The rise and rise of Consumers

When everything else are not so safe, people go for the presumably the safest - consumer goods. We need to eat, we need to drink, we still need to have that puff. However, have you heard of in times of despair, its also time for opportunities. This is also times when institutions and retail together are looking for safe haven. Why? They themselves especially the institutions have to be safe - otherwise they may be out of job. Hence, in times of uncertainty, we might as well be travelling on the "Road Most People Travelled". Humans can't move away from that herd mentality.

Look at the four charts below for Carlsberg (supposed to be a sin stock - we would think Malaysia especially to be a shrinking beer drinking country?), BAT (cigarettes supposed to be a stock to be avoided as they have not much growth story anymore  - NOT quite TRUE), Nestle (a strong food brand - strongest in fact) and Dutch Lady (a strong regional dairy products brand). Hence, we are looking at four consumer goods with different profiles. But they have 1 similarity!

BAT Share Price

Dutch Lady Share Price

Carlsberg Share Price

Nestle

After looking through the 4 charts, can you spot the difference? I can't. Basically, the trend is an assumption of them doing very well. Yes, these companies are doing well, BUT not all of them deserves the word very. They consistently do well, that is all. Probably, that's the next best thing for now.

These are the stocks where it is supposed to provide us with the comfort as they have strong brand names. They provide some comfort but are we just looking for that comfiness? - especially when it has gone that high. Very quickly, over the last 2 years some of these stocks have gone from very cheap to expensive. How fast things have changed? Is it a herd thing? After all, we people move in herds.

Now, who dares to move out of that pack? Now is the best time to look for the next best thing after this. Question is, which one is it?

Why I appreciate better businesses than cheap stocks

There is this quote from Warren Buffett, 'It is better to buy a great company at a fair price than a fair company at a great price.’

If you follow my blog, I am in awe for great businesses rather than cheaper undervalued stocks. As an example, I did say I see greater heights in Nestle, while I have some reservations over RCE Capital despite its valuation is way undervalued and attractive (PE) due to some structural problems. Well, these are my opinion. Nestle's PE is about 29x while RCE's PE is around 5x. Some readers, I noticed prefer value buy - nothing wrong with that.

Now, let me tell you again why I am into great companies. Great companies are built by great business people - at least during the process of building the business, there is at least one individual why has created the DNA of a great company. See Wal-Mart (Sam Walton), Apple (Steve Jobs, of course), Genting (Lim Goh Tong) and even Coca-cola was helmed by several great individuals. Great companies can attract more investors.

Now, think of stocks as a business investment and we as investors put the trust of our decision into the hands of these businessmen. Along the way in the process of building the business, for sure they would have their hands in acquisitions, expansion, divestiture etc. A great leader may have put their skills into test by making decisions that benefit the business in doing that acquisition or divestment. Even in divestment, they would probably know when to divest a business or what their foresight would be like in business decisions that they make. The CEOs literally invest for us besides just managing the company. His / her future action is what you pay for now. Question is, are you willing to pay a premium for a great manager or are you willing to pay below average for an average manager?

Just as an example, Genting Malaysia's foray into Australia, Miami and New York's gaming business. If you are an investor of Genting, your investment is dependent on their decision making on these investments. You are investing into the management as well, not just the company and the brand. In a great company, you are investing into a company which other people are looking to invest as well. Great companies attract more attention. Additionally, owners of great businesses tend not to sell (at fair price) - especially after all the hard work of building it. On the other hand, if the business is just average, the tendency to sell would probably be higher.

Undervalued?

Now, turn it around and let's see a company which is grossly undervalued - Insas. It is now trading at RM0.41. Its book value is RM1.40, hence trading at 70% below book value. If you have invested into the company, you probably have not seen much gain. I have noticed this company for years but to be frank I am probably lucky I did not put my money into it as I was doing a sum-of-parts analysis, and it is attractive now and before. I was really attracted to the idea of buying some stocks - 7 years ago and if I had bought and held it until now, I would probably see no gain.

Let me ask you, are you going to put your money into this company now that you know it is undervalued? Bear in mind, it could have called for a delisting exercise at a slight premium to its price today. You as a minority investor would probably have no say. Again, I probably would not know what is in store for the future but if I have made my decision 7 years ago, I would not have liked it.

On the other hand, if you found a great company with undervalued prices, then you have hit a jackpot!

Nestle: Great companies are expensive

If you are 40 - 50 years of age (or more) and in Malaysia, do you remember Ovaltine? What about Indocafe? Were you the ones who preferred Cintan over Maggi? What happened to them now - these brands are still around BUT just that they are now way overwhelmed by Milo, Nescafe and Maggi.

Think of it this way, as a business owner would you rather own a Milo or an Ovaltine brand (assuming they are sold to you at the same valuation, not price)? Unless, you have the confidence and ability to turnaround the Ovaltine business, the effort to push for its success almost end up in futility. It is almost always much harder to turnaround a failed (or struggling) brand than to manage a successful one for consistent growth. Of course any self-confident investor would prefer to stumble upon great and fast-growth companies such as Facebook, Google, Microsoft, Apple at an early stage - but seriously we are looking at investment as a part time job. Most professional firms which invest into early start-ups are seldom successful anyway.

So how do you as a busy working adult with some savings tend to look at your investment opportunities? You look for great companies. The biggest issue is that great companies tend to be expensive. Look at the below statistics specifically on the Price Earnings line for Nestle.

