“Ah, why didn’t I get an allocation in Alibaba”, muttered a London-based friend of mine. He is a self-proclaimed ‘flipper’ – someone who gets stocks at IPOs (initial public offerings) and shortly sells them for a (hopefully) tidy profit.
He’s usually pretty good at sniffing out these opportunities, but missed out on Chinese e-commerce company Alibaba (NYSE: BABA).
Alibaba had the largest IPO in history when it listed on 18 September and has now risen even higher.
It’s the type of opportunity my friend was made for. But he didn’t get it – and is understandably a bit miffed about the missed opportunity for a 35% profit.
In fact, he hasn’t heard of anybody in his network that had.
That’s because there’s been a recent surge of investors into China, where growth has shifted from export and manufacturing towards domestic consumption and services.
Investors believe Chinese consumers will gorge on e-commerce, play mobile games and chat with each other using various apps. And it will end in a profit bonanza.
And it looks like they could be right. Another similar high-flying stock is Tencent Holdings Ltd (Hong Kong: 700), a Chinese investment holding company, whose subsidiaries provide mass media, entertainment, internet and mobile phone value-added services. This company has gained 20% this year.
But high expectations come at a price. Both Alibaba and Tencent are trading at prospective price to earnings (p/e) multiples exceeding 35 times. There’s a chance that growth will be explosive enough to match the expectations surrounding these stocks, but there’s far easier places that investors could be looking.
While everyone is focusing on new stocks, the market seems to have forgotten about the old timers, many of whom are outperforming.
Old-timer stocks are still around for a reason
It would be natural to presume that in this new, exciting Asia, old age would be a disadvantage.
But that’s not the case – at least based on the performance of the following three well-known centenarians.
First up is Siam Cement (Bangkok: SCC), which was established in 1913 by a Royal decree from Rama IV. Initially, it produced cement in Thailand, but over the years, it has grown into a conglomerate with interests in cement, manufacturing, petrochemicals manufacturing, paper manufacturing, building product manufacturing and distribution.
The stock has yielded an annualised return of 8.1% between 1991-2014, far better than the Thai stockmarket’s average of 3.0%.
The second stock is Hong Kong & China Gas (Hong Kong: 3). Founded in 1862, the company was Hong Kong’s first public utility. Today it produces, distributes, and markets gas and gas appliances to residential and industrial customers through its Towngas brand name.
The stock has gained 12.2% between 1991-2014, compared with the Hang Seng index’s return of 8.9%.
The third stock is Jardine Matheson (Singapore: J36), which was founded in 1832 in China by Scots William Jardine and James Matheson. Today, the group’s activities include financial services, supermarkets, consumer marketing, engineering and construction, automobile trading, insurance broking, property investment and hotels.
Between 1991-2014, the stock has recorded an annualised return of 12.5%. In fact, we are actually underestimating the performance. If we assumed that all proceeds from dividends were reinvested in its shares, the annualised total return would be a whopping 16.6%.
These centenarians have endured wars, numerous business cycles and technological changes. They have not only survived but also thrived. It makes them ‘antifragile’ – a phrase coined by esteemed scholar Nassim Nicholas Taleb.
Taleb defines antifragility as being “beyond resilience or robustness. The resilient resists shocks and stay the same; the antifragile gets better.”
The market is aware of this special status and has rewarded the antifragile companies with superior returns.
So, do Tencent and Alibaba have what it takes?
The good news and bad news
The good news for both companies is that neither are exactly the new kids on the block. Both are 15 years old.
Considering that the average life expectancy for all firms – regardless of size – in Europe and Japan is a mere 12.5 years, I see no reason to assume that the rest of the world – including Asia – should be much different.
Oddly enough, the life span of companies is about the same as pet dogs, giving the phrase ‘dog years’ a fresh meaning for budding entrepreneurs.
The bad news is that the life of a listed company is getting shorter.
In 1958, companies in the S&P 500 lasted in the index for 61 years on average. By 1980, that tenure had shrunk to about 25 years. Today, it stands at just 18 years based on seven-year rolling averages. That means about half of the S&P 500 has been replaced over the last decade.
This is largely due to the birth of emerging markets. While officially beginning in the 1980s, the real start occurred following the fall of the Soviet Union and its command economy system in 1991.
Developed markets had been operating in a fairly benign environment until then – their main competitor being Japan – but with the fall of the Soviet Union, they now found themselves with a lot more competitors to deal with.
Changing economic policies in China and other parts of the developing world also played a part. Listed companies in the US and elsewhere had more competition resulting in shorter tenures as listed stocks.
Looking ahead, this trend is set to accelerate even further due to the combination of more changes in emerging markets (inclusion of Africa, restructuring of China, reforms in India etc) and technological innovation (wearables tech, mobile financial systems (MFS), etc).
Time will tell if Tencent and Alibaba live up to the hype and can make the leap to antifragile status. Yet doubters may want to consider adding centenarians as an insurance policy.