Conversely, stocks with very low trading liquidity, little investor interest, and negligible fund participation are likely to have skewed valuations as well, as the lack of coverage often leads to overlooked data and information that are key to a comprehensive valuation.
That said, these two ends of the stock spectrum give investors the best chance to identify and invest in misvalued stocks. The more misvalued a stock is, the better, since investors can capitalise on it by investing in undervalued stocks and not investing in stocks that are overvalued. However, the risk is also higher for these types of stocks because a single piece of crucial information or update is likely to move the share price significantly compared to stocks that are in between.
The focus of this article is to score these “in between” stocks, as they are less likely to have skewed valuations, and even if they do, they are likely to move less compared to stocks that get too much or no attention. This is a general statement; however, investors can use a purely quantitative scoring table to filter these stocks for further initial examination.
The stocks to be scored are the 30 largest companies outside the Straits Times Index (STI). This list will not include any banks, insurance companies, or REITs, as the key valuation metrics for these stocks are likely to differ. Also, newly listed companies with limited financial data, and companies with a primary listing elsewhere or with revenue primarily generated outside the domestic market, are excluded.
See also: Regrouping in the fog of war, with market narratives derailed
Table 1 lists the non-STI companies that are scored quantitatively. The scoring table considers the following six quantitative aspects:
Historical performance, which looks at the company’s historical financials over the past 10 years or since inception, where discounts are given for poor performance and inconsistency.
See also: Why investment resilience now matters more than optimism
Profitability looks at profitability ratios such as return on equity, return on assets and margins.
Yields and relative valuation compares the company’s fundamental yields against the risk-free rate and its relative valuation to peers.
Financial safety examines the company’s balance sheet, comprising liquidity and solvency ratios, the quality of its shareholder equity, and any external credit rating on the company.
Sentiment looks at analyst ratings and forward price ratios on the company.
Price-to-value analysis compares the price growth to the weighted value growth over multiple periods. This weighted value includes revenue, net income and cash flows in ascending order.
From the scoring table, The Hour Glass, iFast Corp and Raffles Medical Group are relatively the most undervalued.
For dividend-based investors, Table 2 shows the current and forward dividend yields for all 30 companies. ComfortDelGro and StarHub are the most attractive in terms of dividends in this group.
For more stories about where money flows, click here for Capital Section
The key takeaway for investors here is not just to continuously and randomly filter and score a group of stocks until they find something that scores well and is investment-worthy. For most investors, due to time constraints, doing this might be less effective than simply monitoring, scoring, valuing, and examining a chosen, fixed group of stocks in which they understand the business well.
If there is a significant change in what is considered normal for the price or value of the business, investors can take advantage of it more effectively by quantifying these changes using a scoring table that better reflects and evaluates the company’s key metrics.
To reiterate, the scoring table is a great way to initially filter for interest in a group of stocks, allowing investors to include key metrics they are more familiar with than the average investor. If a stock is too inactive for an investor, they can swap it for another potentially undervalued stock to monitor over a period.
