Tuesday, March 19, 2019

DKSH (Malaysia)

DKSH Holdings (Malaysia) is a distributor which handles consumer goods, pharmaceuticals, and chemicals.  They handle the stocking, transport and billing of their customers' products over region-wide points-of-sale.

Companies use them to distribute and market goods into Asia.  They handle the logistics and provide a single point of contact/payment.  The goods they distribute are varied: instant coffee,  lego,  snacks,  CT Scannersprescription drugsspecialty chemicals.

The company operates throughout Asia, but did not break down revenues by different countries in their 2017 annual report.

Competitive Advantage

Does DKSH have sustainable competitive advantage?  Looking at its market share:

Even though it is among the top 3 players, the competitive landscape means it will be a price taker.  So no sustainable competitive advantage.  I see this as buying a reasonable company for a cheap price, not a Buffet-like investment that will compound for years and years.


Revenue and profits have grown, in line with the economy:

Why did profits drop in 2014 and 2015?  They attributed it to:
  • 2014: Due to investments in Healthcare distribution centre, costs from relocation of distribution centre, and new rental costs from the group's offices which they no longer own.
  • 2015: "difficult market conditions", with some infrastructure and one-off costs.
Distributors earn a tiny cut of profit when moving their customers' inventories.  DKSH has very small margins - between 0.7% and 1.5% in the last ten years.  They rely on high turnover.  So they have tremendous working capital requirements - in any particular year, Cashflow from Operations (CFO) is unpredictable, due to the change in working capital.  In most 'normal' years - years showing healthy growth - CFO is below income, due to new working capital requirements for continually expanding revenue/income.  In bad years, CFO spikes up:

Because of unpredictable WC, we cannot use cashflows to check the quality-of-earnings for a distributor.  But we can try to estimate if they are sustainable.

Long term I estimate CFO to average 50% of income in a normal year of healthy growth (averaged from 2011 to 2018).  This includes some exceptionally good years where CFO was negative.  It excludes bad years like 2008-09, when profit drops and CFO shoots up.

The Balance Sheet is normal for a distributor: low fixed assets, low long term debt.  

In summary, in 2018 they had:
  • Profits of RM 32m.  Profits are leveraged to the economy.
  • LT debt of RM 32m.  ST debt of 29m.  Total: 61m  Interest payments were 8.2m, already included in CFO.
  • Dividend payments were 16m, not part of CFO.
I estimate long-term CFO roughly at 16m (50% of profits) when things are going well. CFO increases sharply when the economy goes down.

Auric Acquisition

DKSH announced they are buying Singapore's Auric for RM 490m (SGD 157m).    Might be a good price, as Auric was previously privatised at SGD 207m.

From what I can make out:

  • They are paying 18X earnings for it.  Auric's annual profit is estimated around RM 20m.
  • Lets say they take a (SGD) loan at 7%, that would give additional interest payments of 34m.  Assuming those earnings are backed by cashflow, we have an additional 14m/year left to pay off.
  • They can still pay this out from their CFO.  Though theres a chance they have to cut dividends.


Main risk is cyclical - if a recession occurs, revenue decreases and profits drop like a rock.

The longer term risk for its consumer goods distribution is e-commerce.  DKSH says that they currently sell to or partner with leading online retailers, such as Tmall, JD.com, Qoo10 and Lazada.  They have invested in 2 e-commerce companies: eSweets (a China online seller of sweets) and aCommerce (a Thai eCommerce service provider).


A price of MYR 2.50 would give it a trailing PE of 9.1.

Why is it so cheap?
  • Falling profits in 2014 and 2015
  • Market may be wary of the expensive Auric acquisition announced in December.
  • The stock was removed from the Sharia Compliant List in Nov 2018, forcing Islamic funds to sell.
I think most of the risks are priced in.  The main risk remaining is a recession - that could see the stock drop 50%.  If I buy, I'd probably sell at a PE of 15 - which is a 50% upside.

