MANILA, Philippines - An expert shared a little-known method you can use to find good stocks.
On ANC's On The Money, CFA Society Thailand president Andrew Stotz cited a study that tracks low-growth and high-growth stocks in the United States, which showed a very interesting trend.
The study ranked companies in the U.S. by asset growth, instead of revenues or profit. The stocks were divided into two groups - low asset growth companies and high asset growth companies.
Which outperformed in terms of share price performance?
Historically investors prefer companies that are vibrant and show signs that they are investing in the future.
However, the numbers in the U.S. study showed that it's the low-growth companies that gave high returns.
Stotz said he replicated this study in Asia, and found similar results.
"You know what I found, it's amazing. I didn't predict it. It was the slow-growth companies that produced better price performance,
In Asia, including the Philippines, the numbers show that low-growth gives high returns.
Stotz said this is because investors have a tendency to overpay for growth.
"I think partially it's because when a stock is growing fast, everybody's excited. Everybody knows the story and they are pushing up the share price. People start to overpay for growth. And when a stock is slowing down, and the growth is not fast, people aren't excited. They don't overpay for those companies," he said.
Another factor, Stotz said, has to do with a company's business decisions on growth and dilution of shareholders.
"Sometimes, growth can happen and it can dilute earnings, whereas some companies maintain a moderate rate of growth but in that sense, they actually don't dilute the original shareholders but there's a couple of different factors," he said.
Stotz said when numbers tell the story effectively and objectively, investors don't pay heed because of human psychology. He noted our brains tend to tell us to buy into the stocks that were affirmed by newspaper stories, company reports and analysts' reports.
ANC On The Money's resident financial adviser Salve Duplito said people always look for excitement when investing in the stock market, but that's not where the money is.
"You want to look for the boring companies and catch them before they get to be exciting," she said.
Duplito said before putting your money in equities, you should look at different factors. "Don't forget the whole idea revolves on how well you can find unanticipated growth and isolate unanticipated risks," she added.
As Stotz said, "Whenever you have the highest surprises in growth, you have the highest forward price performance because positive surprises produce very high returns."
While this may seem complicated for new investors, Duplito said you should take time to learn and don't rely on recommendations on what stocks to buy.
"The return that you will get in places like the stock market should be determined by your willingness to study and understand the market, not by your age and risk profile," she said.