Stock Selection Part 1 1 comments

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One of my main considerations in stock sslection has always been scale and focus of operations of a firm. I am a firm believer in economies of scale and also there are other reasons that are a consequence of my investing pattern.

A style of thinking that often accompanies my stock screening process has been trendspotting, which is described in another site (Trendspotting website). It doesn't matter whether I do top-down picking (ie. identify the trend then pick the stock) or bottom-up selection (ie. pick stock then check its sector); actually I do both; but ultimately I look to buy a stock that is in a favourable long-term trend (not price, but fundamentals). A co-existing belief is that factors behind a stock's share price run is split almost evenly between three main ones: the market, the sector, and the company, in a proportion (qualitatively speaking) of 40-30-30.

Once I identify the fundamental trend, which could be about the rise of Asian consumerism or the future omnipresence of hard disk drives, it makes sense to pick key beneficiaries of this trend. That is why companies of a reasonable scale should be selected; the exposure of small microcaps to this underlying trend is often diluted by insufficient pricing power, "growing pains" issues such as corporate governance, and a lack of institutional exposure leading to lack of coverage. Examples I can think right off the mark is the strong price surge experienced by big and mid-cap Singapore plastic moulding firms in late 2004 (eg. Hi-P, First Engineering, FuYu, Meiban) due to increasingly favourable coverage of the sector by the brokerages while micro-caps like Juken and Chosen continued to languish.

At the same time, my view is that the "scale" consideration should not be overdone to the extent of picking the blue chips, which are so heavily covered and traded among the most knowledgeable investors (the institutional funds) that the likelihood of them being mis-priced and having a substantial price run is much smaller than say, for mid-caps.