SET urges focus on the fundamentals

Investors should focus on stocks with strong fundamentals and continuous growth to hedge their portfolios against rising volatility on the Thai bourse, advises Capital Market Education Group, the education unit of the Stock Exchange of Thailand (SET).

According to its latest publication, the education group has screened the bourse for companies that recorded growth in both revenue and profit for six consecutive quarters and five consecutive years (2016-20).

The group found 10 companies that match the criteria, including Bangkok Chain Hospital (BCH), JMT Network Services (JMT), Muangthai Capital (MTL), Srisawad Corporation (SAWAD) and Thanapiriya (TNP).

When the market is increasingly volatile, the unit recommends investors find a company that has remained profitable for many quarters in a row, as the stability will help reduce investment risk.

According to the publication, quarterly net profit increases the company’s chance of retaining earnings and increasing its assets.

Quarterly net profit also reflects the business’s ability to generate consistent profit, which is one of the key factors that predict a strong and reliable business operation in the future.

The unit said many companies’ net income and profit may fluctuate based on several factors and they may experience gains and losses, but a good company should have a core business that generates profits with continual growth.

The continuous growth demonstrates the company’s ability to compete and operate its business, it said.

“During this period, most securities analysts would recommend investors be more careful and sell stocks when there are profits, or wait out the volatility before returning to investment. They may sometimes recommend investors wait and monitor the market,” stated the publication.

“However, if investors want to invest in Thai stocks, they need to be more careful and try to choose stocks that are resistant to volatility. The principle is simple — choose stocks with the strongest fundamentals to keep in your portfolio.”

The unit said the strength of a business can be reflected in its sales revenue and net profit.

A good business should have continual growth in sales or revenue. For example, five consecutive years of profit indicates the business has experienced steady development and will have room to grow in the future.

A company should not only have consistent growth, but also avoid net losses. A company should have continuous growth in net profit that reflects its ability to manage tasks, such as cost control, marketing, competition, and debt levels, and management’s attention to operations.

To determine whether a company can sustain its business for the long term, investors should focus on the profits from the sales of its main products and services, not secondary profits from the sales of land or machinery.

Another tactic is to consider other factors affecting growth such as the company’s strengths and competitiveness with its peers, said the unit.

Theoretically, if a business is growing in terms of performance, the company’s share price will be adjusted accordingly and there is an opportunity for investors to receive dividends, according to the publication.

However, sales and net profit are just one factor to consider when buying stocks.

The stock screening methods used by the group are for educational purposes only and the results are not intended as investment advice. Investors should always study additional information before making a decision, said the unit.