I just listened to The Motley Fool Money podcast entitled “David Gardner on Investing During Tough Markets”.
In it, Chris Hill discusses with David Gardner, co-founder of The Motley Fool, about maintaining a “net buyer mindset” during a downturn and more.
Source: The Motley Fool
Something that stood out for me during the discussion was how David Gardner connected the current market situation to a famous line from the Finding Nemo movie.
Here’s what Gardner shared in the podcast about staying the course and investing for the long term (emphases are mine):
“I would say first of all that I’m always investing, ABI always be investing. Chris, I think everybody should always be investing if you are not in retirement. If you’re not about to retire, you should be a net saver and you should just be adding that money to the market through thick and through thin. In this sense, let’s go back to Finding Nemo. …
Just keep swimming. I found myself using that as a hashtag on Twitter throughout a lot this year. I spoke to it on my podcast. It’s always true anyway. If you are earning a salary, you should be saving every two weeks and I think you should be adding it to the market in whatever way you prefer, whatever your orientation is [be it in funds or individual stocks], but just keep swimming …
I think the reason we need to say just keep swimming is not when the tide is coming in and/or the surfing feels good, I think that Dory starts saying just keep swimming because it’s a time of stress. It underscores the times when it’s hard, that’s when we need to hear that phrase, even though we should always be doing that all the time anyway.”
The company posts a second consecutive year of record revenue and net profit.
Micro-Mechanics (Holdings) Ltd (SGX: 5DD) is a Singapore-listed company that’s involved in the designing, manufacturing, and marketing of consumables and precision tools used in the semiconductor industry.
Yesterday, Micro-Mechanics released its earnings for its financial year ended 30 June 2022 (FY2022) where the company posted a second straight year of record revenue and net profit.
Right here, let’s look at 10 key points from Micro-Mechanics’ earnings release that investors should know about.
Revenue for FY2022 increased by 11.8% year-on-year to a high of S$82.5 million due to stellar growth in the worldwide semiconductor industry. The company saw higher sales in its three largest markets of China, Malaysia and the USA.
Gross profit margin for the year came in at 53.4%, down from 54.3% in FY2021 on the back of rising costs for materials, energy and manpower. Micro-Mechanics said that the inflationary pressures are expected to prevail in FY2023.
Meanwhile, Micro-Mechanics’ FY2022 net profit rose 9.7% to a record of S$19.8 million, up from S$18.1 million a year back.
The company’s earnings per share likewise grew 9.7% to 14.25 Singapore cents.
Micro-Mechanics’ net profit margin for FY2022 was 24.0%, down slightly from 24.5% a year earlier.
The company’s balance sheet remains rock-solid. As of 30 June 2022, it had S$20.4 million in cash and cash equivalents with zero bank loans.
As for its return on equity (ROE), the metric grew to a healthy 34.0% for FY2022, up from 31.2% in FY2021 and 25.3% in FY2020. The continuously increasing ROE shows that the company’s management is doing a great job in using shareholders’ capital to grow its business.
Operating cash flow for FY2022 fell slightly by 1.9% to S$25.2 million. With capital expenditure also decreasing for the year, free cash flow grew 7.4% to S$20.3 million. Free cash flow is money that Micro-Mechanics can use to reinvest into its own business, acquire other businesses, pay dividends to its shareholders, or buy back its own shares.
Micro-Mechanics has proposed a final dividend of 6.0 Singapore cents per share and a special dividend of 2.0 cents per share, with the total dividend for FY2022 standing at 14 cents per share, the same as the previous year.
The World Semiconductor Trade Statistics (WSTS) expects global semiconductors sales for 2022 to grow 16.3% to US$646 billion. For 2023, WSTS forecasts the market to grow a further 5.1% to US$680 billion. Micro-Mechanics should continue doing well over the long run as chips become increasingly relevant in nearly every aspect of our lives.
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Disclaimer: The information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P owns shares in Micro-Mechanics.
On 12 December 2019, CNBC reported that Apple’s shares fell after Credit Suisse said that iPhone sales in China tumbled 35% year-on-year in November that year.
Source: CNBC
I was curious to find out what really happened with Apple’s business during that quarter in 2019 and whether what Credit Suisse mentioned was true.
Upon looking at Apple’s quarterly report for the three months ended 28 December 2019, I found that the company’s Greater China sales actually increased 3% during the quarter.
Source: Apple 10-Q 2020 first-quarter
Apple said that the growth in Greater China was mainly due to higher net sales from the Wearables, Home and Accessories sub-segment.
This could mean that the iPhone sales in the region wasn’t that great. So, the prediction by Credit Suisse could have been right.
