Research analyst shares his view on how he looks at 7,500 firms across Asia and 22,000 in the world to screen for world-class companies.
HE does not watch TV and does not check his e-mails regularly.
But this finance enthusiast has huge amount of data at his fingertips.
“If I want to know what’s happening, I’ll just ask the people I meet. Last time, I didn’t even wear a watch. If I want to know the time, I’ll ask someone,” says investment research analyst and strategist Andrew Stotz.
So, where does he gather information?
Academic papers, books and people he looks up to.
“I don’t want to be distracted,” he says of the noises out there.
“Throughout my career in the financial field, people want answers and they want it now. The experts are pushed to saying things but that’s not the truth or reality,” he says, referring to the global rout in equities over the week.
While many people blame it on China, he says it’s just unrealistic for people to expect the same kind of growth the world’s second-largest economy has gone through in the past few decades.
When a country is developing, it drives gross domestic product to exceptionally high levels.
But once the infrastructure is there, it is inevitable that the economy will slow down.
“Now they’re telling China to loosen policies so that consumer spending will drive the economy but that’s the US consumer bankrupt model. And I don’t agree with that,” he says.
The American who’s spent more than two decades in Thailand was attached to brokerages like Maybank Kim Eng, CLSA Thailand, Citibank and Macquarie. And he won numerous awards during the period.
He thinks the Thai political scene will remain challenging due to the “winner takes all” scenario. Household debt level in Thailand is not as bad a perceived because some 50% of consumer debts are in the form of mortgage loans. Unsecured loans, which comes largely from credit card debts, make up about 25% while the remainder is car loans.
A yardstick of his own
Stotz went on to set up Stotz Investment Research that ranks companies based on what he calls “world-class companies”.
Among others, one of his portfolios outperforms the Thai stock exchange by 11%.
He says investing is like playing piano.
“Once you get your basics right, you can get away untethering from the conventional way. When a person learns to play the piano, he or she starts with the basics before composing a great piece,” he says.
According to him, his investment style is very data driven, depending on a combination of fundamentals, valuation, momentum and risks.
That method can be applied for companies and countries.
What works in the developed markets might not apply in Asian markets, which can be more volatile.
Based on his huge pool of data, he decides what works best in that particular market using the four factors.
In one example, there is a company in Indonesia trading at price-to-book ratio of more than 30 times. Analysts would call it a sell because of the lofty valuation.
But the company had been delivering return on equity of more than 100% and the risks were low. He invested in the stock and eventually exited with a profit.
“I can still make money even though the company was considered expensive.”
So first of all, one needs to understand what works in that particular market. He starts wide, then focus into a certain universe.
That said, it doesn’t mean that his decision making is top-down.
He looks at 7,500 companies across Asia and 22,000 companies in the whole world to screen for world-class companies.
“I can look at companies and decide very quickly.”
In terms of markets, he likes Taiwan, South Korea and Hong Kong because the debt levels and valuations of the companies there are low while fundamentals are sound.
“Debt level is a very important risk that I look at.”
As for Asean, valuations are much higher now and Malaysia is moderately attractive. DiGi.com Bhd is one of the “world-class” companies he picked in Malaysia.
He’s joining Fortress Capital Asset Management as an investment committee member for the firm’s new Asia fund that will be launched in early September. The expected size of the new fund is between RM300mil and RM500mil.
Views on macro events
On Chinese banks listed at the Hong Kong stock exchange, he says: “China’s H shares are cheaper than A shares. But those listed at Hong Kong are mostly banks and I see banks as commodities because the business is highly driven by governmental policies.
“There was a time some 20 years back when banks were entrepreneurial but not so much now.”
He likens the collapse in China’s stock market to a boom and bust that’s just too fast.
It took the US market 35 years from the previous burst to recover to the previous peak. But in China, it happened in less than 10 years! One comfort was, what happened in the Chinese stock market shouldn’t be contagious.
Foreigners’ holdings in A shares are very low due to the restrictions so the impact on foreign investors is really low. It’s mainly the local investors that got hit, he explains.
“Yes, there’s damages in the markets but people just need an answer whenever something happens.
“It’s all self-perpetuating. So as an investor, I would take a step back and think for myself,” he says.
The problem for China’s stock market was that it ballooned by 150% in a year after staying cheap for some seven years. Eventually about 25% of the amateur investors went in and they got caught.
Pre-determining his future action is crucial in preserving capital. When an investment hits Stotz’s preserve capital point, he will reallocate his capital without emotions.
“That doesn’t mean I will buy something immediate right after. I prevent my emotions from affecting my investment decisions.”
On the US rate hike, he says: “I don’t think the Federal Reserve will increase rates until next March.
The US Government has massive debts, which were passed on to the Federal Reserve from the American banks in “complicated ways” on the notion that they’re “too big to fail”.
By reversing the near-zero interest rates to where it was would mean they would have to double, triple or even quadruple the amount of interest costs and that will be a huge burden for the US Government, he explains.
And due to the massive quantitative easing, a little bubble in US stocks was created. As for the soft prices in commodities, it’s simply due to the lack of demand.
Then again, some people point finger to China.
All said, commodity is an asset class that’s overrated and that investing in commodities is costly for individuals, he opines.
On the other hand, the negative sentiment and ultra-low momentum in energy stocks make some of them appear attractive again.