Bought 16000 shares at average price of MYR 2.483.

Monday, March 18, 2019

Systematic Trading: Week 5

Last week SPX closed above the much-watched 2800-2815 resistance area.  Its not convincing yet - this week we'll see if its a false breakout.

Following my system, I'm buying stocks, as the Russel 3000 index has been above its 200 MA.

Value (The Acquirer's Multiple)

Bought the next top 6 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 6 stocks:

  • FSLR (First Solar), bought 73 shares @ $54.27
  • CMG  (Chipotle Mexican Grill), bought 6 shares @ $648.90
  • CDNS (Cadence Design System), bought 65 shares @ $61.37
  • GRA (W. R. Grace & Co), bought 52 shares @ $77.40
  • MSCI (MSCI Inc - not the MSCI index - the company that provides indexes), bought 21 shares @ $190.17
  • PCAR (Paccar Inc), bought 59 shares @ $67.70

Monday, March 11, 2019

Systematic Trading: Week 4

The Russel 3000 index hovered above and below its 200 MA this week.  No buy or sell for either strategy.

This has been a losing week.  Its hard watching individual stocks that I bought go down 5-7% a day.  Don't think there is anything wrong with the strategies - both of them concentrate on small caps, which have had a rough time.

On a day to day basis, most stocks follow the index.  Both strategies seem to pick high beta stocks - if the index goes up or down by 1 or 2%, the stocks each go up or down 2 to 7%.  Just magnifying the index result.

Tuesday, March 5, 2019

Systematic Trading: Week 3

The Russel 3000 index remained above its 200 MA this week, I'm now holding 12 stocks.

Market Breadth looks strong - though its not used in my trading strategy.

Value (The Acquirer's Multiple)

Bought the next top 5 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 5 stocks last night:
  • FLNT (Fluent Inc), bought 728 shares @ $5.39
  • IIPR  (Innovative Industrial Properties), bought 50 shares @ $78.45
  • INSM (Insmed Incorporated), bought 127 shares @ $31.05
  • VCYT (Veracyte Inc), bought 196 shares @ $20.06
  • OKTA (Okta Inc), bought 48 shares @ $81.72

Most of my positions are underwater.  I need to remind myself that the Momentum strategy is highly volatile.  Months with + or - 15% are common.

Tuesday, February 26, 2019

Systematic Trading: Week 2

The Russel 3000 index remained above its 200 MA this week.  I'm now holding 7 stocks.

Value (The Acquirer's Multiple)

Bought the next top 4 stocks from The Acquirer's Multiple All Investable Stock Screener.

Momentum (Clenow)

Bought 4 stocks yesterday:
  • MRTX (Mirati Therapeautics Inc), bought 51 shares @ $77.70
  • XPER  (Xperi Corp), bought 165 shares @ $24.04
  • DOMO (Domo Inc), bought 117 shares @ $34.95
  • LRN (K12 Inc), bought 120 shares @ $32.85

Tuesday, February 19, 2019

Systematic Trading: Week 1

This weekend the Russel 3000 index has been above its 200 MA for 3 days.

Who knows if it will continue?  It could be a false breakout.  Or it could be like 1998: a correction before a final 18 month melt-up.  I will trade the system regardless.

Value (The Acquirer's Multiple)

Yesterday, bought the top 3 stocks from The Acquirer's Multiple All Investable Stock Screener.

I will continue to buy and sell as the number of days the index is above the moving average. (N) changes.

After each stock has been held for 1 quarter, I'll rebalance.  i.e.: replace it with another stock if it is no longer within the top N rated stocks.

Momentum (Clenow)

Bought 3 stocks yesterday:
  • LIVX (Livexlive media Inc), bought 673 shares @ $5.95
  • LCI  (Lannet Company Inc), bought 389 shares @ $10.28
  • EHTH (EHealth Inc), bought 64 shares @ $62.66

Friday, December 21, 2018

The Acquirers Multiple and Quantitative Value

After looking at momentum, I wanted to look at quant value screens/algorithms. Two interesting ones were "The Acquirer's Multiple", and "Quantitative Value".

