Thursday, August 16, 2012

Consumer sector -- a safe haven?

I find that people tends to over doing things when they are on. Consumer index in our KLSE rallied almost 108% from its bottom since late 2008. I suppose there will be a few Warren Buffett around preaching these businesses are wonderful with great brands, great moat, simple enough business to be run by idiots, etc......

The price that investors paid I think is getting out of line that deserves some warnings. These are samples of great simple business sold to you.

I think any of these businesses sold for less than 3.5% ~ 5.0% dividend yield but selling above 25X PE are no longer attractive. We should understand that our 1 year FD rate is around 3.05 - 3.10%. A good bond fund would generate at least 5%. Both of these products are considerably much lower risks. We are not in USA or Europe where the alternative returns are so low. The only argument left is hoping foreigners will continue to chase the price because of the dividend yield is better than their home country alternatives. But then the liquidity in these counters are relatively low that you think it will attract them? So, this assumption needs to be re-examined.  If the shares changing hands merely among small investors, somebody asses will get burn when the music stops.


K C said...

If a stable company has a high expected growth rate, say more than 20% for the next 5-7 years, a PE ratio in the twenties may not be high, if you understand the power of the 8th wonder, ie the power of compounded return. Of course paying high for something "expected" may not be wise because what is actual often deviates from "expected", sometimes by a wide margin. A more appropriate measure should be the return of equity (ROE). If the ROE is say 30%, or more for a stable business, a PE ratio of 20+ is not really expensive, if you are looking at a required return of 10%. Look at Public Bank as an example from its historical performance.

Value Investor said...

Majority of investors in consumer stocks are the "Buy and Hold" type as their main priority is on the high dividend returns. Before the recent trend of investors seeking "shelter" into so-called less risker stock (i.e. consumer, REITS) the yield of some of these benchmark stocks such as Nestle, DIGI, BAT was around 5-6%. However, due to the limited supply of such stocks on Bursa, the continuous buying, especially by funds have resulted in their yields to go down to between 3-4% currently.

I bought Nestle during the 2008-09 crisis at RM27 when it was trading at a P/E of about 22X and yielding 5.5%. As I bought it purely for the good yield, I sold it in 2011 at around RM45 when it was traded close to a P/E of 28-30X and only giving a yield of less than 4%. I switch to other stocks that were giving a yield of between 7-8% such as TienWah, Deleum and Power Root.

Power Root is a good example of a mid-cap consumer stocks but overlooked by investors. I bought Power Root last year at around RM0.54 when it was trading at a P/E of around 7X but giving a yield of about 8%. It has a strong balance sheet, experienced management and good dividend payout ratio.

The problem with most investors is their lack of patience and they prefer to trade rather than invest as most are not interesting in spending time and effort to study/research the companies that they are investing in.

Turtleinvestor said...

KC, Value Investor,