After being a major laggard in 2020, the Straits Times Index (STI) is finally waking up from its slumber.
Year-to-date (as of 26 March), the benchmark index for the Singapore stock market is up 11.1%, outpacing all the major world benchmark indices. This includes the US’ Dow Jones Industrial Average and S&P 500.
If things continue the way it has, it will be the STI’s best first quarter in nine years.
Potentially Undervalued Companies
The late Benjamin Graham, who is often touted to be the father of value investing, liked to purchase a stock for less than its intrinsic value.
For example, when we purchase $1 worth of an asset for 50 cents, we have a margin of safety of 50%, and this “safe distance” can help minimise the downside risks of the investment.
Here, let’s take a look at all the blue-chip stocks that have a price-to-book (P/B) ratio of below 1 currently, which could mean they are undervalued.
|Company||Ticker||Share Price||P/B Ratio (times)||Dividend Yield|
|Jardine Cycle & Carriage||SGX: C07||S$22.82||0.98||2.52%|
|Keppel Corporation||SGX: BN4||S$5.36||0.91||1.86%|
|City Developments||SGX: C09||S$8.00||0.89||1.00%|
|Hongkong Land||SGX: H78||US$4.99||0.33||4.41%|
Source: Shareinvestor (as of time of writing on 30 March 2021)
Cheap Doesn’t Make It an Automatic Buy
Some of the companies could make good investments.
For example, Hongkong Land, which owns prime office and luxury retail properties in Hong Kong and Singapore, has a solid long-term financial track record and has been giving out stable dividends over the years.
On the other hand, there are also companies on the list that have not been doing well in the past.
For instance, Keppel Corporation has seen its revenue, net profit and dividends falling over the past five years, and it could face more headwinds going forward.
The contrasting examples show that just because a company has a P/B ratio of below 1, it doesn’t mean it’s a “buy”. Cheap could be cheap for a reason.
As investors, we have to go beyond the headline number and ensure the companies we invest in have strong business fundamentals to begin with.
With the list above, investors can use it as a starting point to dig deeper into the companies they fancy and determine if they are worth investing in for the long-term.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.