Adam Khoo Value Momentum Investing (review and notes)

Here's my concise notes after learning about how we can build a Winning Portfolio, from Adam Khoo's Value Momentum Investing Course. These are some useful concepts that I jotted down while going through the online modules.

Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6

Part 1: Portfolio Construction

Diversification is needed to achieve low volatility and high returns in a portfolio.

Principles to build a Winning Portfolio

  • Divide your capital into 8-30 stocks
  • Diversify between countries, sectors and stock categories
  • Divide your capital between core long term investments
  • For speculative investments, you can allocate 1/2 of a normal position or less
  • Balance your portfolio such that each stock will eventually take equal percentage of your total capital
  • Do not have more than 25% of your portfolio concentrated in a sector

Add shares of a particular stock if it is

  • Undervalued (price below intrinsic value)
  • Price has retraced down to a support level
  • Not yet at a full position in your portfolio

Part 2: Sector breakdown

Defensive Stocks

  • Defensive companies sell product or services that are necessities
  • They make consistent sales and profits despite the economic cycle
  • Low to moderate growth of 5-10%
  • Outperform during economic downturn and underperform during economic cycle

Strategy

  • Buy defensive stock during economic boom: J&J, United health, Pepsi, P&G
  • You want to do the opposite of others
    • During recession: majority usually buy defensive stocks such as Pepsi, Clorox, Unilever, P&G and Coca-Cola. After recession: buy cyclical stocks.

US sector stocks (defensive)

Healthcare (XLV): JNJ, PFE, UNH, WLP, ABT
Consumer staples (XLP): PG, PEP, CL, KO, KMB
Utilities (XLU): DUK, EXC, NEE, D, SO

Cyclical Stocks

  • Companies that sell products/services that are dependent on the economic cycle
  • Generate high sales & profits during economic boom
  • Underperform during a recession, outperform during economic boom
  • During economic boom, cyclical stocks lead the way and underperform during recession

Strategy

  • Buy cyclical stock during economic downturn: JP Morgan, Bank of America, 3M, UOB, DBS & OCBC
    • Buy these stocks at the bottom of the cycle
  • Sell when they r overvalued (during economic boom)
  • Can consider Ping An insurance, Mastercard (>Visa)

US sector stocks (cyclical)

Basic materials (XLB): DOW, NUE, AA, DD, MON
Finance (XLF): MA, JPM, BAC, GS
Energy (XLE): COP, CVX, BP, XOM
Real estate (XLRE): REG, EXR, IRM, ESS

US sector stocks (moderate cyclical)

Such stocks have consistent profit and sales.

Can look into Home depot, Cosco, Nike, Amazon, Target, 3M, Boeing & Lockheed Martin
Netflix is in a competitive scene as there is Amazon Prime etc

Technology (XLK): Aapl, msft,crm,adbe,pypl
Industrials (XLI): DE,MMM,CAT, BA
Consumer discretionary (XLY): HD, TG,LOW,NKE,AMZN,EBAY
Communication services (XLC): FB,NFLX,GOOGL,DIS,T

Investment categories

  • ETFs
  • Large growth
  • Predictable
  • Cyclical
  • Speculative growth
  • Turnarounds
  • Dividend
  • Deep value

Dividend cash cows/Income stocks

  • For the objective of earning dividend
  • Singapore REITS are in this category
  • Do not invest based on high dividend yield

Criteria for dividend stocks

  • Dividend yield at least 4-5%
  • Consistent increase in dividends per share, net income, CFO for past 5 years
  • Stable or increasing share price for past 5 years
  • Defensive stocks (avoid cyclical stocks like airlines, commodities, shipping, property etc)
  • Conservative debt (debt servicing ratio <30%)
  • Dividend payout ratio between 20-100% (If it is more than 100%, means company paying out dividend more than what its profit (not sustainable)

Formulas

  • Dividend yield = dividend per share/price per share *100%
    • It is possible that dividend yield is high but DPS is falling (because share price is falling more than DPS)
  • Payout ratio = dividend per share/earnings per share *100%

Large Cap Predictables

  • Products/services that you use regularly, never goes obsolete and tends to be defensive
  • Large companies that have wide economic moats, predictable earnings and cash flow from operations
  • Low uncertainty in earnings, cash flow and volatility
  • Slow but steady capital appreciation
    • Growth rates usually 5-10% per year
  • High returns can be achieved when bought at big discounts (during crisis/ face temporary problems), combined with selling covered call options
  • Examples: YUM, CL, PG, UNH, JNJ, Clorox, Macdonalds

Large Cap Growth

  • Large companies that still have high growth potential (>20-25%). Example: Domino
  • Majority tend to be technology related companies or in secular growth industries (Cybersecurity, E Commerce, Software)
  • Stock price is usually overvalued but investors need to be patient and enter at undervalued levels during temporary bad news or crisis
  • Growth companies could either have a wide economic moat (brand monopoly, high switching costs, network effects) that lasts for decades or a narrow economic moat (small competitive advantage, shorter term)
    • Wide moat: googl, amzn, fb, baba, tencent, msft and adbe
  • Narrow moat companies are more risky - take smaller positions
    • Narrow moat: nvda, ulta

Speculative Growth Stocks

  • New growth companies that may have the potential to become large wide moat stocks that will dominate their industry
    • They may currently have a narrow economic moat now
  • Sales revenue growing at >100% but yet to have consistent net income and CFO.
  • Company may still be making losses due to high investment costs and lack of EOS
  • Example: Zoom, Meituan, Beyond meat and Snowflake

Strategy

  • Use PSG as valuation method (PSG should be 0.2 or less)
  • High risk investment hence
    • Recommend to take smaller position in such stocks (less than 0.5 of a usual position
    • May cut losses if stocks turns into a downtrend or 25% down from purchase price

Deep cyclical stocks

  • Companies that are in capital intensive industries
  • Highly sensitive to the economic cycle and are unable to respond to demand changes quickly
  • They make significant profits during Economic booms and smaller profits or even losses during Economic recessions
  • Example: banks, real estate developers, industrials, offshore, marine and commodity companies

Strategy

  • Buy deep cyclical stocks only when they are near the bottom of their cycles and sell to take profits when they are at the top of their cycles
  • Bottom of the cycle
    • Generating low profits or temporary losses.
    • Very undervalued
    • Price is near support levels of long term chart (weekly and monthly candles)
    • Can buy for short term opportunity
  • Top of the cycle
    • Generating high profits
    • Overvalued
    • Price is near the resistance level of long term chart

Deep value stocks

  • Stocks selling for less than the net cash on their balance sheet
  • Buying distressed companies (industry recession) that are selling below their net working capital (current assets-current liabilities) less long term debt
  • Examples: BSH, CXS, FLXS, GENC, MPAD, OPST, PARF & TNAK

Deep value stocks criteria

  • Positive CFO for past 12 months
  • Conservative debt
    • Current ratio >1
    • Debt to equity ratio < 1
    • Debt servicing ratio > 30%
  • Share price< [(CA-CL)- long term debt]/ shares outstanding Accumulate at support levels of consolidation or the reversal into an uptrend (50MA>150MA, both MA flat or sloping up)

Exit strategy: exit when 50MA crosses below 150MA (both MA flat or sloping down) or when company reports a quarterly loss

Turnaround Stocks

  • Great busineses that have been temporary hit by bad news (lawsuit, boycott, scandals, mismanagement, recession etc)
  • Company may be making temporary losses but their economic moat remains intact
  • Stock price can sell at 40-50% below intrinsic value
  • Patience needed in waiting for these stocks to recover and "turnaround"
  • Examples: Yum, Booking, Boeing

Strategy
Only go for wide moat industry leaders

Index, Sector and Industry ETFs

  • No company specific risks
  • Focus only on technical analysis (trends, MA, support/resistance)

Strategy

  • Can buy ETFs when there are too many good companies in the sector (not a single company dominate the industry) or when it is too risky to buy one company
  • Buy when the undervalued sector is hit by temporary bad news
  • When to buy: DCA or buy dips on uptrend

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