There are many different ways to go about finding a winning stock.
You can either look for the best company within its industry or even filter out a list of companies that are hitting their 52-week highs.
As the logic goes, if a company’s share price can scale a year-high, then it must be doing something right..
But if you’re looking for a more methodical method of searching for winners, you can try out the 3 “R” strategy.
In short, the strategy stands for “resilience”, “recurring” and “recovery”, three words that can act as a beacon of light to guide you towards that next great stock.
As the pandemic continues to roil companies around the world, these three words can provide a better chance of finding a haven amidst the turmoil.
Like the song “Hangin’ Tough” by New Kids on the Block, resilience represents the ability to withstand hardship.
Resilient companies can sail through rough seas while emerging unscathed or barely scratched.
As the saying goes — what doesn’t kill you makes you stronger.
This group, therefore, is fertile ground for businesses that can emerge from the pandemic even stronger than before.
Many blue-chip companies fall into this category, as the very nature of being blue-chip means that these businesses have the balance sheet strength and track record to weather crises.
Local banks DBS Group (SGX: D05), OCBC Ltd (SGX: O39) and United Overseas Bank Ltd (SGX: U11) have all reported strong earnings recently.
Though the lenders faced tough economic challenges, they managed to make up for the loss of net interest income with higher fee income.
All three banks also recently restored their dividends to pre-pandemic levels.
Even offshore and marine giant Keppel Corporation Limited (SGX: BN4), which witnessed tepid demand for its oil rigs due to the oil and gas downturn, reported a turnaround for its first half 2021 results and quadrupled its interim dividend.
When a business can generate a consistent flow of revenue and cash flow through good times and bad, that’s a desirable attribute that investors should watch out for.
Such recurring business bodes well for the company as it means customers keep coming back for more, thus contributing to healthy sales and growing profits.
Singapore Exchange Limited (SGX: S68) witnessed healthy demand for its cash equities, with traded volume rising 36% year on year.
Although the bourse operator reported a slight decline in year on year net profit due to higher expenses from recent acquisitions, it demonstrated that its business can generate recurring revenue and free cash flow which it plans to use to beef up its bonds, foreign exchange and indices businesses.
iFAST Corporation Limited (SGX: AIY), which runs a financial technology platform for the buying and selling of unit trusts and shares, also saw healthy profits and cash flow throughout 2020 and in the first half of 2021.
Its strong business performance allowed the group to hike its recent second-quarter interim dividend by 46.7% year on year to S$0.011.
The third aspect investors can watch for is “recovery”.
With the pandemic’s duration stretching more than 18 months, it’s high time we look to a nascent recovery.
After all, vaccination rates are rising around the world, albeit more slowly in some countries compared to others.
And it may soon be a matter of months before air travel can restart, though it may not be until 2022 till we see a full reopening.
Still, investors can look for severely beaten-down stocks in the aviation and tourism sector as these businesses may enjoy a fillip when borders eventually open up.
Take SATS Ltd (SGX: S58) for instance.
The ground handler and airline catering company is adapting to the downturn by reshaping its cost base and building new capabilities to support future growth.
Its recent acquisition of Food City in Thailand will increase its frozen food production capacity to supply more customers in industries ranging from aviation to retail.
And its move to establish its first central kitchen in India will ramp up its meal production capacity by 2022.
Tourism-dependent companies such as Genting Singapore Limited (SGX: G13) and Straco Corporation Limited (SGX: S85) are also poised to enjoy a strong recovery once tourists are allowed back in larger numbers.
Genting was still profitable for its fiscal 2021 first quarter while Straco only reported a small loss during the same period, showing that both businesses remain viable and are waiting for the recovery to take hold.
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited, iFAST Corporation Limited and SATS Ltd.