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Top 10 global stocks mauled by market but outperform indices

Thiveyen Kathirrasan
Thiveyen Kathirrasan • 9 min read
Top 10 global stocks mauled by market but outperform indices
On average, as a group, the 10 stocks have outperformed the market indices, but were unable to outrun market sentiment.
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SINGAPORE (Mar 13): In our story “10 global stocks in an ‘unloved’ bull run” (Issue 917, Jan 24, 2020), we highlighted 10 global stocks, picked for either their cheap valuations, strong balance sheets, defensive businesses or their ability to withstand economic shocks. On average, as a group, the 10 stocks have outperformed the market indices, but were unable to outrun market sentiment.

With recent developments in the economy, particularly with the supply and demand shocks associated with Covid-19 and the oil price drop, we are taking stock of the 10 global stocks. The stocks we chose cover a range of sectors and profiles – from growth stocks to turnarounds, to just those that looked cheap relative to the market. We believe the stocks represented intra-asset diversification through portfolio allocation, a key to being successful in investing, and this is particularly true in a market experiencing a decline. We have updated our investment case for each stock, along with any key business updates, valuations and performance for the year against comparable benchmarks.

With travel bans and drastic cuts to people travelling because of Covid-19, Electronic Arts (EA), a leader in digital interactive entertainment globally, could be buoyed by more uses. It attracts participants for its gaming content and titles which include the likes of FIFA, The Sims and Need for Speed. Our thesis for investing in this company is based on its new business model, which is focused on optimising its already high margins and generating stable earnings and revenue growth. EA is both a growth and value stock, given its prospective gaming titles lined up over the next few quarters, its broad-based business model that reduces dependence on individual titles, as well as its strong financials. EA recently reported its results for 3QFY2020 ended Dec 31, 2019, and it mostly outperformed expectations – with record sales and growth in revenue, earnings per share and cash flow on a y-o-y basis. The company expects stable growth in revenue and earnings for FY2020, along with share repurchases to return value to shareholders. Both digital and packaged sales of titles are also expected to grow strongly, driven by its blockbuster FIFA and Madden franchises, along with the launch of the new Battlefield.

Facebook (FB) has come in for a lot of flak including from regulators. However, it is the world’s largest social media platform that notably owns WhatsApp and Instagram. Our thesis for investing in this company stems from its sheer size and network effect, which continues to grow at a strong rate, underpinned by its very high margins and strong balance sheet. As such, Facebook is growth stock, and we are expecting to see growth over the next few quarters, driven by its venture into e-commerce through Instagram Checkout, Facebook Shop and Marketplace. Facebook’s Libra cryptocurrency is also another growth venture which would complement its e-commerce venture well through establishing an easy and single transaction place for B2B and e-commerce transactions. Facebook’s most recent results for 4QFY2019 ended Dec 31, 2019 were mostly in line with expectations, with growth in daily active users and monthly active users. The company reported better-than-expected earnings and revenue; and continues to improve its average revenue per user (ARPU) every quarter.

Turtle Beach (TB) was the worst performer among the top 10. We still like it because it is a worldwide gaming accessory company specialising in headset and audio peripherals. With its acquisition of ROCCAT in May 2019, TB’s portfolio expanded from the traditional gaming headsets niche to gaming keyboards, mice and other accessories focusing on the PC peripherals market. Our thesis for investing in this company is based on its growth strategy of strategic acquisition of companies along the value chain, which will help diversify its earnings stream and lower the company’s risk profile. TB most recently reported its earnings for 4QFY2019 ended Dec 31, 2019, and beat earnings expectations handily, resulting in a sharp increase in share price after trading hours. TB’s growth and earnings visibility are expected to pick up sharply in 4Q this year, through the upcoming release of the Gen 8 Xbox and PlayStation – which will boost sales of its gaming headsets.

Intuitive Surgical (IS) is a global technology leader in minimally invasive care and the pioneer of robotic-assisted surgery through its flagship da Vinci Surgical System and most recently, the Ion Endoluminal System approved by the US Food and Drug Administration. Our thesis for investing in this company stems from its business model: more than 70% of its revenue is recurring, through the sales and operating leases of its surgical systems. More importantly, it is a play on long-term healthcare, particularly robotic-assisted procedure trends, which has grown in double digits in the past five years, and is expected to grow by 15% this year. IS’ latest 4QFY2019 ended Dec 31, 2019 was strong, with double-digit y-o-y growth in revenue, diluted earnings per share and its systems’ procedures. There is still a large global market for IS to tap for robotic-assisted surgery, and given that IS’ systems lower the total cost to treat per patient compared with existing treatment alternatives, it should see a higher rate of adoption from hospitals and healthcare systems in the near future.

