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: 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

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