Happy new year to all readers! The past year has been full of surprises, both negative and positive. We hope 2021 will be a better year for everyone.
At the beginning of every year, we identify 10 stocks that are likely to outperform the broader market. The stock selections are published on AbsolutelyStocks.com. In addition, we track the performance of the stocks throughout the year — in our Top 10 Portfolio, which is updated at the end of every month. This is to keep us honest. Too often, analysts highlight only their good picks and sweep the bad ones under the carpet.
Typically, we adopt a top-down approach, where we first decide on the macro outlook (whether to be defensive or aggressive), followed by identifying sectors that we think will prosper in the coming one year, before narrowing down to companies that will stand out in these sectors.
We have done this for several years, since 2015. Here is a recap of the performance of our stock selections.
Our Top 10 Portfolio outperformed the FBM KLCI in five of the last six years (see chart), except in 2018 when our construction-heavy portfolio was badly hit by the cancellation of mega projects. That was, of course, triggered by the surprise GE14 results.
In 2020, InsiderAsia’s Top 10 Portfolio did exceptionally well, gaining 32.5% compared with the 5.7% increase by the benchmark FBM KLCI. Seven of the top 10 stocks were up for the year (see Table 1), four of which (Inari Amertron Bhd, Frontken Corp Bhd, KESM Industries Bhd and JHM Consolidation Bhd) were semiconductor stocks, a sector we had overweight.
The other three outperformers (Kotra Industries Bhd, Kawan Food Bhd and Mega First Corp Bhd) were mainly identified using a bottom-up approach, based on reasons specific to the individual companies. We were convinced that these companies would register strong earnings growth, driven primarily by newly commissioned facilities.
As for the three underperformers (SAM Engineering & Equipment (M) Bhd, Willowglen MSC Bhd and Pantech Group Holdings Bhd), they are in sectors that were adversely affected by the unforeseen Covid-19 pandemic, that is, aerospace, property and oil and gas.
Moving into 2021, we have identified several themes that we believe will stand out. First, the imminent normalisation of economic activities with vaccination — herd immunity should be achieved by year end. For this theme, we selected Aeon Credit Service (M) Bhd, Tenaga Nasional Bhd and Magnum Bhd as proxies to ride the recovery.
Aeon Credit is a consumer finance company that mainly provides motorcycle, auto and personal financing. Hence, it is one of the most direct proxies to the recovery in domestic consumption.
On the other hand, Tenaga should benefit from activity normalisation in the commercial and industrial sectors. Sales to both sectors, which have higher tariffs than domestic households, were down in 2020 owing to restrictions on movements.
As for Magnum, the company suffered cancellation of 40 draws in 1H2020 owing to the Movement Control Order. Although the number of draws had normalised in 3Q2020, average sales per draw were still below average. We are optimistic the company’s ticket sales will claw back to pre-pandemic levels once people resume their normal routines.
Meanwhile, we remain optimistic about the semiconductor sector, supported by the 5G rollout, digitalisation, automation and electric vehicles (EVs). We are sanguine that the 5G rollout will gain momentum in 2021 as spending on digitalisation and infrastructure will be priorities in fiscal stimulus packages around the world.
As such, we have kept Inari — the outsourced semiconductor assembly and test (OSAT) service provider for radio frequency (RF) front-end modules — in our top 10 picks for 2021. The company will benefit from higher RF chip content in 5G smartphones and has targeted 30% y-o-y growth in RF chip shipments in FYJune2021.
On top of that, we have added another OSAT player, Malaysian Pacific Industries Bhd, to the list. The company is expanding its 5G assembly and testing capabilities in China, where it recently doubled floor space. Additionally, the company has the capability to package silicon carbide chips, which are widely used in EVs. Hence, MPI will also benefit from wider adoption of such vehicles in the coming years.
We have retained SAM in our Top 10 Portfolio. The company’s equipment segment did well in 2020, thanks to higher demand from data storage and semiconductor customers. Meanwhile, its aerospace segment can also ride the recovery in the aviation industry when borders reopen.
We see secular trends of digitalisation and cloud computing being accelerated as a result of the pandemic. Most companies have quickly realised the importance of having access to data from anywhere anytime, while the costs of subscribing to cloud services have been made affordable by various service providers.
To ride this trend, we have added Telekom Malaysia Bhd, Awanbiru Technology Bhd (formerly known as Prestariang Bhd) and MyEG Services Bhd to our Top 10 Portfolio for 2021.
Telekom Malaysia operates data centres and provides cloud services such as Infrastructure-as-a-Service (IaaS), Platform-asa-Service (PaaS) and Software-as-a-Service (SaaS). This business segment has high growth prospects and offers lucrative margins relative to the other segments of the company. Hence, growing this business segment will expand overall profitability.
