Spotting Dark Horses amidst Uncertainties
The stock market is the best entertainer for any twists and turns you see as they’re always beyond your expectations. Do you still remember that just a month ago, many did not expect President Xi and Trump would reach a favourable outcome (even short term) during the G20 meeting? But they reached a trade truce, albeit without specified period. Furthermore, Trump had announced that he now allows US companies to sell goods to Huawei once again. While the market was feeling positive about the progress, the Chairman of Huawei, Liang Hua, said on 12th July 2019 that the Chinese tech giant has yet to see any benefit from the lifted ban. “So far we haven’t seen any tangible change,” he said. Apparently, the so-called trade ceasefire is like a show.
Despite the ongoing trade dispute, it seems the global stock market has adapted and adjusted to a new paradigm. At the time of writing, the three major indexes in the US have broken new highs, while stock market indexes for the rest of the world are above the MA200 line, indicating the bull is in control. This is much attributed to the expected rate cut by the US Reserve Bank end of July. Malaysia Composite Index FBMKLCI, on the other hand, is still below the MA200 line. With the widely anticipated global economic slowdown, and ongoing tussles between the US and China, but bullish stock markets, how would investors navigate? Are we still able to find dark horses amid uncertainties? In this issue, let’s discuss the traits of a potential dark horse. But first, let’s have a glimpse of our portfolio on 15th July 2019:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.
The portfolio above has showed a gain of 226% since November 2015, which is a 13% increase compared to a month ago. We received dividends of 0.5 cents and 1 cent from JHM and GFM, respectively. Therefore, the total dividend received is RM2000. The cash on hand is now at RM43915.
Six Traits of a Dark Horse
A dark horse is a company that has hidden potential for tremendous gain within a period – For example, a 500%-1000% gains in share price within 10 years. Here are the five traits of a potential dark horse:
1) Doing Global Business
If you can serve the whole world, you would have a huge potential for growth, compared to serving only a country. Your revenue growth potential would increase in tandem with the growing population and untapped markets. This would translate into higher profits and eventually the share prices.
2) Business in the Global Trend
Because of the trend, consumers have to buy your products whether they like it or not. For instance, the smart phone boom since 6-7 years ago has revolutionised the world. So, what would change the world in the next 5 to 10 years? Perhaps; artificial intelligence, renewable energy, vegan food, cashless transactions, automotive LED, low cost airline and so on.
3) High Entry Barrier
Doing global business and selling products in trend is not enough. If everybody can do it, soon you would see the market flooded with similar businesses. Business with high entry barrier is not easy to replace and duplicate. For example, business in a monopoly position, strong branding, intellectual property and long and tough qualification processes.
4) Rising Revenue and Profit
If your business possesses the above three characteristics, it is likely that both your company’s revenue and profits are on the rise too. Therefore, if a company’s profit is growing on double digits for the last three to five years, there is higher potential it could be a dark horse.
5) Strong Cash Flow with Dividends
What would happen if the company keeps making more profits? Should it have received more cash? Unfortunately, not all companies’ cash increases in tandem with its profits. The company might not receive payment from customers, or it has used the cash to pay off the debt or interest.
Strong cash flow is a crucial factor that separates a dark horse from the rest. If the company has strong cash flow, it’s in good position to pay regular dividends. Therefore, always see if the company has good record of paying dividends, for it is an implication of good cash flow.
Conclusion
There are always potential dark horses around whether in good times or bad times. The good news is, during uncertain times like now, dark horses might be resting and you would have more time to spot them before they start running!
Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment
