Monday 6 April 2009
Strong fundamentals a good analyst maketh
Love brought CLSA analyst Caroline Maes to Singapore - and that call hasn’t turned out badly at all. Ms. Maes, an American, worked in New York for three years as an associate in a buy-side firm but moved here in early 2006 to join her Singaporean boyfriend. She now covers offshore and marine stocks.
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Strong fundamentals a good analyst maketh
6 April 2009
Love brought CLSA analyst Caroline Maes to Singapore - and that call hasn’t turned out badly at all. Ms. Maes, an American, worked in New York for three years as an associate in a buy-side firm but moved here in early 2006 to join her Singaporean boyfriend. She now covers offshore and marine stocks.
Her stellar call on Yangzijiang last year was highly rated by StarMine. She was bearish on the Chinese shipbuilder from the outset of 2008 until October, as it sank from $0.69 to $0.38 - a 45 per cent drop - and under-performed the benchmark by 19 per cent. With perfect timing she then upgraded it to a ‘buy’ as Yangzijiang gained 21 per cent and outperformed the benchmark by 33 per cent between then and the end of 2008.
‘It was a point where everybody had buy calls on the stock,’ recalls Ms. Maes. ‘But orders for new ships were slowing, margins were going to come under pressure due to the high costs of raw materials. The stock was not reflecting these risks and this resulted in my negative call.’
The turn came when she realised that the stock had been sold too heavily. ‘I felt a lot of the risks had been reflected in the stock,’ she says. But all these feelings and judgements aren’t magical or alchemical, she says, they stem from very basic, fundamentals.
‘I look for good management, good positioning in the industry, and I always look at the track record to see how they execute. Starting with the macro trends you can see how are they positioned, whether or not they have pricing power.
‘After that it’s a lot of getting down to financials,’ Ms. Maes says. ‘A lot of analysts rely too much on management guidance,’ she notes, which could skew the way they look at a company. Especially in boom times, strong access to management is crucial, but it can’t be at the expense of the data, she notes.
Yet when cycles turn, there is inevitably even more pressure from companies to ‘correct’ misperceptions. She doesn’t want to comment on the ‘blacklisting’ of analysts that can happen when sell or negative calls go out, but says companies are often very willing to talk. ‘We have to explain what our reasons are, explain that the conclusions that we reach are not always reflective of management and the company but of industry trends affecting them. If you’re right, often the management will come back and talk to you, to discuss the company,’ Ms. Maes says.
But one senses there is always a wariness under the surface. When asked what makes a good analyst, she says, immediately, ‘good financial skills. To understand the financials, how their balance sheet works so you can pick up irregularities, to find things that management may try to hide.
‘The most important thing is to question what management tells you and do your own background and industry checks,’ she says. ‘We’re not afraid to issue sell calls - we were one of the first to turn negative on Yangzijiang.’
What helps is that ‘our management is very supportive, and it’s up to us to discuss with the head of research’, Ms. Maes says. ‘If he’s convinced, then it goes through.’
What also helps, she says, is that CLSA’s research team isn’t bolted at the hip to an investment bank. ‘Independent research houses are definitely a better model going forward.’
Her crystal ball is clear, but gloomy for the stocks she covers. ‘We have a very negative outlook for the shipbuilding industry,’ Ms. Maes says. ‘Chinese ship builders will see more order cancellations and delays, and margin pressure from high raw material costs from last year. It’s very hard to be positive on any of the names because the shipbuilders aren’t going to get any new orders, so they’ll be working off their existing order book which are very likely to shrink due to cancellations.’
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