Although discretionary retail is likely to be the last thing on consumers’ minds amid the Covid-19 outbreak, we like Harvey Norman (HVN). Our thesis for investing in the company is based on its financials, particularly its dividend yields, which are too attractive to ignore. HVN reported its most recent results for 1HFY2020 ended Dec 31, 2019 – and it was underwhelming, given the widespread bushfires in Australia and global slowdown in the economy. Regardless, HVN should be able to maintain its strong dividend yields due to its significant reserves. The company has announced an interim dividend of 12 Australian cents, similar to the previous year; at its current trading price, this translates to a whopping dividend yield of 9.6%. HVN is currently on track to deliver its organic growth strategy, with five new stores opened in 1HFY2020 and another five more expected to open by the end of FY2020 in Malaysia, Singapore and Ireland.

Isra Vision (IV) is a developer and manufacturer of software and systems for the image processing and machine vision industry. Our thesis for investing in the company is based on it being a proxy for the fourth industrial revolution, particularly in the area of robotics, aside from its strong financials and fundamentals. IV’s most recent results for 1QFY2019/2020 ended Dec 31, 2019 were mostly stable, with profit margins remaining around the 20% level. Dividends were also increased from 15 cents to 18 cents for the financial year. Previously, IV’s strategy was to increase its global footprint through acquisitions and integration of other companies. However, on Feb 10, 2020, Atlas Copco, an industrial conglomerate, made a takeover bid for IV, with an offer price of 50 euros per IV share – at a 43% premium to its previous closing price. This offer runs until April 8, 2020, and as it stands, Atlas Copco has already secured 37.85% of the share capital of IV and will most likely be successful.

With Brexit done and dusted, Kier Group has risen 26.9% since our report. Kier is a UK-based construction and infrastructure services company. Over the past two years, Kier has been riddled with debt and other financial concerns caused by Brexit, and hence its share price has suffered. Our thesis for investing in Kier, as a turnaround story, was based on its restructuring effort of rightsizing by selling its loss-making business and major management changes. Kier recently reported its results for 1HFY2019/2020 ended Dec 31, 2019, and showed that it is on track to recovery. Key metrics such as operating profits grew 3.4% on a y-o-y basis, and net debt was in line with expectations based on its restructuring efforts. It will take a few more quarters to show solid tangible recovery, but as it stands, Kier is doing well through its three-pronged strategy which includes focusing on government, regulated or blue-chip client base; operating in B2B markets; and contracting through long-term framework which should provide more stable cash flow visibility ultimately.

San Holdings (SH) is Japan’s largest funeral services company. Its three main subsidiaries, Koekisha Group, Sou-Sen Group and Tarou Group, provide funeral services while the fourth, Holding Company Group, leases real estate, office spaces, and parking lots. Our thesis for investing in the company is based on the nature of the business, which is inherently value investing-compatible. There will always be demand for death care services; and SH’s strong economic moat, coupled with strong fundamentals, makes it a low-risk stock to own. In the most recent 2QFY2020 ending Sep 30, 2019, SH reported a strong set of results, with a y-o-y increase of 5.2%, 2.8% and 2.0% for total funerals handled, revenue and operating profits respectively. SH’s current business strategy includes optimising margins, such as through building funeral halls with distinctive features and using internet matching sites to improve the customer’s experience.

Hainan Meilan International Airport (HMIA) operates Meilan Airport on the Hainan Island in South China. Our thesis for investing in the company is based on cheap valuations, mainly caused by its seemingly strong association with debt-laden China conglomerate, HNA Group. Our calculations indicate HNA Group’s effective stake in HMIA to be only 11.52% and HNA Group is not HMIA’s largest shareholder. As it stands, HMIA’s cash flow will be used for the second expansion phase of the Meilan Airport, and if travel sentiments improve over the long run HMIA stands to benefit significantly. Currently, Covid-19’s impact on the business is negative, with travel bans to and from China, which should adversely impact HMIA’s upcoming results. However, HNA Group could be given a lifeline as it is currently in talks with the provincial government of Hainan in southern China for a takeover – which will help boost the short-term sentiment of the stock if it is successful.

Although hotels are one of the worst-hit sectors amid the Covid-19 outbreak, Shangri-La Asia (SA) is too cheap to ignore. The company owns and manages hotels under four brands: Shangri-La Hotels and Resorts, Kerry Hotels, Hotel Jen and Traders Hotels. Our thesis for investing in the company is based on the quality of the balance sheet relative to its trading price. Currently, the company’s price-to-book is attractive at just 0.54 times, and it trades at the lower end of its historical price-to-book. The company’s upcoming results will most likely be underwhelming because it is in an industry that is reeling from Covid-19. Further, approximately 40% of the company’s revenue and assets comes from China. Looking ahead, Shangri-La’s strategy will be to focus on its high-end luxury brand, Shangri-La Hotels and Resorts – which makes up its entire hotel development pipeline for the next two years.

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