The word “footloose” existed long before Kevin Bacon, Lori Singer and Sarah Jessica Parker (in a smaller role long predating Sex and the City) danced their way up to six top 40 MTV hits in the 1984 hit movie of the same name.
The thesaurus throws up a whole bunch of alternatives including “unfettered”, first used in the 1840s to describe unshackled slaves in the US, which eventually led to the American Civil War between the Republicans led by Abraham Lincoln and the Democrats of the Southern states, who were mainly conservative landowning farming class taking up arms to preserve the status quo. How times have changed.
The term “fancy-free”, first used in Shakespeare’s A Midsummer Night’s Dream just before 1600, had an older and more esteemed pedigree. The phrase means someone without romantic engagement or a sweetheart, which therefore means he is free to look around and possibly flirt with someone new.
Both footloose and fancy-free aptly describe what this column is observing in the markets this financial reporting season. For those active of late in the local markets, one has to take that approach to extract returns and not remain wedded to a particular favourite stock out of blind love.
Even analysts covering local stocks are making more tactical calls, often calling a “sell” on news or results announcements when a stock has been on a run — just in case speculators lock in profits, reversing a technical trend.
The lack of conviction to follow through a “buy” call when a company has delivered and the ability to find an explanation to justify a downgrade have led to a bit more volume in the local markets since January compared to the anaemic turnover in 2H2023, where the securities daily average value dipped below $1 billion. This phenomenon is rarely seen in Singapore — even during my time — aside in the odd month of December or when fund managers in the West go for their summer holidays.
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Are we in the local market perhaps a tad too kiasi and kiasu (k&k)? And in so doing, have we shot ourselves in the foot for undermining our own capital markets as the choice platform to allocate capital to entrepreneurs and grow our economy?
Contrary results
Those who follow this column by now will be familiar with the Magnificent Seven. Tesla is now sputtering but not Nvidia as it continues to power up the US markets to new heights with a gain of more than 200% in the past 12 months. No wonder there is a meme depicting Nvidia as a striding gunman carrying a bunch of wounded comrades (referring to the rest of the market and the broader US economy) across his shoulders.
Nvidia’s recent result for the quarter ended Jan 28 was generally in line with expectations but the sentiment was given a hyper boost by CEO Jensen Huang gushing that “accelerated computing and generative AI have hit the tipping point” as he guided for revenue to grow to US$24 billion ($32.3 billion) in the current quarter from US$22.1 billion in the recent quarter. Nvidia’s 15% post-earnings pop took it to a market cap of more than US$2 trillion, which is the sum of the market cap of several Southeast Asian stock markets put together.
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Apart from the few trend-bucking downgrades following the most recent quarter, the Street was singularly bullish about the stock, with 59 “buy” and six “hold”, according to Bloomberg data as of Feb 26. Based on more bullish target prices, Nvidia was already trading at around 100 times earnings. With the bullish guidance, a slew of raised target prices followed but with nary a question raised about the certainty of growing further sales to China, which accounts for up to a quarter of its sales in recent quarters. If Nvidia was listed here, this potential sore point would probably feature prominently as a key excuse to “sell” or “reduce”.
To be sure, our strong corporate governance codes and culture are precisely meant to prevent hyperbolic CEOs from talking up their own stocks. With conservative boards ensuring that forward guidance is generally muted and well covered by caveats if at all provided, analysts often have no choice but to make up their own narratives. To be fair, if the board and management prefer to be k&k, there is less impetus for analysts to stick their necks out and shout too loudly, given that they have their own reputation to protect.
One may wonder why CEOs tend to be more vocal in the US. Footloose and fancy-free to the point of numerous pumps, dumps and meme-like stock movements that happen not just in the side recesses of the OTC pink-sheet market as depicted in The Wolf of Wall Street but even among the large-cap index stocks. Perhaps, it is because the payoffs are potentially bigger with management well-incentivised by company equity as part of the compensation. For instance, Nvidia’s Huang has just become a billionaire with the recent stock price surge.
Or, simply in the laissez-faire capitalist bastion of New York, it is left to lawyers to fight it out in the courts through shareholder class actions if they feel that they have been taken for a ride, which was what happened to Grab Holdings after it dropped 75% following its de-spac even with improving financials.
Here in Singapore, the fear of regulatory sanction for breaching rules or codes, or simply the “k&k” culture of fearing reputation risk, has anchored us to the boring reality of an unexciting investor versus a speculator-driven market. No doubt, this is a more comfortable position for the regulators, with fewer complaints from retail shareholders than what the US and China have to deal with. Part of the reason too is that past punters are no longer active in the market!
