Not necessarily, shows a study of SGX-listed companies
By TEH HOOI LING
THE stock market has been pummelled in the past 10 months. Compared with October last year, $180 billion has evaporated from the market value of Singapore-listed companies.
Globally, about US$13 trillion has been wiped out – which is almost America’s gross domestic product for 2007.
Of course, US financial institutions have seen the biggest plunge in market value. As a friend pointed out recently: ‘Wilmar International can now buy two Lehman Brothers.’ What he meant was that Wilmar’s market cap was twice that of Lehman.
Since then, Lehman has recovered. But still, Wilmar’s $27.6 billion market cap today is about 1.67 times that of Lehman’s US$12 billion.
In the case of US financial institutions, size did not give investors any protection against diminution in value.
But generally, one would expect this to be the case. Investors holding small-cap stocks in Singapore – or anywhere else – in the past 10 months would have seen their portfolios shrink much more than general market indices would suggest.
To check out just what happened, I looked at how all stocks listed on the Singapore Exchange (SGX) fared between end-September last year and July 31, 2008.
I grouped companies based on their market capitalisation as at Sept 28, 2007. Back then, 554 of the 732 listed companies – or 76 per cent of all SGX-listed stocks – had market cap of $500 million or less.
The small-cap ranks have since grown. Today, 624 of 775 listed companies here are worth $500 million or less. That’s 81 per cent of all listed companies.
In the first exercise, I grouped companies into those with a market cap of $20 million or less, between $20 million and $30 million, between $30 million and $40 million, and so on. The biggest companies have a market cap of $10 billion or more.
Back in September last year, there were 40 companies with a market value of $20 million or less. However, this group has seen the biggest jump in market cap on average in the past 10 months. The average market cap gained 82 per cent. And the reason is, such companies are attractive candidates for reverse takeovers.
Five have since resumed life on SGX with new businesses. They included Novo Group (formerly Neocorp), Memstar Technology (formerly Mediastream) and China Animal Healthcare (formerly Colorland Animation).
Increased market cap, however, does not necessarily mean that long-suffering shareholders were finally compensated. In many cases, there was massive dilution of stakes as new shares were issued to those who injected assets.
From Panel A of the accompanying table, you can see that, interestingly, companies with market cap of between $100 million and $500 million saw the most severe plunge in their market value.
Those with a market cap of $100 million or less were not hit as hard. It was similar for those with market cap above $500 million. And above $1 billion, the bigger the company, the less affected it was by recent market turmoil.
Perhaps there is a logical explanation. Companies with very small market cap could have been the result of them having not done well.
If this were the case, there were poor expectations for these companies to begin with. So when the market turned bad, there wasn’t that big a downgrade in terms of its prospects and share price. Also, such companies may not be big enough to attract money from professional funds, and therefore were not too affected by fund redemptions.
As for companies in the $100 million to $500 million range, a number of them were seen as emerging companies that held promise as the blue chips of tomorrow. So high expectations were built into their valuations. When the global economy stumbled, their prospects dimmed significantly. And due to the relatively small market float of such companies, when funds needed to exit their shares to meet redemptions, there were not enough market depth to absorb the sales. That caused the share prices to sink.
And finally the big cap stocks. These are established companies that have attained blue chip status. Many have gone through numerous cycles and proved their resilience. They are considered safer. And even if there are sellers, there will always be buyers willing to provide liquidity.
And because they are big, such companies are not expected to register super-normal growth, so their valuations generally are not as rich as those of the exciting new challengers coming up.
All this would explain why these companies have suffered the smallest declines in value.
Next I looked at price-earnings ratios. Do high PE stocks fall more than low PE stocks?
This generally appears to be the case. In Panel B of the table, I further sub-divided each group of companies based on their PE ratios. I sub-divided companies with a market cap of $50 million or less into those with a PE of five times or less, those between five and 10 times and so forth. These PE numbers were obtained from Thomson Financial Datastream. Companies without this data were excluded.
As can be seen from the table, in most of the categories, stocks with PE of more than 20 suffered bigger losses than those with, say, a PE of 15 to 20.
On the whole, there was not much difference in terms of performance of stocks with a PE of 20 and below. Perhaps, some of the really low PE stocks did not indicate value.
But rather, it was the market’s expectation of declining earnings going forward, which eventually took place. This would explain why stocks with PE of five or below suffered almost similar losses as those in the 15 to 20 category.
But perhaps the one category where low PE does suggest value is companies with a market cap of $5 billion and above.
Among companies in this group, those with PE of 20 or more have seen their market cap shrink a median 29 per cent. Those with PE of five or less have actually expanded their median market cap by a marginal one per cent. And that’s the only group of companies that has gained in value.
So the next time you see a blue chip company with good business and good assets – not the CDO kind – trading at a low PE, it is almost certainly a good buy. And often, this only happens in crisis times.
The writer is a CFA charterholder. She can be reached at [email protected]