Positioning my portfolio for aggressive growth
There have been a number of transactions prior to my plan here. While I seek to acquire long-term income producing assets, I have to figure out a way to capitalize aggressive growth opportunities. In the last paragraph of my previous post, I have written a note on this. If executed successfully, this helps to produce a much larger warchest which I can reinvest to buy higher dividend-yielding stocks and reits. This method will speed up my end goal of “Project Silver Milestone”. On hindsight, I can choose the tried and tested method of buying up good old firms that have deep economic moat which perfectly serves the right solution (in my opinion) or I can select a firm in a cyclical stage but have products and services that are in global demand/have valuable assets in place – just that the external market conditions and industry trends are not favorable and inter-related market players are in cost-cutting mode. As such, the sector remains bleak, a case of structural challenges for some.
In theory, I will go for the first option. In practice, I decide to take a more risky approach. After all, the person who is bold and has the conviction to make decisions not commonly agreeable by most professionals, sometimes the numbers doesn’t provide highly visible outcome, may emerge unscathed but victorious – though I must say it’s not advisable to many retail investors. To do this, I study the firm’s prospects, assess the big picture, understand the possible implication from decisions made by management during the industry-wide recessionary period and look through a number of key financial metrics - not all boxes checked but the majority must make business sense to me. Hence, my strategy opted is to buy these reasonable companies at distressed valuation, hold on to them in mid-term and wait for value to be realized after the macroeconomics, improving financials and industry dynamics are aligned together. By then, I know it’s time to sell and put majority back into reits. There are always news and commentaries to increase the hype, one of the ways to monitor the positive sentiment. Of course, the downside is I may end up with corporations not going back to where they are in the past. And they can remain in poor financial health. That’s why I always ask myself this question “what’s highly valuable about this company?”
Let me talk about one of my buys in recent months. It won’t be in a lengthy explanation but to pen down my overall thoughts:
Bought Lloyd Banking Group – I know about the Brexit impact. It’s not going to be pretty. Instead of access to a single European Union (EU) market, Britain’s trade is going to be restricted with new FTAs thrashed out; new terms have to be agreeable between countries. One of the largest export market – cars – would be subjected to tariffs of more than 10%. Higher costs incurred if say British Airways are to use parking aprons in other European countries. All these means Britain will need to think of policies to make their sectors competitive. Well, the Bank of England has kept interest rate low. There could be further corporate tax cuts to encourage investments but this is going to be short term since it’s not economically viable for government coffers. Perhaps, the domestic consumption-led model will increase the purchase of local goods and services – however sufficient jobs have to be created with incremental wage growth for consumers to spend and the central government needs to think of an economic policy to facilitate the ecosystem without burning a large hole in their national budget. It doesn’t look this way considering there could be job losses post Brexit– more clarity in 2018 and beyond once Ms. Theresa May and her administration starts unwinding the aftermath of exiting the EU markets.
Therefore, why Lloyd? On the contrary, leaving the Eurozone may benefit Britain. Instead of cohesiveness among European nations, there is a divide caused by socio-economic shifts. The fruits of labour are also not equally divided, leading up to economic disparity. The political tussles and ideologies by different European leaders may drag the decision-making process.
On the economic front - there would be a time where the central bank has to increase the rate of borrowing, to ensure the currency becomes competitive since the Federal Reserve in America has recently increase the interest by 25 basis points. Besides, UK has to make new trade agreements with economies of the world. There needs to be a better balance of trade and not having a relatively undervalued pound that doesn’t make economic sense upon the exchange of expensive American dollars in return. By buying into the start phase of low interest rate environment, Lloyd is poised to benefit in the long term as the UK economic health grows. More than 90% of the bank's income derived from UK. Secondly, UK properties are more attractively priced considering the depreciation of the pound, therefore facilitate foreign purchases. It will come to a point where the cost of borrowing goes up to curb any short term property speculation. In addition, student accommodation is in demand due to the quality and offerings of UK education system. These are the catalysts. Thirdly, the worst is over for Lloyd. The UK government has sold off all stakes. Financially, Lloyd Bank has demonstrated her resilience in the Bank of England’s latest stress test this year. Their net interest margin is relatively healthy; the bank assumes a strong capital position judging from their CET1 (common equity tier) ratio and their asset quality ratio is one of the lowest as compared to other UK-based banks such as Stanchart and HSBC.
Other purchases which I take a contrarian view are National Oilwell Varco and Mobile Telesystems. One is in the oil and gas industry where they are the oilfield equipment manufacturer and technology provider (beaten down by depressed oil prices, rationalizing expenses but gearing towards horizontal drilling) and the other is a Russian-based telecommunication company.
Therefore, I have a mix of local and international exposure, mainly positioning for growth - especially my stake in Keppel Corporation who will benefit from rise of oil prices. I last average down at $4.85 per share. I have also the fundamentally strong Boustead, bought at $0.80 cents per share, who is in a good cash position to make any strategic acquisitions. Next up is Keong Hong at S$0.44 per share. Their plan is to have 50% of revenue in property development and investment. Great strategy of partnering with local developers such as Fraser Centrepoint for attractive projects. I expect earnings to grow with revenue recognized in the near term
My current portfolio consists of shares from listed firms, reits, private equities (start-ups) and a small percentage on bonds. It’s always good to take a reality check to find out where you are and how far you can stretch to reach your expected target.