Investment Theses

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Many young people find investing to be an incredibly daunting task There’s always the question of what, how, when, who and why? 

To boil it down to its basics, all you need to purchase a stock in any public company is a brokerage account and enough capital to purchase said stock at the market price. Still a bit too jargony? Breaking it down even further, you can have ownership of any company (even something like Apple), if you have enough money to buy a unit of its share.

Then comes the “what to buy”, and for many this is the biggest hurdle. Here at FLY, we’ve assembled a few of our members who have a keen interest in investing to form FLY’s Virtual Investment Portfolio or FLY VIP. 

Our philosophy is that, behind every investment, are strong ideas. These ideas are built on an interest in their business model, which allow us to gauge their future prospects. With this in mind, members of FLY VIP will now elaborate on their investment picks, and provide a short thesis to explain their rationale behind their pick.

The point of this exercise is to illustrate to you, the reader, how you can conduct your own due diligence and allow you to start thinking about businesses that you’re passionate about. 

DISCLAIMER: This should not be misconstrued as financial advice, nor is this an inducement to take any positions. This is simply an educational illustrative exercise and does not represent the views of FLY MALAYSIA as a whole.

And with that, here are the picks our team are most passionate about:

Cheong Hien’s Investment Pick: Berkshire Hathaway (BRK.A)

Disclosure: The author has units of the stock in his own personal portfolio

(Image Source: https://www.investopedia.com/articles/markets/041714/how-warren-buffett-made-berkshire-hathaway-worldbeater.asp)

Thesis: Progressing into the year, investors should be on the lookout for valuations and cash flow generation as the Federal Reserve (FED) is expected to raise rates and reduce QE completely. With this in mind, I scoured meticulously for a business that is diversified, able to handle inflationary pressures efficiently, fairly valued and generates a strong free cash flow. At last, the company I found that embodies these qualities is Berkshire Hathaway.

Berkshire Hathaway is a giant conglomerate which operates in various sectors such as insurance, railway, energy, foods, and consumer goods This diversification grants Berkshire the stability needed to  easily weather numerous environments. A side note; energy, railway and financials, which make up a larger portion of Berkshire’s business, is expected to outperform in 2022 due to higher energy prices, higher demand for transportation and higher rates. These are trends that may potentially help boost Berkshire to a year of outperformance relative to the SnP500. 

All of Berkshire’s ventures are excellent cash flow generators which are reinvested sometimes back into their core businesses to grow organically but more notably, into its  gigantic investment portfolio worth $348b as of September 2021. This portfolio helps Berkshire increase its book value every year and provides another source of income for the conglomerate in the form of dividends. Consisting of countless strong companies such as Apple, American Express, Coca Cola, Bank of America and the like, the portfolio is just as solid as Berkshire’s core businesses. Being arguably the best stock picker in the world, Berkshire’s portfolio has consistently crushed the SnP’s annual returns since its inception, that is until the last decade where the Fed started to implement a looser approach in both monetary and fiscal policies. As the Fed starts to tighten their policies once more, Berkshire, in my opinion, should once again outperform the market 

Berkshire Hathaway is a business with many facets and as such it is very hard to know its true value. For example, Berkshire is required to report its unrealised gains by the quarter which  distorts many valuation calculations for the multinational. Furthermore, its insurance and financial businesses are also subject to different standards of accounting and valuation methods. However, coupled with the aforementioned points, I have full faith in Warren Buffett and Charlie Munger, who are regarded as the world’s best capital allocators, to lead Berkshire Hathaway to greater heights in 2022.

Muhammad Bahari’s Investment Pick: AXIS REIT (5106)

Disclosure: The author has units of the stock in his own personal portfolio

(Image Source: https://www.edgeprop.my/content/1412799/latest-asset-buy-seen-have-muted-impact-axis-reit%E2%80%99s-earnings

Thesis: A key idea of achieving financial freedom is the creation of a consistent and steady cash flow, and dividends are a means of achieving this. A constant stream of income every quarter helps alleviate monthly expenses. REITs have to pay 90% of their earnings to their shareholders, hence unlike publicly listed companies who can (unless stated in their constitution) declare dividends on a whim, REIT’s almost guarantee a higher than normal dividend, assuming earnings are good.

Personally, I’ve considered investing in REITs , but the pandemic made me hesitant. Office spaces and mall uptakes would never be the same due to the shift in consumer behaviour. But upon deeper research into REITs, AXIS REIT caught my eye.  Its portfolio consists of data centres, logistical warehouses, and manufacturing facilities in which the demand and use of such industrial spaces are far more specific than the need for office spaces.

