Top Executives create value for listed companies

A recent "SET in the City" session on "picking best stocks" was crowded. Thep Roongtanapirom, a member of the audit committee at LPN Development, and Niwes Hemvachiravarakorn, adviser to the Thai Investors Association, expressed their views, based on their experience in investing in the stock market.

The two men impressed the participants with their incisive insights and entertaining anecdotes about value investing.

Thep said investors should evaluate whether the executives of certain listed companies could create value for their firms.

To measure their performance, Thep looks at the return on equity (ROE) of the companies they run.

"If the ROE is below 15 per cent, you just ignore them, but if the ROE exceeds 20 per cent, you should consider to have them as your employees and make money for you," he said.

Many investors believe in rumours as they see the stock price of the targeted company go up accordingly. This is very dangerous, he warned.

The reputation of executives is important. Investors should stay away from those with tainted backgrounds.

Another benchmark is how good executives are at reacting to emerging problems such as rising oil prices that drive up production costs.

If you agree to buy shares in a company then you should help its executives run the firm by participating in the shareholders' meetings and ask constructive questions. He used to quiz executives during the meetings on what went wrong with the company's profits and how they could deliver high profits like they used to do.

Investors should not rely too much on stock analysts. "You should help yourself," he said.

Investors should study the balance sheets of companies and look for unusual signs such as the withholding of the opinion of the auditor. "If the auditor says he could not give his opinion on some items, then you should be wary," he said.

Investors maybe cannot manage risks stemming from the economic situation or external events, but they can manage risks better in a company if they had carefully picked it.

Thep recounted his bitter experience before he adopted his new investment strategy of seeking stocks that pay consistently high dividends.

"When your stockholdings rise sharply, you should not sell all of them at once because the price could rise further. Just sell some of the shares," he said.

Niwes suggested investors look at the past five years of a company's record and try to read its future for the next five. If long-term investors want to use the price-earnings ratio as a yardstick for picking stocks, make sure that operating profits are generated from the inherent potential of the business, not from extraordinary events.

For example, energy companies have been riding on the back of soaring oil prices, which may not be sustained, he said. The stock must also not be expensive, otherwise you should wait for the right moment.

While banks or financial institutions may shine during normal economic times, they usually get burned badly when the economy turns sour. Banks depends very much on their executives' capabilities, he said.