Wednesday, September 21, 2011

Investing in a little light research could prove to be lucrative - The National

Richard Dean

$(document).ready(function() {$.get('/national/overrides/ajax/article_detail_date.jsp', {'vcmid':'27155581a9c72310VgnVCM100000e56411acRCRD'}, function(data) { $("#article_date").html(data);});});

Just finished a cracking book on how to make money like Warren Buffett: The Little Book of Value Investing by Christopher Browne.

Most books on Mr Buffett - and I've read a few - are by some third-rate author desperately struggling to cash in on the great man's celebrity. Not this one. Browne's father worked closely with the Sage of Omaha, acting as stockbroker when Mr Buffett bought Berkshire Hathaway half a century ago. Young Christopher inherited Mr Buffett's investing principles along with the Browne family firm, and used both to great effect.

Christopher Browne died in 2009. His legacy: millions of dollars; an estate in the Hamptons; and a pocket guide to get-rich-slow.

The Little Book argues that making money in the market is easy. First, avoid so-called growth stocks that are darlings of the financial press (think Groupon today, or pretty much any over-hyped tech stock of the 1990s). Second, invest in solid, stodgy companies with stable earnings - but only when the share price is low. "Buy stocks as you would buy groceries - when they are on sale."

All well and good in Nebraska. But can it work in the Gulf region?

Let's find out.

Here's one of Browne's bargain-hunting tricks: find companies with a price/book (P/B) ratio below 1. In simple terms, book value is the cash you'd be left with if you shut the company tomorrow, selling all the assets and paying all the debts. If the book value is more than the firm's stock market value, you could be on to a winner.

I took Browne's advice and ran a search of all 200 companies in Bloomberg's GCC stock market index (for the record, I searched using tangible book value, a more stringent measure that strips out fluffy assets such as goodwill). Here's a list of the 10 cheapest stocks in the Gulf right now, by price/book value: Abu Dhabi National Hotels 0.31; Dubai Investments 0.33; Deyaar 0.40; Sudan Telecom 0.42; Agility 0.52; RAK Ceramics 0.53; Sorouh 0.54; Emaar 0.55; United Development Company 0.66; Union National Bank 0.67 (source: Bloomberg).

Browne warns this is only a rough guide to finding value stocks - plenty of bad companies have had low P/B ratios. But if we scratch below the surface of the Gulf's cheapest three shares, we find at least two of them stand up to scrutiny:

Abu Dhabi National Hotels (ADNH) I've been a big fan of this stock for a while, so I got a warm, fuzzy glow when it topped the book value charts. ADNH owns and manages hotels across the emirates. It is well run, with a track record of profitability dating back to the 1970s. The hotel division is the bedrock of the business, but it actually generates more revenue from a catering joint-venture with the global firm Compass. Analysts predict a steady increase in revenue and profit, as Abu Dhabi's tourism sector grows, and rate the stock a buy.

With a price/earnings ratio of just 7 based on next year's forecast earnings, ADNH looks a strong candidate.

Dubai Investments Mr Buffett would surely love this company. Dubai Investments owns the kind of old-fashioned, stable, cash-generating businesses he covets: a glass factory; a dairy farm; a drug maker; aluminium extrusion; edible oil. The list goes on.

Sure, Dubai Investments has faced challenges lately. Profit slumped to Dh239 million (US$65m) in the first half of this year - down almost 50 per cent year-on-year. The Dubai property slowdown and the Arab Spring have both taken their toll.

But neither presents a long-term threat. Analysts at TAIB bank have a "buy" rating on the stock, forecasting net profit of Dh1 billion by 2013.

That equates to a mouth-watering price/earnings ratio of less than 3, based on today's market value.

Deyaar Development Here we see the limitations of book value laid bare. On the surface, Deyaar looks like a screaming buy - a property portfolio trading a discount of 60 per cent.

But hold on. Last year, Deyaar racked up losses of Dh2.3bn - more than its market value - mainly due to write-downs and impairments. It's creeping back into profit this year as it completes tower blocks in Dubai, but doubts remain about what kind of company Deyaar will look like in five years.

Saeed Al Qatami, the chief executive, says the new strategy is to focus on low and middle-income housing in the UAE and surrounding region.

Investors and analysts are yet to be convinced.

Irfan Ellam at Al Mal Capital has a "hold" recommendation on the stock. He notes the attractive P/B ratio, but says a "lack of strategic clarity" makes it hard to see where long-term growth is coming from.

Richard Dean hosts Tonight on Dubai Eye 103.8 FM and is the author of Sink or Swim? How to Stay Afloat in Tough Economic Times: Business Lessons from the UAE. He does not own any of the shares mentioned in this article.

business@thenational.ae


View the original article here

Marc Faber News

Nouriel Roubini Blog

Jim Rogers News

Bob Janjuah News

Gary Shilling News

Warren Buffett News

Dennis Gartman

Doug Kass News

Suze Orman News

Rich Dad Poor Dad