There is plenty being written at the moment about the value of investing overseas. Chad Padowitz, Chief Investment Officer at international equities manager Wingate Asset Management, says there are a number of points to consider before venturing into this space.
Investors who are considering returning to equity markets must realise that the rules applying to stock selection have become more challenging from those that existed during the bull market, says Chad.
“Only a few years ago, the general uptrend lifted most stocks that investors bought and the possibility that a company could go broke wasn’t really a consideration.
“Today’s investors need to be much more selective – and while there is good buying to be had, there is still considerable risk.”
Chad says investors need to seek value in their stock selection rather than expect market growth to take care of everything.
“In a rising market, such as we saw until two years ago, stocks across the board increased in value, so growth wasn’t an issue. Therefore looking for value in the bull market became less important than perhaps it should.
“However, selecting stocks in today’s market needs much more patience and an eye for long-term value.”
Chad says that there are a number of points for investors to consider, including:
Don’t pay for blue sky
Chad says that investors should be careful about companies that depend on new products, projects, technologies or industry dynamics for future profits – especially if they are not currently profitable and in a development stage.
“More often than not, the market will provide an opportunity at some future time to buy such companies – if they survive – on a realistic valuation based on products or services actually being delivered.
“Any company that has a big blue sky element has a corresponding higher risk component and is usually using capital to survive while new activities are developed – and new capital will continue to be hard to find,” he says.
Don’t assume to be smarter than the market
Chad says that while there are many bargains to be had in the market, if a stock has been heavily discounted, there is usually a good reason why.
“A case in point is the saga of BrisConnections where investors were said to be buying the stock at 1 cent, not realising there were further instalments to come.
“This is not a good market to buy “penny-dreadfuls” as it will probably be some time before they come good – if they ever do.”
Watch out for debt
Chad says that investors should continue to be careful about companies carrying a lot of debt as the ramifications of the credit crunch are still lurking in the background and some companies could still fall over.
“Access to capital, equity or debt is likely to be difficult to find for companies with a poor trading record, or a decline in business because of the recession, and they may struggle to roll over existing debt.”
Check asset values are realistic
Chad says that while a company may look to have a strong balance sheet, investors should ask what the real assets of the company are, and whether they are over-valued.
“If assets haven’t been re-valued recently they could be wildly overstated.
“A simple example is inventory. Inventory that is un-sellable in the current environment may well prove to be valueless.
“This may be a valid concern in a number of industries, for example car part manufacturers.
“Even though the world may very soon be under-producing new vehicles - which will lead to a major catch-up in production down the track – new or abandoned models may make parts now held by suppliers redundant.”
Look for sustainable earnings
Companies with good, sustainable, earnings are the ones to look for, Chad says.
“Companies that are still trading well, making a profit and have confidence in the medium term, are the sort of stock that investors should look for, even though they may report temporary trading set-backs because of the tight economy.”
Look beyond the next two years
“Investors should look beyond the next few years in their investment choice and look for companies likely to emerge from the recession in a strong position,” say Chad.
“These are the sort of companies we have touched on here. Companies that are actually doing things rather than developing products; that will continue to make a profit even if it is affected by the recession; and those that have manageable, or little, debt.
“It is such companies that are likely to be offering real value to investors in the current market.”
Chad Padowitz is chief investment officer at Wingate Asset Management, an international equities joint venture partner of Australian Unity Investments
APRIL 2009