Date
25 November 2017
A PetroChina oilfield in Daqing, Heilongjiang province. The stock won't have too much scope for further declines at its current level. Photo: Reuters
A PetroChina oilfield in Daqing, Heilongjiang province. The stock won't have too much scope for further declines at its current level. Photo: Reuters

Why investors should follow GARP principle

“Never overpay for a stock. More money is lost than in any other way by projecting above-average growth and paying an extra multiple for it.” — Charles Neuhauser

US-listed oil companies are usually considered as “Growth at Reasonable Price” or GARP stocks. These stocks offer earnings growth as well as reasonable price. Legendary fund manager Peter Lynch utilized the theory of GARP to perfection.

There are two reasons why Peter Lynch favors GARP. First, GARP won’t be affected by price or market trend changes. Second, GARP emphasizes buying growth stocks at reasonable price, instead of chasing growth stocks at a high level. Investors would suffer huge losses if they buy stocks at a high level and market expectations reverse.

For example, a number of Macau gaming stocks have halved since early last year. And before that, A shares of PetroChina (00857.HK) had slumped by as much as 75 percent from their peak level.

However, it’s quite interesting that most of the GARP stocks in the US markets are real estate, education and energy service plays. It remains uncertain whether the same theory can be applied to mainland and Hong Kong markets.

Will PetroChina become a GARP stock after going through seven years of sluggish performance? We can just take a look at its third quarter earnings.

The oil giant’s revenue in the first three quarters of 2014 rose 4.3 percent to 1.75 trillion yuan (US$279.3 billion), while its net profit grew 0.8 percent to 96 billion yuan. In the third quarter alone, its sales gained 3.2 percent to 600.6 billion yuan while net profit dropped 62 percent to 27.9 billion yuan. The drop was due primarily to lower crude oil price during the period.

PetroChina’s distribution unit outperforms all its other business sectors. Despite lackluster demand from the domestic market, profit at the unit soared 57.6 percent to 10.6 billion yuan in the first three quarters of last year thanks to improving product mix and efficiency.

The market has been worried that further oil price falls would drag on the company’s last quarter earnings. However, there is very limited downside for oil price. Russia, the biggest loser in the current oil rout, is not expected to just sit and watch the price of its top export continue its free fall.

Now, if crude oil price stabilizes, PetroChina will benefit from it. In fact, the National Development and Reform Commission have hiked domestic fuel prices twice this year.

Also, the government might reimpose consumption tax to stem deflationary risks and offset lower oil prices.

PetroChina won’t have too much scope for further declines at its current level. Investors should watch closely and take some short-term bets. They can trade at HK$8.3 to HK$9.2 or 10.8 yuan to 12 yuan.

This article appeared in the Hong Kong Economic Journal on March 5.

Translation by Julie Zhu

– Contact us at [email protected]

JZ/JP/CG

members of the Association of Chartered Certified Accountants; full time investor

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