Top 5 undervalued stock ideas for COVID-19

I don’t know about you guys, but the only news I read these days is COVID-19/Wuhan Flu/Novel Coronavirus related.

It’s not really my fault too, because all that is going around on Channel News Asia, Whatsapp sharing, and Wechat these days is COVID-19.

In the spirit of continuing the trend, let’s look at the Top 5 undervalued stock ideas for COVID-19.

Basics: Why are stocks so high?!

I’ve been getting many questions from readers asking why stocks are close to their all time highs, when COVID-19 is making new scary headlines every single day.

Of course, no one knows for certain, but my theory is this.

Stocks are forward looking right? So in the world of stocks, they’re already looking forward a few months to say April, where COVID-19 is fully under control and on the downtrend (hey Trump said the same thing).

Now put yourself in the shoes of global governments. Imagine you’re in April, COVID-19 is fading away, and your economy has taken a 2 to 3 month hit from drastically reduced spending, with tourism unlikely to recover for at least a few more months. What do you do?

If you guessed massive monetary and fiscal stimulus, then well, you guessed the same as me.

And we’re already starting to see that, with many central banks cutting benchmark interest rates (MAS already spoke up to depreciate the SGD). The next logical step here is big fiscal stimulus, which in Singapore we’re likely to see in the upcoming budget. Over the next few months, expect to see that coming out of every single Asian economy that has been impacted, which is just about the whole of Asia.

If you believe this narrative, then the question is whether the amount of monetary and fiscal stimulus from Asian governments will be sufficient to offset the amount taken out of the economy due to COVID-19. I don’t know about you, but my answer is a resounding, hell yes.

Personally, I think that as long as COVID-19 can be contained within the next month or two, the massive stimulus packages we’re going to see after that will pump prime the whole of Asia, and we could really see things flying in 2H2020.

If COVID-19 drags further to 2H2020, then all bets are off though.

Not a stock buying guide

I do want to caveat that this article is not meant to be a stock buying guide. Unlike some of my other articles where I rank my top stock picks for the year, this article is not meant to do that.

Stock prices are changing too rapidly, and the situation on the ground is changing too quickly, that any article I write will be outdated by Monday. Note: If you do want a stock watch that is continually refreshed, you can check out our Patron.

FYI – I’ve been getting comments on some of our earlier stock lists written a few months ago. None of them will be accurate anymore because COVID-19 is an absolute gamechanger for the world economy. Long term outlook is the same, so no change for long term investors, but the short to mid term outlook has changed materially, so all short to mid term investments will need to be reassessed.

Instead, what this article does is to provide 5 stock ideas for you to monitor and ponder over the coming days and weeks. This article is here to stimulate conversation, to get you thinking about the impact of COVID-19 on corporate profits, and their corresponding impact on share prices. This article is there to get you thinking – COVID-19, opportunity, or danger?

Above all, please note that this is a highly volatile time for markets. All the stocks listed on this list have high potential for capital losses if COVID-19 takes a turn for the worse. But on the flipside, if everything clears up and the stimulus packages start rolling out, there’s also big potential for capital gains. That’s risk-reward for you right there.

A disclaimer before we start:

Do note that this is not intended to be financial advice. Please perform your own due diligence and understand your risk appetitive and investment objectives before making any investments. If in doubt as to the action you should take, please consult your stock broker or financial advisor.

United Overseas Bank (UOB)

Let’s start with something relatively “safe”.

United Overseas Bank, or UOB for short, is one of the big 3 local banks.

Of the 3, it also has the least exposure to China, so that’s a good or bad depending on how you see it.

At current prices, it trades at an 11% premium to book, and a 4.7% trailing twelve-month (ttm) yield at a 40% payout ratio. Those are all really nice numbers, and look far more attractive than some REITs out there (MCT I’m looking at you).

The chart pattern is also really interesting for those who are into technical analysis. It looks to be converging into a classic wedge pattern, which indicates the next move (up or down) could be big.

