To simplify things, we can break down the value or fundamentals of the company into four components — revenue, net income, operating cash flow and free cash flow — in order of increasing importance. We will reuse the table from last week containing the same 20 real estate-themed stocks to assess whether these companies are potentially undervalued or value traps. We will arbitrarily use a one-year, three-year, five-year and 10-year period to compare each company’s value growth against its price growth. A 10%, 20%, 30% and 40% weightage for revenue, net income, operating cash flow and free cash flow respectively will be used to represent each company’s value growth.
Table 1 shows the value growth of the companies against the price growth over four periods. The companies which consistently have their value growth higher than its price growth are likely to be undervalued, while companies which have their price growth more than its value growth, despite having attractive valuation multiples, is likely to indicate that it is a value trap. However, as mentioned earlier, this is just one way of filtering potential investment-worthy companies — there are a plethora of different ways to filter and analyse companies that are undervalued — or seemingly undervalued.
From last week’s table, Yanlord Land Group, Tuan Sing Holdings and Sinarmas Land showed good signs of being able to narrow the price to book discount. The price to book discount is a valuation multiple that generally indicates whether a company is undervalued — where narrowing the price to book discount implies an appreciation in stock price and hence a stock to potentially invest in. From this week’s table, Hongkong Land Holdings, Yanlord Land Group, Metro Holdings, Tuan Sing Holdings and Chip Eng Seng Corp show good signs of being undervalued, and hence might be a good starting point for investors to further research and analyse.
An observation from the table’s data is that this method of differentiating undervalued stocks from value traps might not be suitable for companies with cyclical businesses or smaller companies which generally have more volatile earnings. Companies that make both profits and losses within a period, for example, is a limitation — where the data has to be smoothened and may not accurately reflect a company’s value growth. As mentioned previously, there might be other methods to separate value plays from value traps and the company’s idiosyncrasies is important for further research.
Photo: Bloomberg
