Wednesday, August 15, 2012

Consumer stocks ripe for profit-taking

It was reported that Warren Buffet had recently sold down on consumer stocks after being disappointed by their performance. In a regulatory filing dated August 3, Berkshire is reporting about a 21% reduction in the amount of consumer products stocks it holds, even as it ups its exposure to banking, insurance, and industrial stocks. For more, go here.

Unlike the US consumer stocks, the performance of the top flight consumer stocks listed on Bursa Malaysia has been anything but disappointing. Just look at the 5 charts below. In term of financial performance, they also did not disappoint. So, should we just ignore the action taken by the Oracle of Omaha?

I have tabulated the value of the 5 top performing consumer stocks below. The valuation of these stocks are quite rich, with PE multiple ranging from 22 times to 30 times. One possible justification for buying or holding these stocks is that the growth rate is high. Looking at the table, you will see that the growth rate is respectable for Carlsberg & Nestle at 16-17% and the outlier is Dutch Lady. (Note: We can ignore F&N because of its current problems which I had dealt with in a separate post). Dutch Lady's substantially higher profit dates back to 1Q2011 when it had a successful relaunch of its growing up milk. Can Dutch Lady continue its high growth?

Table: Consumer stocks valuation

Investors should not only concern themselves with PE ratio but also look at PEG ratio. The difference between these two ratios are:
P/E = Price per share / Earnings per share

PEG = (P/E) / Annual earnings-per-share growth
(Note: The growth rate in the table above is arrived at by comparing the EPS for the last 4 quarters with the preceding 4 quarters' EPS).

As a rule, investors should seek out stocks with PEG ratios closer to 1 and avoid stocks with PEG ratios closer to 2. Based on this rule, the only stock that is relatively attractive is Dutch Lady while Carlsberg & Nestle (with PEG ratio at 1.8-2.0 times) & Guinness (with PEG ratio at 3 times) are deemed pricey. If Dutch Lady's current year growth were to slip to a more sustainable level (say 15%), its PEG ratio would be bumped up (to 1.6 times). While Dutch Lady would not be deemed expensive, it would no longer be deemed cheap.

Based on the above, I think it is advisable that we too should consider taking some profit on our high-flying consumer stocks- not because of their poor performance but because they are fully valued.

Chart 1: Carlsbg's monthly chart as at Aug 7, 2012 (Source: Tradesignum)

Chart 2: Dlady's monthly chart as at Aug 7, 2012 (Source: Tradesignum)

Chart 3: F&N's monthly chart as at Aug 7, 2012 (Source: Tradesignum)

Chart 4: GAB's monthly chart as at Aug 7, 2012 (Source: Tradesignum)

Chart 5: Nestle's monthly chart as at Aug 7, 2012 (Source: Tradesignum)


Mat Cendana said...

No one can deny that Warren Buffett is one of the greatest investors ever, if not *the* greatest. However, there is also no denying that his investments and strategies had not been the best at times. As with others, he had his misses and mistakes (although these were more than mitigated by his successes - it's the longer run that counts).

Gold - this is one investment which he had ignored and dismissed... and had missed out on the great rally over the past six years especially. I had read at (take caution that this is one of those `gold bugs' sites) which claimed that Buffett would have gotten more returns had he invested in gold rather than stocks. Don't really know whether this is totally correct. But it's worth noting these alternate opinions.

Anyway, concerning the main topic here: I have never bought this kind of stocks before due to their price, although I might one day... when I have a few million ringgit to invest. But what I'm concerned about right now is the essence of that post you wrote a few weeks ago - about the pre-election rally.

Over the past week or so, and despite the index going up, I feel that stocks have generally gone on a downtrend. Or going sideways at best. I suspect we are already in bear mode, albeit mildly. The question is for how long this will go on? The General Elections factor - this one is casting a shadow over the market.

At the same time, there's the coming Budget. Most analysts are predicting another `people (election?)-friendly' budget so there might be an upswing here. As always, the key is in timing - something that we can't get right all the time. So, the next best thing to do is to buy counters when they are at "reasonable" levels. At present, many/most are a bit on the high side. For me, I think I will do more watching than trading for now; selling when there's a profit.

Alex Lu said...

Hi Mat Cendana,

Your description of our broader market- one where the index is rising but the many stocks are seemingly in a downtrend or just drifting- reminds me of the late 2007. That's why I am cautious in this market because the market is merely floating with an upward bias. The next wave has yet to show up and that will dictate the price direction of the market. With the poor market breadth and the uncertainty in the global economy, we should reduce our exposure to the market & take profit on some of our investment.

Anonymous said...

Hi Alex

Can you comment on Brem Holding? What is it support and resistance level? Stock currently trade cum dividend of 6sen, yield at 5%.

Its earning base seem to be most diversify among construction stocks: water supply concession in PNG; property development; property investment and the least is from construction. Could it be next Ken holding, apply to transfer from construction sector to propriety sector?

Jay said...

Also, in year 2011 Dutch Lady stop Sweeten Condensed Milk production and sold off losing money business line to F&B, a small SCM player.

Fyi, Dutch lady is having a Capex project to install one more UHT production and target to do commercial production by End Feb 2013.

Alex, I think the outstanding share of 64mil by Dutch Lady make it a special one of becoming not so liquify counter among consumer stocks

Jay said...

fyi, Dutch Lady had stop Sweeten Condensed Milk (SCM) production in year 2011 and sold off the line to F&B, a small SCM player.
Dutch Lady currently is having a Capex project to add 1 more high speed UHT production line and target to have commercial run ready by 2013 Feb.
I think we can judge again by 2nd quarter of 2013

Btw Alex, how about BAT?

Alex Lu said...

Hi Jay,

Thanks for the info on DLady.

As for BAT, I think the stock can continue to rise but at a slow rate. I am cautiously optimistic that it can continue to improve its bottom-line, though a close reading of the Notes to the Accounts suggests that this may be difficult to achieve. we will have to wait & see.

Alex Lu said...

Hi hng

I am not familiar with Brem. It has good support at RM1.15-1.20 from horizontal line as well as its uptrend line. Resistance will be the horizontal line at RM1.30.