The tricky thing about banks in the coming few quarters is that non-performing loans are going to tick up (or surge), because lots of SMEs are going to run into cash-flow issues. The government will do whatever it can to bail out these SMEs, but I think at the end of the day, the banks are going to be forced to absorb some of these losses onto their balance sheet. If they don’t they will at the very least be more lenient about rolling the loans over. That’s going to impact the bottom line.

And don’t forget that any drop in interest rates is also going to impact net interest income.

So short term at least, I’m not so optimistic on banks’ earnings.

But at these kind of valuations, I’m happy to add a small position now, and look to average in further if they drop in the coming quarters.

Mapletree North Asia Commercial Trust – MNACT

If you’re a Mapletree North Asia Commercial Trust, the past 6 months would have looked like a perfect storm.

First you had the Hong Kong protests, with protestors storming the your single largest asset (Festival Walk, 50%+ by valuation), burning down key sections and taking it out of commission for months. Like what are the odds of that?

But okay, shit happens right? So the mall is repaired, and all ready to resume operations in January. The worst is over right?

Wrong! You now have COVID-19, in what is shaping up to be the worst pandemic this century so far.

But with danger, comes opportunity.

If you assume a full reopen of Festival Walk, and no impact to underlying rentals from COVID-19, Mapletree North Asia Commercial Trust is trading at about a 6.4% to 6.5% yield right now. Which looks pretty juicy.

Even if you take 10% off the DPU to compensate for rental waivers and the like, you’re still looking at say a 5.8% to 5.9% short term, with strong possibility of recovery once COVID-19 is over.

Oh, and don’t forget that it’s trading at a 15% discount to book.

And the fact that other than the big Hong Kong mall, it’s other assets are Chinese and Japaese offices, all of which are locked into long term leases and less likely to be impacted (compared to retail)

Does MNACT look a lot more attractive now?

China Construction Bank

Okay I get what you guys are thinking. China banks?! What is FH smoking. Their book value is a complete joke, and on top of that they’re going to be forced by Beijing to absorb all the non-performing loans (NPL) in the coming months.

I get that.

No matter how big the stimulus package Beijing is going to roll out, a lot of SMEs are going to face big liquidity crunches from the shutdown. There’s no doubt about that. The disruptions to the supply chains, combined with a prolonged shutdown and impact on consumer and business sentiment will be a disaster for these SMEs. Most of these guys only have the liquidity to last 2 to 4 weeks. And how long has China been shut down?

So no matter what Beijing does, the banks are going to have to take on some of the fall in the form of non-performing loans, or at least roll them over for a year or two and hope that the SMEs recover.

Interest rate cuts are also going to impact net interest margin, and the big stimulus package is going to impact the Yuan, which is bad news for foreign investors like us.

So that’s all the bad news.

The question then, is at what price does China banks start to look attractive? China Construction Bank (second largest bank in the world) is now trading at a 5.4% ttm yield and an 18% discount to book value (which I get means nothing).

No? What if it drops another 10%? Would you buy it then?

I think with China banks, the key is to take a longer term, 10 to 20 year view. I think in 10 to 20 years we’ll look back on COVID-19 with the same fondness that we look at SARS now. If you could go back to 2003 and buy some Singapore banks, would you do so?

The China economy in 20 years is going to be vastly larger than where it is today, and as a proportion of the world GDP, is going to be massive (as is its influence). Perhaps in time to come, this could turn out to be a great buying opportunity.

It’s listed in Hong Kong though, so check out our Stock Broker Guide on which stock broker to use.

Yangzijiang Shipbuilding Group

Okay now we get into the really risky stuff. Yangzijiang holdings.

This Singapore listed shipbuilder is one of those “value” counters hotly debated on HardwareZone forums and Facebook groups and investor Whatsapp groups.

And I can see why. It’s trading at cash value (which basically values the entire core business at zero), a 5% ttm yield, and a 5.5 times P/E. This stock basically fits the textbook definition of a value stock.

