Are you investing in the right industry?
Part 4
But this view is widely (observable). Further-more, most of the residential property stocks have already outperformed the market by huge margins. These are signs that the market has probably discounted the positive conclusion of our analysis. As such, the (investment) upside is probably limited. (Conversely), if our conclu-sion unearths new information from the gene-ral market, we may have discovered something interesting here. To confirm that we have a good find, check out the valuation to see if it is attractive. There are many valuation tools, but the (commonly) used ones are Price/Earnings --PE, Enterprise Value/EBITDA*, Price/Book--P/B, and Dis-counted Cash Flow --DCF. Make a cross-industry comparison as well as historical (comparison). Going back to our property example. If our conclusion is new to the market, the industry is trading at the lower end of its histo-rical PE band, and it is also very (attractive) on PE terms versus the other industries in Singapore...bingo! In conclusion, I would like to leave you with a brain teaser. Imagine this is 1996 and you are an investor looking at the Dynamic Random Access Memory ----DRAM industry: DRAM is a semiconductor chip used in most (electronic) products such as personal computers. The business is cyclical in nature because corporate and private consumption of PCs usually rises when the economy is doing well. There are, however, two (secular trends) that underpin the growth in the industry. First, more and more people are buying PCs for their home and oiffice. Second, the requirement of DRAM per PC is also on the rise as processing power of computer increases exponentially. On the competitive issue, the cost to build a wafer fab is extremely high --about US$1b, and the technology is usually state-of-the-art. Besides (capital) and technology, there are no other significant barriers to entry. Margin for the industry had been very good because of supply shortage. This probably explained why share prices outperformed the market in 1995. The historical five-year PE band for (selected) stocks in the industry between 1991 and 1995 was about 10 to 100. The average PE during the period was 30. The industry is currently trading at a PE in the low (teens). Would you invest in this industry? (The writer is the Investment Manager of Jardine Fleming Investment Management. This column has the support of the Investment Management Association of Singapore and the Stock Exchange of Singapore.)