MICHAEL ONGHAI, 38, is a portfolio manager who looks out for value stocks in Asia and in the US that he can hold for about 3 years.
When I met him at a roadshow organized by Financial PR, one comment he made struck me: ”The US recession will end, led by technology breakthroughs.”
Michael was taking a leaf from the history pages on the development of nations.
But with everyone focused on the global credit crisis, such out-of-the-box words sound uncannily prophet-like.
Based in New York, the Filipino-born fund manager who works for IBIS Management travels to Singapore about thrice a year to suss out for SGX-listed bargains.
Michael is a CFA charterholder and uses a pretty complicated measure when assessing whether to shortlist a stock as a potential bargain.
|Common equity at equity value|
|+ Debt at market value|
|+ Minority interest at market value|
|- Associate company at market value|
|+ Preferred equity at market value|
|- Cash and cash-equivalents|
|In a takeover, enterprise value is the acquiring party’s net settlement amount with all the security holders, including bondholders and minority shareholders.
That is why all third party claims are valued at market.
Cash reserves, which can be paid out to shareholders, are not counted as part of the business value.
He uses enterprise value to normalized free cash flow.
A simplified way to understand enterprise value is to envision what the takeover price should be when an entire business is purchased.
And normalized free cash flow is the operating cash flow less capital expenditure discounted over one business cycle of, say, seven years.
So Michael’s enterprise value to normalized free cash flow is a more comprehensive calculation for our intuitive price-to-cash flow measure.
In economically challenging times such as these, some stocks may not have earnings to speak of, so companies looking out for distressed assets need to look at cash flow.
In particular, Michael likes to zoom in on sectors that he has worked in before joining Ibis a couple of years ago.
The fact that he started two financial web sites - DailyStocks.com and 123Jump.com -- and sold them in 2000 and 2003 explains why he likes Internet business models.
In other words, he goes by the Warren Buffet way of buying businesses that he understands. That way, it is much easier to separate the winners from the losers, he says.
HDD will win the data storage fight
It is not surprising that someone who believes technological breakthroughs will lead America out of its devastating economic woes has a keen eye on the tech sector.
Michael believes that hard disk drives will be around for a while. That’s why he has put his bet on Broadway Industrial, a hard disk drive (HDD) component manufacturer listed on the Singapore Exchange.
Armstrong Industrial is another HDD component manufacturer that he has been eyeing.
The majority of Armstrong's HDD components are for Seagate and Western Digital while Broadway supplies to Seagate and Hitachi.
Giant HDD makers like Seagate, Western Digital and Hitachi have for some years been threatened by solid-state drive (SSD or flash) giants like Transcend and Gigabyte in the fight to dominate the data storage world.
With no moving parts, SSDs are less fragile than hard disks and also have the virtue of being quiet as there are no mechanical delays. Users also use less time to start up the storage facility and retrieve data.
While SSDs have begun to appear in laptops, they are still substantially more expensive per unit of capacity than HDDs (US$500 for a 256 gigabyte SSD, vs. US$50 for a similar size external USB HDD).
Tech pundits are of the opinion that flash memory will be the leading choice in portable applications where a limited number of small files are used because it will offer the lowest overall system cost.
In applications where file size or the total number of files to be stored is of more concern than the total system cost, HDDs will prevail.
Michael believes that solid-state memory is unlikely to be accepted on a widespread scale as an affordable replacement for hard disk drives. He cites two reasons for this:
Firstly, data creation and storage demand will only increase exponentially.
Secondly, the trend in electronic gadget design is to launch applications requiring larger and larger multi-media storage space.
That’s why the latest hot electronic gadgets like the netbook use HDD.
For the uninitiated, the netbook is a lightweight laptop computer designed for wireless communication and access to the Internet.
Netbooks are popular for their small sizes and light weight, as well as affordability relative to the general-purpose laptop.