The Acquirers Multiple

This single measurement is based on Enterprise Value (EV), which gives the cost you would pay to acquire the company. It takes into account a company's capital structure (eg: debt and cash), unlike market-cap based valuations such as PE. And it's more objective than book value.

Divide EV by earnings, usually EBIT1. The resulting number measures how cheap the company is - the lower the better. You need to take a portfolio approach and buy 20-30 of them: these stocks go to zero occasionally2 .

You end up with a bunch of shitty companies. Companies that are targets of lawsuits. Oil companies in the middle of a multi-year bear market. Retailers being killed by Amazon. Companies that no one wants to hold.

The theory behind this is mean reversion: After an industry has been is losing money for years, competition dries up, and eventually the remaining companies are profitable. They may not be very profitable, or have any growth prospects, but after their stocks have been priced for bankruptcy, any improvement in their situation means their stock prices will recover.

When trading using The Acquirer's Multiple, I should expect:
  • Long periods of underperformance. This is true of value investing in general.
  • Declines in bear markets:
(Source : Deep Value and the Acquirer's Multiple (28:20): QuantConn NYC 2016. This is not "The Acquirer's Multiple", but rather the lowest decile of value stocks - similar to TAM) 

The declines are less than momentum strategies, but still bigger than the S&P 500. I'd use the S&P 500's 200 MA to time the my entry.
  • Long term returns of 15-17%. See results from 1964-2016 here.

Quantitative Value

This book gives is a more refined version of The Acquirer's Multiple. It uses EV/EBIT as its main screen, but does some other things:
  1. First it screens out probable Frauds, Manipulations, and companies in financial distress, using statistical techniques.
  2. Then finds the 10% of cheapest stocks by EBIT/EV.
  3. Then tries to find stocks with strong Franchises (high ROA, ROC, FCF/assets, all over 8 years), and Financial Strength (profitability, stability, and operational improvements). The top half are chosen.


I was not able to do a reliable backtest on Quantopian because some fundamental data was missing. If I was trying again, I would try Portfolio123 or QuantRocket. Too bad. I would like to see the shape of the equity curve, the drawdowns, and how they would improve when we use a 200 MA to time entry. But I'm not willing to put any more time into this.

How would I trade this?

I could just buy the Quantitative Value ETF (QVAL), which selects stocks based on the book. Its holdings are equally divided among 50 stocks. Limited to the top 40% largest stocks (minimum market-cap is around 2bn). The expense ratio is 0.79%, meaning if I buy USD 100K and hold for a year, I'm paying $790.

I could also subscribe to the Acquirers Multiple screener for $500 a year, and buy stocks from their All Investable screen. I'd probably trade every week, and ease-in and out of the strategy based on the index's MA - similar to what I do for my momentum strategy.  After filling my portfolio, rebalancing would be quarterly.

Comparing the two: I'll probably go for the screener:

  • It also filters out Frauds, Manipulations and Financial Distress (same as QVAL).
  • It uses operating earnings instead of EBIT, which is slightly better.
  • And it accesses smaller cap stocks (around 150m, depending on market conditions).
  • It also eliminates stocks with high short interest (which QVAL doesn't do).
  • The only thing it doesn't do is check for Franchise and Financial Strength.  This screen is based on purely cheapness and believes we can't distinguish quality.


1 Tobias Carlisle preferred Operating Earnings (Revenue - COGS + SGA + D&A), as it excludes special items. See FAQ: "What are operating earnings?"
2 In an interview - which I can't find - Tobias Carlisle said that an average of 2% of stocks go to zero every year - market wide. For Acquirers Multiple stocks, the average is 6% a year. But that's the average - the bankruptcies tend to cluster in certain years.