Myra Kiasatina’s Investment Pick: Twilio Inc. (TWLO)

(Image Source : https://techcrunch.com/2021/07/14/twilios-new-tools-will-let-anyone-add-live-video-and-audio-to-their-apps/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAE7zsMfPGC2oPP44_7ZDmIMM7rStJT4t9AdHIp9GS6_yOlpLIVeTauUNUY4ACI7olAGNupz3hyyL_W3LmMdhTn0dltqQJZ3i1eU9EyDQKMWeVkrpwrQuPEZ4XMIfFN_uIBHlqEm8sZfog29W6Nm16EwuczKcP9SKFbpnl16la3m5)  

Thesis:  “Numbers don’t usually tell the whole story”. When investing, it’s a crucial key factor for investors to look beyond the quantitative terms and instead opt for a more qualitative approach. 

As Benjamin Graham, author of The Intelligent Investor puts it “ the market is highly bipolar”. I don’t think any of us can predict where the bottom is for any stock, it’s unpredictable, irrational, and volatile. Take how titans such as Facebook (or now known as Meta), lost $200b in market value when their Q4 earnings report fell below market expectations.

Thus, when choosing an investment, we should always conduct proper research and gain a true understanding of the company and its future projections. TWLO’s objective is to fuel the future of digital communications whichI believe has strong growth potential. One of TWLO’s goals is to digitise customer engagement with its top-tier cloud communications platform; this lies at the core of the world’s future communication. 

TWLO has regularly generated high total revenue growth in recent quarters, although organic revenue growth was a bit below expectations at 38% year over year last year. A lot more noise now than before clouds our thinking when making an investment decision. However, it is also worth noting that recent research reports highlighted TWLO’s prospects to be better than ever due to its high-rate environment and business nature that strives alongside the advent of technology. Such ability for future growth presents the company with a golden opportunity over the long haul. Hence, in my opinion, it’s important for us to find assets that will be in high demand over the long run, purchase said assets and hold them for the long term. 

Jih Yih’s Investment Pick: iShares Core S&P Total US Stock Market ETF (ITOT) 

Disclosure: This is not a recommendation to buy/sell said stock but meant for research purposes only.

(Image Source : https://seekingalpha.com/article/4327651-ishares-core-s-and-p-total-u-s-stock-market-etf-buy-all-limit-your-risk)

Thesis:  One fundamental idea to achieve long-term growth consistency for investments is the creation of a well-diversified portfolio. Exchange Traded Fund (ETF) best applies this practice. Essentially, an ETF is a basket of securities that holds multiple underlying assets, instead of just one like a stock does.

ITOT consists of all U.S common equities listed on the NYSE and the NASDAQ, which goes beyond a NASDAQ ETF (100 largest technology companies) or an SnP500 ETF (500 largest listed companies in the US). Therefore, ITOT in my view, is a single fund with convenient access to the total US stock market . 

Furthermore, unlike SnP500 ETFs which have an expense ratio of 0.09%, ITOT is one third of the cost – it’s expense ratio is only 0.03%. In terms of sector weightage, 25.27% of its assets is invested in the technology sector, which I am bullish on, due to the nature of emerging technologies (i.e., artificial intelligence, machine learning) which are rapidly advancing. A major portion of 12.9% of its assets is invested in healthcare (i.e., one of the non-cyclical sectors) which serves as a good safety net when the economy underperforms.

To achieve financial freedom, one must understand the importance of diversification in reducing the volatility/risk of their investments. As there are many ETFs to choose from, we should select one that best suits our own financial profile. For instance, if you prefer long term investment, you may opt for an ETF that invests heavily in blue-chip firms that can promise steady growth in the long run based on excellent reputation and financial stability. Contrarily, if you favour short term investment, you may opt for an ETF that invests in startups and has high growth potential for the near future. 

Key Term: Blue Chip 

Typically, large, well established and financially sound companies that have operated for many years” (Chen, 2020)

In Malaysia, many consider Maybank, Public Bank and Tenaga to be “blue chips”, as they have strong financials year to year, and consistently pay a dividend.

Kng Fen Ying’s Investment Pick: Revenue Group Berhad (REVENUE)

Disclosure: This is not a recommendation to buy/sell said stock but meant for research purposes only. Invest at your own risk.

(Image Source : https://www.theedgemarkets.com/article/revenue-group-buy-25-stake-digitalisation-service-provider-rm12m

Thesis: Before investing, we must first understand our purpose and identify our risk appetite. Some may prefer stable dividend investments  while others may prefer high-growth stock. 