However, looking at Apple’s overall iPhone sales for the quarter, the company posted an 8% increase in revenue.
Source: Apple 10-Q 2020 first-quarter
What this means is that while iPhone sales in Greater China could have slowed, other regions made up for it, leading to an overall increase in iPhone revenue for Apple.
Investors who had sold Apple shares upon seeing CNBC’s negative news that day would be kicking themselves.
Since 12 December 2019, Apple’s share price has gone up 147%, even after taking into account the large declines in early 2020 and 2022.
Financials-wise, Apple’s revenue, net income, and free cash flow have also stepped up from fiscal year 2019 (ended 28 September 2019) to fiscal year 2021.
Source: Tikr
So the quick lesson from this post is that we shouldn’t make investment decisions based on news reports and emotions.
We should always go deeper and think critically. Some questions to ask would be:
Is there a chance that the report is wrong?
Even if the report is right, can the company still continue doing well?
Is the company fundamentally shaky?
Is it a one-time solvable issue (temporary), or is there a structural damage to the business?
Is the investment thesis busted?
Hope this article gives you some clarity as to what to do when you come across negative financial news, especially amid the volatile stock market period like now.
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Disclaimer: The information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock.
I admit it’s attractive to cherry-pick companies to invest in now with the steep market correction.
But investing in just one company for the foreseeable future is extremely risky in my opinion. While the business can be great, a small mishap from the firm could wipe out an entire portfolio.
Therefore, given the risk of concentrating my portfolio on a single stock, I’m going to diversify my portfolio in an instant with a single investment.
And that investment would be buying an exchange-traded fund (ETF) that tracks the Standard & Poor’s 500 index, more commonly known as the S&P 500 index.
There are plenty of ETFs available that closely track the index’s return, but my pick would be the Vanguard S&P 500 ETF (NYSE: VOO).
Why Is the S&P 500 Index Attractive Now?
For those who may not know, the S&P 500 index consists of around 500 large-cap US companies in leading industries. Such companies include iPhone purveyor Apple (NASDAQ: AAPL), computer software maker Microsoft (NASDAQ: MSFT), and e-commerce retailer Amazon.com (NASDAQ: AMZN).
The S&P 500 index is generally seen as one of the best representations of the stock market as a whole. According to Investopedia, the index has returned a historic annualised average return of around 10.5% from its inception in 1957 to 2021.
To be part of the S&P 500 index, a company must meet some of the following criteria :
It must be a US company;
The market capitalisation must be US$14.6 billion or higher;
It must have positive as-reported earnings in its most recent quarter, and over the most recent four quarters summed up; and
The stock must have adequate liquidity and must trade for a reasonable share price.
The strict entry criteria form a barrier and ensure that investors are getting to invest in some of the best companies out there with relatively low effort.
The S&P 500 is in negative territory, having fallen 12% from a peak of 4,796.56 seen on 3 January 2022. Only last month, it was in bear market mode with a fall of 20%.
A fall of over 10% may sound terrifying, but therein lies the opportunity, if we have a long-term focus.
(Fun fact: A 10% fall in the stock market is a common occurrence.)
Over the short term, anything can happen to the US stock market, but over the long run, history has shown that stocks tend to rise.
During the depths of the Great Financial Crisis (GFC) back in October 2008, famed investor Warren Buffett explained the need to look at the long term in an op-ed for The New York Times entitled, Buy American. I Am. (emphasis is mine):
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Since that op-ed, the S&P 500 index has gone on to rise over 300% to close at 4,210.24 on 10 August 2022. Those who had invested during the GFC would be sitting on juicy returns over the past 13 years or so.
Right now, people are fearful that the inflationary and rising interest rate environment could trigger a recession.
While a recession may happen and stocks could continue languishing before recovering, we should remember that this is not new and that humanity has survived several market crashes previously.
So, “this too shall pass”.
And once the storm is over, stocks should continue climbing higher, as history has shown time and again.
Source: MacroTrends (grey bars show recessions)
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Why Vanguard S&P 500 ETF?
I’m choosing the Vanguard S&P 500 ETF to invest in since it has the lowest expense ratio among the S&P 500 ETFs of 0.03%.
The SPDR S&P 500 ETF (NYSE: SPY), which was the very first ETF listed in the US and is the more popular option, has a higher expense ratio of 0.0945%. An ETF’s expense ratio reveals how much investors are paying as fees annually when investing in the ETF.
Bringing down expenses when investing is essential since a fund with high costs will eat into our returns.
