C.ky Series 4 : Proof of the Pudding is in the Eating

Proof of the pudding is in the eating. This idiom means that something can only be judged when it is tested or by seeing its results. So I am going to share with readers one of the successful fundamental techniques in investing used widely by many well-informed, professional investors.

There are many methodologies one can use to pick stocks. One of the methods that I am using is called the Top-Down Approach.

This method believes that the economic environment and industry performance influence the share price and its return. So, in picking shares, we first analyze the economy, then choose the industry and finally, select the company.

In October 2010, emerging markets were recovering well after the world’s economy was battered by the subprime loan crisis originated from US. As the economies in East Asia were recovering faster, it was a good time to invest in those countries. During this period of time, I had some funds to be invested. I started to analyze which industries will perform better with the economy cycle on the upswing in Malaysia. I narrowed down the industries into a few and one of them was the oil and gas sector.

 

The oil price dropped sharply (from the high of U$145 per barrel to US$30.28) during the economic crisis and investment activities in this sector also slowed down. However, when the economy picks up, the demand of oil and gas will rise and the price of oil will start to rise too. Companies will invest more in oil exploration activities as it’s more profitable to do so as compared to when the oil price was lower. These investments will create multiplier effects and benefit oil and gas related companies that provide support services.

 

There is a number of oil and gas related companies in Malaysia. I did some analysis and finally picked the Dialog Group Bhd, one of the leading specialist technical services providers to the oil, gas and petrochemical industry. I invested in the shares at RM1.20 in October 2010. I hold some shares for long term investment and some shares for short term trading purpose.

 

Why did I pick the Dialog Group Bhd? The main reasons are:

1. It is not a neglected stock (It’s popular with analysts and fund managers). Neglected stocks are good companies that are not in the radar of most investors thus it’s harder for the price to move up.
2. Excellent past management track record. 
3. Good financial results, these include good ROE for the past 3 years (2008: 19.9.3%, 2009: 20.87%, 2010: 24.42%), high Altman’s Z-Score, reasonable gearing (low financial risk) and good liquidity, amongst many other indicators)

So, with economy improving, the rising oil price, increasing investment in the oil and gas industry, and a slew of positive news and contracts awarded, it’s not surprising that Dialog Group Bhd share price increased almost 100% in just four months. I made some handsome realized gain and substantial unrealised profit in the past 4 months. (The price on 18 Feb 2011 was RM2.31)

 

This company is one of my most successful stock picks in recent months based on the Top Down Approach. Though the price has almost doubled, I am still holding some of the stocks as I think there is further upside potential.

 

 

[Disclaimer: This article serves an educational purpose and in no way, constitutes to a recommendation to buy Dialog Group Bhd shares.]