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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