Except for 2008, the year where most investors grapple for safe haven investments such as gold, government bonds, Nestle's PE was never below 20. The lowest it went was 18.5x, and highest most recent year, 2012 - almost 29x. In fact, I have looked further up to as early as 2001, the PE was never below 20x. Just look at the trend below.

Three other lines which you will want to notice are the Profit After Tax (PAT), Cash Flow and dividend yield. Nestle has superb PAT and Cashflow growth for a mature company while dividend yield which tracks its dividend payment against price is above Fixed Deposit yield in Malaysia.

Hence what does that tell you? Even at its most expensive period like now, you are almost assured of buying into a company that is to have a continuous growth in future while it continues to pay a good dividend to you as an investor. Yes, for the more aggressive investors, Nestle is a boring stock but for the person who do not have much time doing research, Nestle is one company which you do not have to do research. You can almost be assured that this is one stock which provides the natural hedge against inflation, recession and any other calamities.

And yes, it is expensive - so are diamond and gold (for those who is buying gold as a natural hedge against inflation and currencies depreciation)! As Warren Buffett says, would you buy something which you can only fondle but does not do much beyond that?

I wonder fondling a piece of gold bullion ever becomes a hobby...

I recently bought a bottle of IndoCafe (cause for whatever reason Nescafe was not available) - did not like the taste anymore - I am now starting to believe that taste is most of time acquired.

Serious Investing! 

If you are not an Investor which ONE stock should you pick

Imagine yourself do not have the time to read through stock picks. You have no time to do your own research. You do not trust the unit trust agents or investment managers. Neither do you have believe in any other trade calls as they are mostly short term trades. The return from fixed (time) deposits are just too low. You do not want to keep too much in cash as well. You want to have some investments (besides properties) for your retirement or children's education fund over the next 10 to 20 years.
Which one stock would you pick? We do not want to look at financials at all in this piece. Judgement beyond numbers will be used. It has to be a stock with very strong brand value, stickiness. No PE, EV/EBITDA or any fancy ratios will be used at all as it does not matter for this one stock for your lifetime. (Some stocks may be expensive now but a good stock will give you back your value in a matter of time not too long down the road)

Let's look at the potential lists of individual stocks and where it must meet the above criteria.

Utilities stocks
Tenaga Nasional, Independent Power Plants or any other water utilities stocks - not really as we already know how poorly run Tenaga is. Other IPPs? Some of these concessions are almost to end over the next 10 years. Gone are the lucrative contracts anymore. Hence No. Utilities stocks do not meet any investments criteria for now.

Banks
This sector is more interesting as some of them have given much value to investors over more than 20 years.
CIMB - Well run now but it is very much seen as a one man company right now - Nazir Razak. What happens if there is a change in government - the CEO can be changed as well right? - hence do not buy as it is an unknown.
Maybank - decently managed but not one which you would want to own  as it is not good enough. Anyway, over the last 10 years, it is one of the least performing bank as compared to CIMB or Public.
Public Bank - if we look at banks only, maybe this is the one. Very well run, but the leading man is 80 years of age? It has to prove to me what happens if it changes its management.
Hence for that one stock to choose, banks are not the one.

Telecommunications
Telco sectors, you have 4 stocks - Telekom Malaysia, Maxis, Axiata and Digi.
While they performed well over the last 10 - 15 years - the end game is not known yet and it will never be. First there was TM, then Celcom (now Axiata) and later Maxis. Digi has provided a lot of value to its investors as well. However, as you can see winners of the industry changed few times over less than 20 years. This sector is a bit too volatile and technology caused change in regulatory decisions as well.

Constructions and Property stocks
Some construction stocks have given good value to its owner. But Hell No as they are too volatile. Moreover,most construction stocks depended on largesse from the government for jobs. As for properties, again the land bank thing is a hindrance. Example, what happened to one of the property darling, Sunrise.

Petronas Group of stocks - PDB, PetroChemical, MISC
Uninteresting - and what happens when we run out of oil? I am not able to answer that.

Plantations
Plantations in Malaysia basically refers to palm oil. Maybe this is one of the sectors that will last through time. There are some good stocks there such as IOI, KL Kepong United Plantations. (I would not consider Sime Darby as it is a conglomerate) However, one of the threat is Indonesia, as it seems the prices of oil palm more and more are being dictated by Indonesian planters and government. Anyway, palm oil is more of a commodity stock.

Consumer goods
Tobacco - No. Due to regulatory factors.
Liquor companies - No. Same as above.

Out of all the consumer food companies (Dutch Lady, F&N, Mamee), one stands out - Nestle. It has a very dominant position for two or even three of its brands in Malaysia - Nescafe, Milo and Maggi. Anyone in Malaysia can do without one or the other? (And is Malaysia a growing population? Yes for sure.) Name the competitor brands for Nescafe or Milo? There are, but any one of them are able to shake these brands owned by Nestle? In fact, over time probably Nestle has gained market share from its competitors.

Will it be affected by raw material price inflation? Yes, short term - a definite, No for the longer period. Its brand power provides them pricing power especially for Milo and Nescafe. Its sales volume also provides them purchasing power strength from its suppliers. People can afford not to eat out, but will probably not bother to do without Milo. This one stock, no one cares who its CEO is. Can you name the person? This is one company which the management can make mistakes for that one year and yet be still dominant! There you are this stock is the hedge against inflation.

Is it expensive? Yes, but as I said this stock is for those with really long term outlook.
If you are looking for one pick only, do not even bother to look at its financials. Just take that pick!

For overseas investors, I am referring to Nestle Malaysia and I am also sure Nestle, the one listed in Switzerland is just as fantastic!

Happy Investing!

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