Part I.V.I - Stock in Nature / As a Company (1/2)
As I previously provided an explanation of what stocks are, let's now delve into the details and grasp their nature.
I myself perceive stocks from two perspectives: first as a company, and second as a merchandizer. Let's start with the first one.
The following explanation might seem familiar, as you might have encountered it before, perhaps even in my previous article, the straightforward version. Which is - A stock represents a company engaged in legitimate businesses of various kinds. An important question that arises is 'how many kinds of businesses are there, and what are they?'
Given that no single company does all kinds of businesses or provides all kinds of products and services (as the Thai saying goes, 'from toothpicks to battleships'), each kind has its own distinct characteristics. Each one responds to economic conditions and challenges differently. Understanding the essence of the stock (company) you've invested allows you to act properly to any circumstance and also facilitate diversification of your investment portfolio.
When it comes to categorizing stocks, in my view, one of the most effective models is the '6 Stock Categories' proposed in the renowned investment book 'One Up on Wall Street' authored by the legendary fund manager, Peter Lynch. These 6 categories include: Fast Grower, Slow Grower, Stalwarts, Turnaround, Cyclicals, and Asset Plays. Let us begin…
1. Fast Grower 🚀
These companies are typically small and aggressive, achieving growth rates of at least 30% each year. For example,
- ★SAWAD experienced consecutive annual growth of 30-50% from 2014 to 2017, resulting in a nearly fivefold increase in its price.
- ★Similarly, PTG achieved consecutive growth of 30-65% during the years 2014-2016, resulting in an almost tenfold increase in its price.
- ★And COM7 achieved annual growth of 30-50% consecutively from 2016 to 2019, leading to an almost twentyfold increase in its price.
Fast Grower are usually traded at high P/E, reflecting high expectation from the market.
2. Slow Grower 🚂
These companies like RATCH, and EASTW have already reached their mature stage. Their businesses can hardly be further expanded. Their growth expected to be slightly just above the national GDP.
3. Stalwarts 🌟
Stalwarts are like ADVANC, HMPRO, CPALL and some other renowned blue-chip stocks that most people have likely heard of. These companies grow at medium pace, usually faster than the market in general. The growth of around 10% per year or slightly more can be expected. As they have strong and well-established business allowing them to maintain their decent earnings through good time and bad. Having Stalwarts in your portfolio can be a great protection during market downturns.
4. Turnaround 🛫
Turnarounds are the stocks that have been badly hammered in the market for a variety of reasons. Once the circumstance significantly changes whether by internal or external factors that favorably impacts the company the share price can spike rapidly. While these stocks have the potential for substantial gains, the risks are equally high.
AOT can be one good example. During the COVID-19 pandemic, when air traffic ceased, the share plummeted more than 40% from its peak. Once there was a "sign" of endemic, the share price rebounded swiftly 50% within a short span (even though its actual earnings haven't yet returned to pre-COVID-19 levels).
5. Cyclicals 🎡
These companies rise and fall primarily in line with the boom-bust cycle of macroeconomic and/or sector-specific conditions. Generally, these companies have very little control over changing their destinies.
Those that produce products or offer services with a lower degree of value addition, such as commodities like rubber (STA), steel (TSTH), oil refinery (TOP), coal (LANNA), petrochemicals (IVL), and shipping vessels (RCL), typically find themselves within the cycle. However, there are also industries with a higher degree of value addition, such as the automotive (AH) and airlines (AAV), which fall into this category as well.
6. Asset Plays 🏭
These are the companies that have assets valued more than themselves (market cap.) Some of their assets have been overlooked or hidden from most people. The hidden assets can be plains things like cash (or equivalents), inventories, or something that needs to be appraised to their current values such as lands, real estates, or even its subsidiary companies for instance.
Last but not least, it's important to note that some stocks can fall into two or more categories at the same time. Also, due to the dynamic and ever-changing nature of the market, certain stocks have been categorized within each of the six categories at different points in time.
Knowing all the categories and being able to categorize stocks might not be sufficient for a successful investment. To know what to expect from each stock and when to sell them would be the key. In the next section, we'll discuss about them.
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