Silver linings in local clouds
A titan among local CEOs, Piyush Gupta of DBS Group Holdings has built a track record of being cautiously optimistic at the best of times and generally keeping expectations under control as he lets the results do the real talking. After he delivered record FY2023 ended December 2023 earnings that increased by 23% to cross the $10 billion mark, DBS shares gained nearly 6%. Yes, he did declare that DBS has sufficient capital for growth and dividends and that there was no stress in its commercial real estate book. Nonetheless, the positive reaction was probably more due to the 1-for-10 bonus issue and the 24% increase in dividends over the previous year that forced shorties to run for cover.
Despite this, DBS trades at a historical 8.7 times P/E, yielding over 5.5% on its dividend which is still growing. With the stock hovering close to May, August and October 2023 levels of $34, analysts have generally held their recommendations given that Goldman Sachs and CGS International’s “sell” and “hold” calls have proven wrong thus far. Gupta must be wondering why after 15 years of consistent sterling y-o-y growth, DBS shares are still trading below Indonesia’s Mandari’s 12 times P/E and yielding just 3.75% while operating in a market where the risk-free rate is higher than Singapore. With twice as much profit, DBS’s market cap is only 55% higher. Can we lend more support to our homegrown regional champion?
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Or take Singapore Airlines C6L (SIA), whose revenue in 3QFY2024 ended December exceeded $5 billion for the first time with earnings further improving both y-o-y and q-o-q. Yet, its share price dropped by more than 10% following the results as it missed the Street’s lofty expectations because of higher competitive pressure that held back further margin growth, which incidentally, should keep supporters of our national carrier happier.
Given SIA’s prior gains before the results, the “buys” became “holds” and the “adds” became “sells”, “particularly in light of the stock’s robust performance year to date”, explains one local house. OCBC Investment Research stands out by raising the price target to $8.00 while still being circumspect with a “hold”.
SIA has more altitude to gain. It has already redeemed 75% of the mandatory convertible bonds and is on course to return to pre-pandemic capacity this year as travel demand can only grow.
Ironically, some of the same analysts favour other regional airlines including Cathay Pacific, which is struggling to pay a dividend but can fetch a P/E of 32 times, versus SIA’s P/E of 7.3 times and potential dividend yield of 6.5%. If one were footloose and fancy-free with no emotional attachment, the selloff looks like a good re-entry for those who had taken profit although I am still not flying Cathay.
A similar affliction appeared to have tripped up Sembcorp Industries U96 , at least momentarily, as it dropped more than 5% the day it reported FY2023 ended December 2023 earnings of more than $1 billion, up 45% before exceptional items.
As a “growth” recovery stock, it is up 60% from a year ago but still below the recent high of just below $6 last August. Analysts generally held both their calls and target prices but the stock, which was up 10% year to date, promptly reversed 2% in a couple of days. I am comforted that since Covid’s low of 80 cents, this 6.5-bagger has had a few corrections like this. I wish, unlike SIA where I was a bit more footloose, I would have been fancy-free and sold on news to buy back later. Perhaps, having enjoyed various parts of the ride up so far, I may average down at 10 times P/E.
In sympathy, Genting Singapore G13 ’s five-month climb on a wall of worry from 82 cents to $1.06 is still below its 12-month high of $1.18. Similarly, following lower-than-expected earnings, it dropped 10% in a day to 93 cents. At the other end, Wilmar International F34 , having declared a 36.5% drop in their results, was earlier weighed down by a series of negative news that saw it drop around 13% in the past 12 months. With Wilmar now trading at 10x P/E and 5% yield, I can imagine analysts do not need a lot to go on to raise their calls from here.
Perhaps one could study the stock price movement of the market bellwether of the Singapore Exchange S68 Group, which was the first to declare results, as is customary. Disappointing earnings and lack of catalysts were an excuse to downgrade after getting to a $9.90 high below a psychological $10 technical barrier. The stock promptly sold off to just above $9.00 before already coming back including dividends to $9.73.
Selling on news and buying on correction seems to be rewarding with trading ranges expanding to 10% or more. These “Flashdancers” do make for profitable trades if one has the moves. But one can’t help imagining if we had the stomach to see through our convictions, perhaps we won’t get to 100 times P/E like Nvidia without the type of growth potential underpinning but for our darlings at 10 times and below, it may not be a bad thing if we stay a bit wedded for longer in our local champions!
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
