry average of 15% when traditional methods are used.
Also, Rex takes seismic data from oilfield concession owners instead of gathering the data itself and only needs 4 to 6 weeks to scan and interpret the data, compared to years for traditional methods.
(2) Deal-making ability: Instead of opting for immediate income as a service provider, it recognized that it can use its proprietary high tech data analysis service to bargain for equity interest in oilfield concessions.
(3) Ability to execute: Rex is able to gain rights to new concessions rapidly because oilfield concession owners recognize that the accuracy of its proprietary oil discovery technology translates into unprecedented savings during offshore drilling campaigns.
The company is on track to meeting its aggressive target of doubling its portfolio of E&P licenses from 10 (during its July 2013 IPO) to 20 within a year of listing. It currently has 16 licenses.
It is planning 5 to 7 offshore drilling campaigns this year and any single strike of commercially viable oil could led to a phenomenal FY2015 performance.
Here is what I consider to be a buying opportunity: Two weeks ago, the first phase test drilling at its Oman oilfield yielded disappointing results of non-commercially viable oil and caused its share price to plummet by about 10% to 58 cents (Friday close price).
At 58 cts, Rex International's stock price is near a historical low. Bloomberg data
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