Another attractive aspect of the Vanguard S&P 500 ETF is that it allows instant diversification with a single click of the button.
To understand how diversified the ETF is, let’s take a look at the following snapshot showing the fund’s sector composition:
Source: Vanguard
Based on the Global Industry Classification Standard (GICS) sector classification, information technology (at 27.1%) contributes to the bulk of the ETF, followed by healthcare (14.4%), and financials (11.2%).
In terms of specific companies, Apple takes up 6.5% of the pie, followed by Microsoft, and Amazon. The top 10 companies occupy around 26% of the fund.
Source: Vanguard
Now could be a good time to start investing in the Vanguard S&P 500 ETF. According to JP Morgan’s Guide to the Markets (3Q 2022) , the index is selling at a forward price-to-earnings (P/E) ratio of 15.9x, as of 30 June 2022. For the past 32 years, the S&P 500 index’s forward P/E ratio stood at an average of 16.2x. This suggests that the index is fairly valued right now. If its valuation comes down further, investors have the chance to dollar-cost average (DCA) into the ETF, diversifying across time as well.
The Power of Compounding
Since Vanguard S&P 500 ETF’s inception in 2010, the fund has produced an annualised return of 13%.
Source: Vanguard
US$100,000 invested in the Vanguard S&P 500 ETF some 12 years ago would have turned into almost half a million dollars by now. That’s the power of compounding taking effect.
Warren Buffett said in his 2016 Berkshire Hathaway shareholder letter that “investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
That’s what I’ll be doing by buying a low-cost fund with Vanguard S&P 500 ETF and sitting on it for the long run to allow the magic of compounding to occur. To add icing to the cake, my overall return could be higher than average as I’ll be investing during a bear market.
Knowing Your Downside
All investments come with risks, and investing in the Vanguard S&P 500 ETF is no exception.
One risk is to do with foreign exchange. Since this ETF is denominated in US dollars, any adverse fluctuations against the US dollars for a Singapore investor could harm the overall returns.
The volatile market condition is something else to take note of.
Stocks in general are subject to wide movements in share price in the short term. That’s what we are experiencing currently. As we discussed earlier, stocks could fall further before they recover, depending on how the economic conditions plays out.
Having said that, we should also understand that volatility is part and parcel of investing in the stock market, and it’s not a bug in the system.
If one is willing to stomach the short-term volatility and stay the course after investing in the ETF, the investor should reap the rewards over the long run.
As author and investor Morgan Housel once mentioned:
“Volatility is the price of admission. The prize inside are superior long-term returns. You have to pay the price to get the returns.”
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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock.
A look at Singapore companies from Forbes Asia Best Under a Billion 2022 list.
Forbes Asia has released its annual Best Under A Billion list for 2022.
The list highlights 200 Asia-Pacific listed companies with less than US$1 billion in revenue and consistent growth in both their top- and bottom-lines.
The companies were chosen based on many factors, including their debt, sales and earnings per share growth, and average returns on equity.
Seven companies were chosen from Singapore and they are:
Eggriculture Foods Ltd (HKG: 8609)
Grand Venture Technology Ltd (SGX: JLB)
Koda Ltd (SGX: BJZ)
Micro-Mechanics (Holdings) Ltd (SGX: 5DD)
Nordic Group Ltd (SGX: MR7)
The Hour Glass Ltd (SGX: AGS)
UMS Holdings Limited (SGX: 558)
The biggest company among the list (in terms of market capitalisation) is The Hour Glass.
The Hour Glass is a luxury watch boutique that opened its first store in 1979 in Singapore. It has since expanded its presence to a combined network of 50 boutiques in the Asia Pacific region.
For FY2022 (financial year ended 31 March 2022), the company’s top-line increased by 39% year-on-year, crossing the S$1 billion mark to S$1.03 billion. Meanwhile, its profit after taxation soared 88% to $154.7 million.
The luxury watch purveyor said that customer demand for mechanical watches has been increasing and deepening over the past few years. Even during the Covid-19 pandemic, interest in watches didn’t wane. The Hour Glass believes that the fascination with high-quality mechanical watches will continue in the years to come.
Source: Forbes
Being chosen to be featured in the Forbes Asia list is not easy, but that doesn’t make any of the company a sure-win investment.
Such lists can help to generate investment ideas for our stock portfolios. However, it’s up to us to do our due diligence on the companies before investing our hard-earned money them.
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Disclaimer: This information provided in this article is purely based on my opinions and is not intended to be personalised investment advice. The ideas discussed here are not recommendations to buy/sell any stock. The writer Sudhan P owns shares in Micro-Mechanics.
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