I have added some stocks that are in the electronics sector recently in my portfolio, namely Valuetronics and AEM. When I bought them, it was when Mr Market was very unhappy and beaten down their stocks badly.
Needless to say, since I can’t predict how things will turn out, the price of both stocks have also decreased by double percentage points in my portfolio after I bought them. Yet amazingly, within just three days, both have also risen up to be green currently.
17 August 2018
Although I do have some emotional capability of holding stocks that will become very, very red in my portfolio, this is a new threshold of volatility to me. Being so new as an investor, it is inevitable that I will have some issues with self doubt.
Of course, because of this volatility, my portfolio has been doing extraordinarily well. In fact, in the first time in 6 months, it has finally beaten the STI ETF! More stats in the next portfolio update. You can read the previous one here first.
So anyway, I’ll do a quick analysis on Valuetronics today, and why I decided to become a mini owner of the business.
Firstly, I want to talk more about the industry.
Electronics and the World
Working as an engineer in the electronics sector, there is huge demand in electronics everywhere, especially with Internet of Things (IoT).
IoT is short for Internet of Things. The Internet of Things refers to the ever-growing network of physical objects that feature an IP address for internet connectivity, and the communication that occurs between these objects and other Internet-enabled devices and systems.
Definition here: https://www.webopedia.com/TERM/I/internet_of_things.html
Pause for a second and think about not having the internet for a day.
No wait – stop. I can’t. It’s too painful.
Because of this demand in various industries, particularly in consumer electronics (think Apple), many suppliers are unable to keep up with their own supply. In the current situation, there is a big shortage of passive components and there is no choice but to delay the production release of their products.
Simple economics – high demand, low supply. Drives prices up. Win-win for product chain. Extremely good earnings because business is booming. And thus also makes Mr. Market very very happy.
But also remember that this is a cyclical nature. When there is recession, people will be more careful with their money and control their spending. They will think twice, thrice about buying a new phone, laptop or car.
So naturally, earnings will not be as good. Mr Market will be moody. And we have to always be prepared for that. Because we never know when it will happen.
So when should you buy electronic stocks?
- Gross and net profit margins are at 14% and 7%. This remains to be the same throughout the past 5 years and I believe that there will not be much changes to these numbers.
- PE ratio of 9.3
- No long term debt (thumbs up!)
- Net asset position with NAV at about $0.21 per share. It is low because PP&E is really low.
- Cash per share is at 35% of my buying price.
- Cash flow from operating activities has always been in the green.
- Except for FY2018, net cash has been increasing over the last 5 years.
- Presence of dividend payout since 2008 (10 years straight record)
- Dividend policy – payout of 30% to 50% of net profit
- Strong dividend yield, based on my buying price @ 4.94% for July alone.
- Growth of dividends are in line with growth in earnings.
Valuetronics has proven over the years that it is able to sustain the ups and downs of the electronics industry. Even during the downs, they are able to maintain their dividend payout. Over the long run, I have observed that Valuetronics is growing organically well.
They have managed to acquire a Tier 1 customer in the Automotive industry, and Tier 1s are a big deal with huge volume orders. I am wishing that in future, they can also expand their expertise to other more defensive industries like the medical field as their main revenue now is only from CE industry and the newly added Automotive industry.
But anyway, it is not up to me but my trust in the management that they know what is best for the company. It might not be a good idea to venture too far from what you’re good at, and fail in the end after pumping many resources. Better not bite off more than what you can chew.
I hope that Valuetronics can be a stock that I can hold for a long time ahead, and she is fundamentally strong in their numbers so far. Vested at S$0.692 per share.
Next up, AEM?
Thanks for reading!