Punting for quick profits from blue chips

Saturday, 16 July 2011
Business Times

Top candidates include Golden Agri, NOL, Noble, Olam, Genting Singapore, City Developments and Sembcorp Marine

By TEH HOOI LING
SENIOR CORRESPONDENT

SINCE November last year, the stock market has been trapped in a trading range of 3,000-3,300 points. Investors would see their stocks rise, then fall again a few weeks later. Except for those stocks which are yielding generous dividends, there is no profit for investors to pocket, except for those who go in and out for quick gains in the market.

In my years of watching the market, I've come to the conclusion that, at least in Singapore, on average it doesn't quite pay to punt in the small cap stocks. Yes, the volatility may be there, and you may be making some good money if you are nimble enough. But the question is for how long. There is a rather high chance that while you are holding that stock, screaming at you one morning is a newspaper headline relating to that stock. It could be that the cash that was supposed to be in the bank isn't there, or that the revenues and profits have been overstated, or that a fire has gutted the company's factory.

Small caps vulnerable

Such bad news will deal a big blow to the stock price of small cap stocks. It is not unusual for them to plunge 50-60 per cent in a day, which would mean all the accumulated profits that you had made previously might be wiped out. Worse still, you might even lose your capital.

So I've convinced myself that if one were to itch to trade in markets such as now, one should be trading the blue chips. At least, if there is some unexpected negative macro developments, or even certain unflattering news relating to the company, chances are that over time these blue chips would bounce back. One just has to ride through the rough patch.

The question then is which of the blue chips are good candidates for trading?

I downloaded the daily share price of the 30 component stocks of the Straits Times Index from 2000. I then calculated their price difference over three-trading-day periods. From there, I find out the standard deviation, or volatility, of this price movement. In addition, I also calculated the one month return of these 30 stocks.

The purpose of this exercise is to find out which of the 30 stocks are most volatile, which would make them good trading candidates.

Based on the 12-year record, Wilmar emerged as the most volatile of all STI stocks. Its median standard deviation, or the variation of its return around its average three-day return, is 6.7 per cent. It has seen its stock price double in three days before. On the downside, it has fallen by as much as 30 per cent in three trading sessions.

Over a month, its share price had risen by as much as 214 per cent and had fallen by 48 per cent. Admittedly, looking at its numbers, it should be noted that much of Wilmar's volatility was due to its upside movement. Relative to the other stocks, its maximum downside over three days and a month had not been the biggest.

The second most volatile STI stock in the last 12 years is Golden Agri. Its standard deviation is 5.3 per cent. Its maximum three-day gain was 135 per cent, and its maximum plunge, 32 per cent. Over a month, the maximum upside and downside were 149 per cent and 56 per cent respectively.

Meanwhile, the most steady stocks in the benchmark index are Singapore Press Holdings, Global Logistics, CapitaMall Asia ????, StarHub and SIA Engineering. Other steady counters included ComfortDelGro, ST Engineering, OCBC, UOB and SingTel.

Steady versus volatile stocks

Sharp-eyed readers would realise that these are dividend yielding stocks in the STI stable. The more volatile stocks meanwhile tend to be the 'concept' stocks - those with very exciting narratives, but which might or might not deliver. And they might be expensive to begin with, which makes them susceptible to any negative news. Hence, the volatility.

Wilmar, Golden Agri Resources, Noble Group, Olam and Genting Singapore fit that description. I plotted two charts, just to have a graphical representation of how the share price and volatility change over time. From the first chart, you can actually see that for Wilmar, its volatility has decreased over time.

It started out as a concept stock. Over time, solid assets were injected into it and the group started to deliver results. Its share price rose and its income stream became more steady. There were less surprises. Consequently, its volatility declined.

The second chart showed the share price performance and volatility of Golden Agri. In the last one and a half years, its volatility has also fallen. That set me thinking: Perhaps the 12-year record may not be an accurate representation of the stocks' volatility today.

So I looked at the volatility starting from 2009 until now. True enough, based on the price movements in the last two and a half years, Wilmar was no longer among the most volatile stocks among the STI component stocks. It had fallen to the 16th spot. But retaining top spots were Golden Agri-Resources, NOL, Noble Group, Olam, Genting Singapore, City Developments and Sembcorp Marine.

At the other end of the spectrum, the most steady of the STI stocks since 2009 is CapitaMall Trust. The others are the usual suspects such as SPH, StarHub, ComfortDelGro, ST Engineering, Global Logistics and SingTel. So now, when you itch for some short term trades, you know which blue chips to go for.