The thing about value stocks though, is that they are usually cheap for a reason. It’s easy to think that you’re smarter than the market in being able to identify this undervalued gem in the rough, but more often than not, it turns out to be you who is the one missing something crucial.

What really worries me about Yangzijiang, is the forward looking prospects of the company. They make ships. Does that sound like a good business in the coming few years?

That big cash position can go up in a puff of smoke very quickly after a few quarters of consecutive losses.

The interesting thing here though, is that I think Yangzijiang either goes up a lot, or it goes down. Which could make it an interesting short term trade, with the right stop loss in place. For a longer term investment though, I’m not so sure, it’s still very early days.

Or if you’re not into Yangzijiang but love to take risk, you can check out Comfort Delgro as well. It’s starting to look pretty interesting.

Vanguard Total China ETF

I didn’t feel right ending off this list with Yangzijiang, so I wanted to end off with a nice, safe, diversified China ETF.

The annoying thing about China is that there is no “S&P500” equivalent. When I invest in the US I can just buy the S&P500 and be done with it. When I invest in China, I need to look at N shares (US listed), H Shares (Hong Kong listed) and A Shares (China listed). And there is no single good index that is able to capture all of them accurately.

There are many indexes out there to track China, but none of them is perfect. It’s either too high an expense ratio, too low AUM, too concentrated in one sector or exchange, you get the idea.

One interesting one that I short-listed was the Vanguard Total China ETF (3169), listed on Hong Kong.

Note: iShares Core MSCI China Index ETF (2801) could be another alternative due to the lower TER and higher AUM (but no access to A-Shares).

It covers N, H and A shares, at a fantastic 0.4% expense ratio (most of the others are at 0.7 to 0.9).

Really nice sector split between financials and consumers services and tech as well.

 

 

The drawback? AUM is tiny at 180 million RMB.

But like I said, there’s just no perfect ETF for China. Other options include the Hang Seng Index, iShares FTSE A50, or the US listed FXI or MCHI. Each has their own pros and cons – if you’re a Patron or FH Course member, we did up a summary table that you can download.

To be really honest though, using a passive index is a poor way to get exposure to China. Sure it works, but because of huge inefficiencies in the market, and because their stock market is changing so rapidly, you’re likely to get better results with active investing. You can either DIY (requires significant effort to keep track though) or try to pick a fund manager who is good.

But I get that active investing isn’t for everyone, so there’s still a passive option available. Just don’t expect this to be as great as the S&P500 though. The US market and the China market are worlds apart.

Closing Thoughts

There’s a famous story about Foxes and Hedgehogs. Hedgehogs are single minded in their focus. They believe in something (eg. stock prices will go up), and look for information everywhere to justify this idea. Foxes on the other hand, are skittish and paranoid. They believe in something (eg. stocks may go up), but as soon as they find evidence that disagrees, they reassess their original belief.

In popular media. Hedgehogs are way more popular than Foxes because they express firm opinions on what’s going to happen, even though they may turn out to be wrong. Foxes on the other hand, come across as uncertain and flaky, because they’re constantly changing their mind based on new information.

Try to ask yourself. In the world of investing, are you a Hedgehog, or are you a fox? Do you change your mind about the global economy on a daily basis, or are you singular in your belief?

I know which I am.

But closer to home, what’s starting to concern me, is how rapidly the situation is developing outside of China. Just as China seems to be getting the situation under control (or maybe not based on news this morning), it is now countries like Singapore, Vietnam, Hong Kong (not a country I get it) that are starting to look worrying.

I actually think now that there is a small possibility that things in Singapore get much worse before they get better. This could open up some interesting possibility to invest in Singapore focussed counters. But we’ll cross that bridge when we get there. For now though, Singapore stocks are looking way too optimistic about COVID-19, which I’m not so sure is warranted.

As always, this article is written based on information as at 14 Feb 2020, and will not be updated going forward. If you want our updated thoughts (or my personal stock watch/investment portfolio), do consider supporting this site as a Patron!

What undervalued counters do you have your eye on? Share your comments below!

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