You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Best Stocks in Terms of Real Growth of the Company

If you want to invest in the Indonesian Stock Market through mutual funds, one way in determining the quality of mutual funds is by looking at the track record of the fund’s performance in the long term, say five years. If the compound annual growth rate (CAGR) of a mutual fund is better than CAGR of Jakarta Composite Index (JCI) in the same period, then we could simply said that it has a good performance. If the difference is fairly large, say 17% per annum while the CAGR of JCI over the same period was only 7% (so that the difference reaches 10%), then it is even better.

And now, although a prospectus of mutual fund always says these: 'Our investment performance in the past does not reflect the fund's performance in the future', but still, you would feel more comfortable when investing in a mutual fund that have a track record of good performance, would not you? Some people may be quite satisfied with the track record of growth of 10 – 15%, the others may take an aggressive step by targeting 25 – 30% per annum, and the rest may take a look back to the basic rules: At least it is better than the market, in this case the JCI.

But if we use a track record of Berkshire Hathaway, then for a very long period of time between 1965 and 2013, the company had an average growth of 19.7% per annum, including the performance in certain years where there were crises. Since the average increase in the S&P 500 over the same period was 9.8% per year (including dividends), the performance of Berkshire was 9.9% better than the performance of the US stock market in general. The difference of 9.9% may seem small, but if you are able to keep it for decades, then the result will be enormous, and that is why Warren Buffett is always listed as one of the richest men in the world.

The question is, Berkshire Hathaway is not a mutual fund company. The company never took money from the public to invest in stocks, but only use their own funds or loan, whether it be from a bank or other source, but not from the public. If someone wanted to invest in Berkshire, he can simply buy the shares directly in the market.

So then, how does Sir Warren calculate the annual investment performance of his company? While for a mutual fund, the method is obvious: The investment performance can be calculated from the value of its net asset value (NAV). Take it simple, if the NAV was 1,000 per unit at the beginning of the year, and become 1,200 by the end of the year, then the growth is 20%. So the figure of 20% can be recorded as the performance of the fund in the relevant year.

While Berkshire? The company using its book value per share (BVS) as an indicator of performance. Here’s the explanation: the value of net asset/equity, or book value of Berkshire by the end of 2013 was US$ 221.9 billion. In the same period, the number of outstanding shares of the company was 1.6 million shares, or more precisely 1,644 thousand shares. So, Berkshire’s BVS was US $ 221.9 billion divided by 1.6 million, equivalent to US$ 134,973 per share.

While in the previous year ie 2012, Berkshire's equity value was US $ 187.6 billion, while the number of outstanding shares was 1,643 thousand shares. So BVS Berkshire by the end of 2012 was US$ 114.214 per share.

In conclusion, during the year 2013, Berkshire Hathaway recorded investment performance of 18.2%, because the BVS has increased from US$ 114,314 at the beginning of the year, to US$ 134,973 at the end of the year. However, the performance is considered as 'poor' because in the same year, the S&P 500 rose 32.4%.

Looking at the above explanation, I started to think: If we invest through mutual funds, we must pay for management fees, transaction fees, and probably profit sharings for the fund manager, which cut our profit. Then what if we invest directly in shares of companies? If we can assess the quality of a mutual fund by the track record of investment performance, then we can also assess the quality of a stock from the track record of growth in net asset value of the company, or precisely the net assets per share or book value per share (BVS). Perhaps, on the Indonesia Stock Exchange, there are actually many stocks that have an average growth of BVS that is higher than the average growth of JCI. So why don’t we take these stocks?

So, here is the track record of growth in book value per share (BVS) of the twenty largest shares on the Stock Exchange of terms of liquidity, within the last four years, ie from the end of 2009 to the end of 2013. This data can be updated later if all listed companies in the stock exchange have released their financial statements for the full year of 2014:

Company
Ticker
BVS 2009
BVS 2013
CAGR (%)
Bank BRI
BBRI
1,105
3,216
30.6
Telkom
TLKM
387
601
11.6
Bank Mandiri
BMRI
1,674
3,747
22.3
Astra International
ASII
985
2,623
27.7
Bank BCA
BBCA
1,130
2,590
23.1
Semen Indonesia
SMGR
1,719
3,521
19.6
Bank BNI
BBNI
1,253
2,552
19.5
Perusahaan Gas Negara
PGAS
484
1,280
27.5
Lippo Karawaci
LPKR
282
555
18.4
Kalbe Farma
KLBF
85
173
19.5
Indocement
INTP
2,901
6,234
21.1
United Tractors
UNTR
4,161
9,557
23.1
Indofood Sukses Makmur
INDF
1,157
2,693
23.5
Wijaya Karya
WIKA
245
526
21.1
Adhi Karya
ADHI
416
860
19.9
PP London Sumatera
LSIP
559
969
14.8
Adaro Energy
ADRO
545
1,031
17.2
Bank BTN
BBTN
619
1,094
15.3
Gudang Garam
GGRM
9,512
15,209
12.5
Jasa Marga
JSMR
1,056
1,598
10.9
Jakarta Composite Index
JCI
2,534
4,274
14.0

Note:
  1. Data are sorted by level of liquidity of shares
  2. Book value per share (BVS) is in the full amount of Rupiah, calculated based on the equity value of the company at the end of 2009 and 2013, divided by the number of outstanding shares during the year
  3. Number of outstanding shares includes taking account of stock-splits
  4. If the company's financial statements are presented in US Dollars, the figure is converted first into Rupiah. The exchange rates are Rp9,400 per USD for 2009, and Rp12,189 per USD for the year 2013.

Well, now pay attention. If we assume that the average growth in book value per share is equal to the NAV growth in mutual funds (and indeed both are same, just different by term only), then which is the best 'fund' of the table above? Bank BRI (BBRI), of course. With a CAGR of 30.6%, then the average growth of the company was much better than the average growth of JCI (in fact, if we put dozens of smaller stocks into the table, then we might find other stocks with CAGR that are even higher than BBRI. However, the figure of 30.6% is excellent already). CAGR of the BVS is far more real than the CAGR of company's stock price, because stock prices can go up and down all the time, but the BVS will continue to rise as long as the company’s keep making net profit. If you held BBRI since the end of 2009, then other than the gains in the form of real capital gain of 30.6% per annum, you’d also received a 'bonus' in the form of an annual dividend, bringing the total profits of more than ‘just’ 30.6% per annum.

Meanwhile, if you invest in mutual funds, it is not only you will get no dividends, but the profit you earn in one year will be reduced by management fee of 1 - 2%, and probably other fees. So if you make a profit of 20% per year on the paper, then the real profit in your hand of would be about 17% only.

After BBRI, the next options are Astra International (ASII) with a CAGR of 27.7%, and PGAS with CAGR of 27.5%. As with BBRI, the two companies are also quite generous in dividends. So, look at the facts above, I do not think that it is a coincidence if the majority of fund managers that operating here in Indonesia, whether foreign or local, they almost certainly owns the trio of BBRI, ASII, and this PGAS in their portfolios. So instead you entrust your money to them, then why do not you buy the shares by yourself?

Of course, as already mentioned above, the 'past performance does not reflect future performance'. Going forward, both BBRI, ASII, and PGAS may experience decreased performance at any time, just like the average annual performance of Berkshire Hathaway that, in the past five years, could not beat the performance of the S&P 500. Therefore you should consider the other fundamental factors in addition of the track record of growth, and also do not forget: The valuation of the shares. Just because you find a stock with very good fundamentals, then it does not mean you can buy it at any price.

On the other hand, the three stocks with the worst track record of performance in the table above are Gudang Garam (GGRM), Telkom (TLKM), and Jasa Marga (JSMR). As a consumer goods company, and is also one of the largest in its sector, GGRM seems to having it difficult to grow further, especially after another cigarette king, HM Sampoerna, acquired and managed by Philip Morris since 2005, where GGRM tends to be less competitive. For TLKM, the story is also similar to GGRM where it have been 'stuck' and almost can not do anything further. And JSMR, although it actually possess a very interesting prospect because Indonesia has so far still lack the infrastructure of highways, but the company has been very slow in realizing the construction of the new toll road sections, so the company's growth is almost entirely dependent on the increase of toll ticket price alone. Well, if you are one of its shareholders, then maybe you need to join the AGM to propose the replacement of directors, so that the company could be a little more aggressive in expanding.

Okay, at this point I do not have anything else to say, so you can take a look back at the above tables then make your own analysis.

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