Diversification Strategy: Between Blue Chips and Second Liners

A friend of mine once asked, ‘Dear Sir, do you know why Warren Buffett does not like the stocks of technology? I mean, if he acquired Apple, Google, Microsoft, etc., he might earned enormous gain in the long term.’ And I answered, ‘Buffett said that he does not understand technologies. But I think the actual reason is because he realized that this kind of business has high risks. For example, between the year 1995 – 1999, there were many technology companies established in the United States, including internet companies, until occurred an event that known as dot com bubble. But after the bubble was burst, almost all of the companies went bankrupt except Google and Yahoo.’

Criteria of Blue Chip Stocks

By definition, blue chip stocks are stocks that representing companies with the following characteristics: 1. The company is large, 2. Have a good reputation and the name (of the company) is well known to the public, 3. Have a good financial performance, 4. Usually is the leader of its industry, and 5. The trading volume (of the stock in the market) is liquid.

Gema Grahasarana

First Quarter 2014 was the period in which the financial performance of most of the second-tier (or also called ‘second liner’) companies has declined, if viewed from their net profit that fell over the same period in 2013. While the opposite conditions experienced by large companies (which represented by blue chip stocks), where their earnings increased. Either this is a cycle or just a coincidence, but the poor performance of second liner companies has made their shares dropped in the last two months. One of them is Gema Grahasarana (GEMA), in which the company posted net profit that fell about 40%, and consequently the shares continue to fall until Rp380 per share. But with the stock’s PBV that is only 0.8 times, is the price low enough?

If Prabowo Elected as President..

If we look at the movement of Jakarta Composite Index (JCI) in the last few months, where the index rose sharply on March 14, 2014, when Jokowi officially run for President, and dropped dramatically when Prabowo gain support from Golkar Party, then it is clear that the majority of stock market participants (regardless of personal choice of individual investors) prefer Jokowi as President. However, first you have to realize that the number of investors in the Indonesian stock market was less than 500 thousand people, aka very small compared to the total population of Indonesia, which reaches more than 250 million. So even if all the stock market investors elect Jokowi, then it's not a guarantee that Jokowi will win the election.

Resource Alam Indonesia (KKGI)

On numerous occasions with Mr. Lo Kheng Hong, he told me that there are at least two coal stocks that are very attractive for investment because of their low valuations. They’re Bumi Resources (BUMI), and Resource Alam Indonesia (KKGI). For BUMI, well, I personally has a slightly different opinion. But for KKGI, this stock is indeed interesting, and it's not because of the 'romantic story in the past' in which KKGI had gave us big profit when it surged to Rp8,000’s per share in early 2012, but due to its low valuation, its bright outlook, and its healthy balance sheet. Okay, here we go!