Similarly, Awanbiru aims to offer cloud solutions to the public sector through partnerships with leading cloud players such as Amazon.com and Google. Yes, it will lose its master licensing agreement with the Ministry of Finance this month. However, we think the downside risk should be partly shielded by the potential compensation from the government for the termination of the Sistem Kawalan Imigresen Nasional (SKIN) project. This stock is comparatively higher risk than most of our other selections, but also potentially one with high returns.
As for MyEG, we selected the company because of its improved medium-term outlook following the recent extension of two major concessions — with the Immigration Department and the Road Transport Department — to May 2023. In the near term, the company’s earnings may be boosted by Covid-19-related services such as the digital health pass system, MySafeTravel, which was launched in November 2019.
Last but not least is Duopharma Biotech Bhd, the largest pharmaceutical company by sales volume in Malaysia. We think the company’s progressive diversification into speciality products should bear fruit in the coming years. Duopharma was also identified by the government as one of two companies that will carry out the fill and finish process for Covid-19 vaccines. Thus, it should benefit from vaccine distribution in the country.
The Malaysian Portfolio rose 22.3% in 2020
The Malaysian Portfolio ended the year 2020 on a high note, gaining 22.3% (from Jan 2 to Dec 31), far outperforming the 4.8% total returns for the benchmark FBM KLCI over the same period.
The portfolio started the year on a strong footing, outperforming the benchmark by 5.5% by the third week of January. However, the gains began to reverse after the Chinese government announced lockdown measures owing to the Covid-19 outbreak in Wuhan. Sentiment turned cautious given the apparent severity of the situation.
We disposed of our semiconductor stockholdings in late February on concerns of supply chain disruptions caused by lockdowns in China. This raised our cash holding to 37% of total portfolio value, amid heightened uncertainties.
In March, it became apparent that the Covid-19 outbreak was worse than we thought as more countries, including Malaysia, implemented nationwide lockdowns. We held on to our positions during the panicked selldown and only adjusted the portfolio in May when prices had largely recovered.
We sold our holdings in Pantech Group Holdings Bhd and JHM Consolidation Bhd as we anticipated slower recovery in the oil and gas sector and global car sales. We then added defensive counters RCE Capital Bhd, Lingkaran Trans Kota Holdings Bhd (Litrak) and Magnum Bhd, all of which have generally done well in the following months.
In the meantime, we also added major construction player Gamuda Bhd to the portfolio, in anticipation of higher government spending on infrastructure projects to stimulate the economy.
The market continued to recover in the ensuing months, driven by retail investors. Daily transaction volume rose sharply in late July on strong trading momentum. We took the opportunity to lock in gains on Kotra Industries Bhd, Kawan Food Bhd, Willowglen MSC Bhd and SAM Engineering & Equipment (M) Bhd. We reinvested part of the proceeds into value stocks Telekom Malaysia Bhd and Master-Pack Group Bhd and increased our cash holdings to 36% of portfolio value.
This turned out to be a key pivotal point for us — the portfolio and index performances began to diverge as the portfolio emerged relatively unscathed from the subsequent market pullback.
In the last few months of 2020, we gradually deployed our cash — acquiring United Plantations Bhd amid the unfolding rally in CPO (crude palm oil) prices and Public Bank Bhd to ride the anticipated economic recovery. We also added to the portfolio UEM Sunrise Bhd, which we believe is vastly undervalued relative to its peers. The company has relatively low debts to realisable asset value.
Total portfolio value began to rise again in November, in tandem with renewed optimism in the market on the back of announcements of effective Covid-19 vaccines. The portfolio once again outperformed the broader market during the rally, thanks to strong performances by Telekom Malaysia, RCE Capital and UEM Sunrise.
Heading into 2021, we turned aggressive in our portfolio strategy in anticipation of the imminent normalisation of economic activities with immunisation rollouts around the world. Hence, we exited low-beta counters in the final two months, disposing of our stakes in Master-Pack, Public Bank, Litrak and United Plantations, and bought into growth counters Frontken Corp Bhd, Malaysian Pacific Industries Bhd, Inari Amertron Bhd, MyEG Services Bhd, Awanbiru Technology Bhd and Duopharma Biotech Bhd.
The Global Portfolio traded marginally higher for the week ended Jan 7, lifting total returns by 0.3% to 49.0% since inception. The portfolio is outperforming the MSCI World Net Return index, which is up 35.6% over the same period. The top gainers for the week were Rio Tinto (+10.1%), Bank of America (+6.1%) and Taiwan Semiconductor Manufacturing Co (+6.0%), while the biggest losers were ServiceNow (-7.8%), Adobe (-6.8%) and Okta (-5.7%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
