Koon Yew Yin 18 Feb 2021
When an investor buys a stock, he expects to gain from dividend yield and share price increase. Almost all the listed companies in Malaysia give out less than 6% yield. So, share price increase is most essential.
Before an investor decides to buy a stock, he must first find out if the company has good and sustainable profit growth.
What pushes the share price up?
Among all the criteria such as NTA, cash flow, debt, cash rich etc, profit growth is the most powerful catalyst that pushes the share price up. Even if the company has a lot of cash, the company wants to reserve the money for expansion or for some contingency. Good examples are glove stocks.
Covid 19 pandemic is affecting all the listed companies except Tech and Glove stocks.
Currently more people have to work at home. As a result, many have to buy new computers to work at home. As you know, computers are very durable. They can last for many years. As a result, the demand for new computers is gradually reduced and the profit grow is not sustainable.
Both motor and electric vehicles require chips. Currently the demand for electric vehicles is increasing but the demand petrol or diesel vehicles are reducing. The annual growth rate for vehicles is reduced due to Covid 19 movement control.
The table below shows the projected PE for tech stocks.
Many scientists predicted the pandemic will not be completely under control for another 4 or 5 years despite massive vaccination. The world population is 7.6 billion people. At least 70% of the world population have to be vaccinated, otherwise the coronavirus can easily spread to affect more people. Only the rich countries can afford to buy enough vaccine to vaccinate their citizens. Most of the countries cannot afford to buy so much of vaccine to vaccinate all their citizens. In fact, most medical workers wear gloves during vaccination for safety protection. Additional glove will be required.
Based on the above circumstances, the demand for gloves will continue to exceed supply and the demand is sustainable.
The table below shows the projected PE for glove stocks.
Conclusion: The PE for Glove stocks are much cheaper than Tech stocks in terms of PE ratio. Moreover, the profit growth for Glove stocks are more sustainable than Tech stocks.