How to look for potential good companies to
study? Where to even start if I do not even have a clue on what ratios to use
when I am doing a stock screening?
I’ll be honest with you. The easiest way to
start is to be more observant and curious the moment you wake up. From the
toothpaste you use to brush your teeth under the Colgate-Palmolive Company,
the breakfast you eat every morning, be it Gardenia brand bread manufactured by
QAF Limited,the MILO or Nescafe produced by Nestle (Malaysia)
Berhad, you’ll suddenly notice, investment ideas are almost everywhere.
Once you start to get the hang of it, curiosity
will pique you to be eager to know more about these companies. Let me share
with you the 4 Ms I look at before I proceed to invest more time and effort to
study a company deeper!
Every listed company has a business or a few
businesses. For a company’s business to be successful, it must have a
competitive advantage or edge over its competitors. The first M – Moat is
perhaps the most important M that I look at.
What is a moat?
A moat, in a very simple explanation, is a
man-made lake, that usually surrounds a castle. Back in the days, moats usually
serve as a defence to deter enemy troops from attacking and entering a castle
in huge troops.
Warren Buffett popularized the term economic
moat, in which he explains, is the competitive advantage that a company has, to
prevent its business from being attacked by competitors.
An economic moat can range from having a strong
product brand, patent, copyrights, or regulation protection. One simple example
will be Bursa Malaysia Bhd and Singapore Exchange Limited, both
in charge of securities listing and managing the stock exchange of Malaysia and
Singapore respectively. Apart from them, no other companies are in the same
business, making them the sole monopoly in their respective countries.
A great economic moat will shield a company from
competition and disruption, just like the olden days where moats serve as a
castle defence. So having a good economic moat is, in my opinion, the greatest
advantage any company could have in a competitive world.
One of the simplest yet most effective ways to
differentiate a great company from a mediocre company is by looking at the
margins. A great company will be able to achieve a higher and more consistent
profit margin compared to its competitors.
Hartalega Holdings Berhad (Hartalega) and Top Glove Corporation Berhad (Top Glove) are two giant
glove manufacturers listed on the Kuala Lumpur Stock Exchange. Both are in the
same industry, manufacturing rubber and nitrile gloves.
But if we were to compare the net profit margins
of both Hartalega and Top Glove side by side, we can notice that in terms of
margin, Hartalega does have the upper hand, with a historical net profit margin
of around 20+%. Top Glove on the other hand only managed to achieve a net
profit margin of around 10+%.
This means that Hartalega Bhd is more efficient
in generating profits compare to Top Glove Bhd. This means if I am looking at
investing in the glove industry, I would focus on Hartalega Bhd first before
looking at Top Glove Corporation Bhd.
A company needs to prove that it can produce
cash from its business operations. Under accrual accounting, a company can
always record higher revenues with higher accounts receivables. A potential red
flag can be raised if operating cash flow does not follow the trend of revenue
Even when a company has proven it has the
ability to rake in cash from its businesses, the next question to ask would be
how would the company deploy the cash it has? Will it be paid out as dividends?
Will it be used to pare down debts? Will it be reinvested for capital
Again different companies in different sectors
will be undergoing different phases of growth. An exciting growth company
should be concentrating on reinvesting its cash in rapid expansion mode while
stable cash cow companies should be paying out regular and sustainable
dividends. So do keep an eye on how a company utilizes its money!
Last but not least is the management, the
directors, officers and managers running the company. Just as the famous
Chinese saying of “A great rider needs a great horse, a great horse also
requires a great rider”, great companies achieve more under great management
There are currently 3 companies worth 3 trillion
USD. All 3 of them have visionary and exceptional management to guide them to
where they are today. Tim Cook, CEO of Apple Inc., Jeff Bezos, founder
and CEO of Amazon.com, Inc. and Satya Nadella, CEO of Microsoft
All 3 of them are powerful managers, and
surprisingly all 3 of them manage tech-related companies. In a world where
science and technology are evolving so rapidly, it is pivotal for them to be
always focusing on where their companies would grow towards.
We have seen Amazon starting off as selling
books to selling almost everything to now streaming music and video. Microsoft,
which sells software and operating systems for personal computers, even came
out with gaming consoles (the X Box) and is now focusing heavily on cloud
It is a heavy responsibility as a company leader
to venture into the realm of the unknown. And if a venture is successful it
opens up a new economic moat and niches segment that the company can monetize
on to deliver more profits. But the downside of a potential failure would also
pose huge risk to the company’s performances as well
I would be lying to say that even after all 4M’s
are met, investing in these companies would be a sure-win game. There are many
factors that can affect the course of a company’s performance and direction.
But by knowing these 4 factors coupled with prudent risk analysis and
assessment, the chances of succeeding in investing would increase.
Then again, even if everything is in place, the
last piece to the jigsaw puzzle is the T factor.
The friend of a fantastic investment – Time!
Persevere in your stock analysis, and have the
Patience to watch the company grow!
Ong Joo Parn is the co-founder of MyKayaPlus.com, a website that aims to spread financial literacy to the mass public. It aims to prove that financial freedom is possible through hard work and determination, even though without a degree in finance and accounts. Being a Malaysian based in Singapore, has allowed him to see the beauty not only from both stock markets, but also any great potentials around the world.