When choosing a good company to invest in, the future prospects of the company is one of the key aspects to consider. Good future prospects  suggest that the business will create more value (generating revenue, turning a profit) which means shareholders are rewarded as the value of their investment increases.

Secondly, we have to understand the company’s business, management and financial position. One of the ways to do so is by  selecting the industry of choice,  evaluating all the companies in it and then deciding on a corporation to invest in. For example, I believe that in the future, digital payment will be the new norm hence, I am confident that the digital payment industry holds a bright future ahead. 

To assess a company’s management,  it is necessary to stay informed about any reports of the business. attending a business’ AGM and sharing sessions, is an additional way of ensuring management efficiency. I have personally been to a REVENUE sharing session where the professionalism and expertise of the management instilled confidence in me. Moreover, I believe that as the REVENUE co-founders double as the high management, they’re incentivised to make the business successful, removing any worry of the “principal agent problem”.

Fen Ying’s word of advice for our young Malaysian readers: 

Investing is a life-long journey. Keep learning and be patient. As the economic cycle peaks and troughs, so does an investment journey have its wins and losses.  

Nadiah Sobri’s Investment Pick: Vanguard Total Stock Market ETF (VTI)

Disclosure: This is not a recommendation to buy/sell said stock but meant for research purposes only.

(Image Source : https://www.nasdaq.com/articles/is-vanguard-total-stock-market-etf-stock-a-buy-2020-02-08

Thesis: An Exchange Traded Fund (ETF) is a type of index fund that can be traded. It is essentially a basket with a selection of securities and shares. Instead of investing in individual stocks, investing in an ETF is a good way to diversify one’s portfolio. 

VTI is a market-value weighted index that measures the entire investable US equity market, including small-, medium-, and large-cap companies. Due to its nature as a passive index fund, it has a low expense ratio of 0.03%, making it beneficial for long-term growth investors. This fund’s largest percentage of holdings of 29% are in the technology sector, with its top three holdings being Microsoft, Apple and Alphabet (Google’s parent company). 

A significantly large percentage of this portfolio is also in the consumer discretionary sector, industrials and healthcare. I believe this is a strategic investment as technological progress is advancing rapidly and the fund is well-balanced with a diverse range of sectors, giving it good future prospects. Despite inevitably being exposed to systematic risk and economic downturn, VTI has done well historically, with a one-year return of 18.52% and a five-year return of 16.08%. It’s annual healthy returns also make it seemingly attractive for long-term investors. Although, it is always good to bear in mind the common investment adage; “past performance is not indicative of future performance”.

Shahril Azhar’s Investment Pick: Malayan Banking Berhad (MAYBANK)

Disclosure: The author has few units in his own portfolio. This is not a recommendation to buy/sell said stock but meant for research purposes only.

(Image Source : https://www.nst.com.my/business/2019/05/489353/maybank-further-lowers-its-rates-second-time-after-opr-cut

Thesis:  Good financial performance and consistent dividend payout is a great way to play it safe in the market and survive in the long run. Maybank, in my view, possesses these characteristics. It is Malaysia’s leading financial service with over 22 million customers, close to the heart of the community and is a benchmark for the country’s financial industry

Fundamentally, its financial health is robust with 80% of its liabilities being low-risk funding, meaning the default risk is incredibly low. Over the past 5 years, Maybank has shown  great performance with earnings growth of 1.2% per year on average.

However on the downside, its past dividend (8.05%) is not well-covered by earnings leading the Malaysian bank to look elsewhere for means to give out dividends. If this trend remains, it might pose a risk to investors. 

Shahril’s word of advice for our young Malaysian readers: Not all investment ideas will be a “winner”. Hence, take stride in losses by learning and enjoy the process.

What comes next:

Keep an eye out on our social media platforms, as we will track month to month how our “virtual portfolio” is doing. Our researchers can also decide to change their position, if they deem a change in the fundamentals, so make sure to follow us by keeping engaged with all of our channels!

References

Chen, J., 2020. Blue Chip Stock. [online] Investopedia. Available at: <https://www.investopedia.com/terms/b/bluechipstock.asp#:~:text=A%20blue%20chip%20stock%20is,often%20paying%20dividends%20to%20investors.> [Accessed 26 February 2022].

Researcher(s): FLY VIP’s team

(Cheong Hien, Muhammad Bahari, Myra Kiasatina, Jih Yih, Kng Fen Ying, Nadiah Mohd Sobri, Sharil Azhar)

Reviewer(s): Muhammad Bahari, Faith Tan

Editors : Natalie Seah

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