4th Issue

Identifying Value Stocks on the Middle East Central Stock Markets. A Primer on Value Investing

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Identifying Value Stocks on the Middle East Central Stock Markets 

A Primer on Value Investing

By Edward Grey – Capital Markets Editor – Middle East Business

What are the secrets that sophisticated investors use to identify undervalued, publicly traded stocks?

The answer is an established investment methodology called “Value Investing.”

Value investing is an established investment style used by portfolio managers and other sophisticated investors in allocating investment capital. Value investing is designed to identify publicly traded companies that are fundamentally sound, yet undervalued relative to their peers.  The investment expectation is that the true value of the companies will eventually be reflected in the price of the stock.  Value investing has several sub-styles, such as deep value and relative value, and may also be paired with other investment styles such as market capitalization, sector rotation, and emerging markets, among others.


There are both company-specific and external factors that are considered in assessing whether a company is a value company.   Company-specific factors include analyzing the fundamentals of the company, such as valuation ratios (e.g., price-to-earnings, price-to-free cash flow, and true intrinsic value-to-market), SWOT analysis (i.e., Strengths, Weaknesses, Opportunities, and Threats), and year-to-year patterns in the income statement, statement-of cash flow, and the balance sheet.

External factors, such as the respective environmental and intellectual property regulatory environment, particularly in foreign regions, may have a significant impact on all companies within a sector.  For example, Jordan has seen a notable growth in its healthcare sector following its revisions to its intellectual property laws. Subsequent to these revisions, foreign investment, both direct and indirect, has increased significantly in Jordan.   Direct investment has been from both institutional and individual investors.  Indirect investment has been through established multi-national companies, such as Merck, Novartis, Sanofi-Aventis, and Pfizer.  Further, new sectors, such as contract clinical research and early-stage drug development, have developed both through private companies and as a complement to existing pharmaceutical companies.

Overall, value investing has provided investors with above average market returns over the long-term.  For example, for the 3-Year period ending August 27th, 2014, the S&P 600 Small-Cap Pure Value Index had an annualized return of 24.76%, the S&P MidCap 400 Pure Value Index had an annualized return of 23.64%, and the S&P 500 Pure Value Index had an annualized return of 27.65%.

As much as value investing may realize significant returns, it may also incur significant losses. Specifically, value stocks typically have a Beta (i.e., a measure of volatility, or systematic risk, of a security in comparison to the market as a whole) greater than 1.2, or otherwise less than 0.8.  This means that these stocks are typically more likely to perform worse than the broader market during market downturns, or otherwise have little correlation to the overall market direction, respectively. There are several option strategies that may provide a hedge against market downturns for those value companies with a Beta greater than 1.2. These options, however, may have inherent costs that may partially offset a part of the over all gains that may be realized through value investing.

The Middle East stock exchanges, such as the Amman, Jordan (ASE); Bahrain (BSE); Tel Aviv, Israel (TASE); Kuwait (KSE), Dubai Financial Market (DFM), Abu Dhabi (ADX), and Palestine (PEX), among others, have constituents (i.e., listed companies) that are value stocks.  One such publicly traded company is Hayat Pharmaceutical Industry Co. (ASE: HPIC).

Hayat Pharmaceuticals, based in Amman, Jordan, was founded in 1994 and became a public shareholding company in 2005 on the Amman Stock Exchange (ASE: HPIC). Its primary business is as a pharmaceutical developer and marketer.  Currently, it has developed and registered 116 different dosage forms / pack sizes in the Jordanian market representing 56 different brands in various therapeutic areas.  It exports its products throughout the MENA region.

Hayat’s price-to-earnings ratio, however, is relatively low, and its level of foreign investment is negligible.  Further, it does not appear that Hayat has taken full advantage of the revisions in the intellectual property regulations in Jordan that otherwise may increase its market value significantly. Hayat does have a strong balance sheet and a strong income statement.  Its cash flow evidences an increasing year-to-year investment into capital assets. However, it also set a cash dividend in 2011, and increased it in 2012, which appears counter-intuitive to the opportunities presented to it for growth.  Its management team appears to be sound, and as a young company, it has achieved significant milestones in establishing itself in its respective markets.

Hayat has the opportunity and ability to expand its operations, particularly its research and development, as well as expand its market presence beyond the MENA region.  For example, it may secure outside financing without impairing its balance sheet, and invest those proceeds in capital assets such as clinical research and development of licensed or in-house compounds.  This all would go towards a long-term strategic growth plan, and unlock its value in the marketplace.

One of Hayat’s larger peers, Hikma Pharmaceuticals PLC (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY), founded in Amman, Jordan and now headquartered in London, has taken advantage of these opportunities.  This is evidenced by not only a significantly higher price-to-earnings ratio, but also its listing on the London Stock Exchange as well as the NASDAQ Dubai and OTC exchanges.  These listings have also attracted notable foreign investors in the trading of its stock in the secondary markets, which typically results in a higher stock price.  Further, Hikma recently announced the acquisition of Boehringer Ingelheim Group’s Ben Venue Laboratories, which will significantly increase its core business and presence in international markets, as well as research and development capabilities.

Hayat has the opportunity to pursue a similar growth strategy as Hikma Pharmaceuticals has done.   If Hayat executes successfully this growth strategy, Hayat may unlock significant value that will likely be reflected in a significantly higher value for its stock.

Value investing is an established investment style designed to identify publicly traded companies that are fundamentally sound, yet undervalued relative to their peers.  The investment expectation is that the true value of these companies will eventually be reflected in the price of the stock.  Value investing requires in-depth and comprehensive research of both external and company-specific factors, an understanding of broader market behavior and patterns, and patience for long-term realization of capital gains.  Stock exchanges in the Middle East Central Markets have constituents that may be value stocks, a portfolio of which that may result in significant gains over a long-term.

Notice:  Nothing in this article is intended to be, nor may it be construed as, investment advice.  Any company mentioned in this article is for illustrative purposes only, and is not intended to be a recommendation to buy or sell securities in such company. The author of this article is independent, and does not have an existing interest in or relationship with any company mentioned in this article.

Edward Grey is an investment banker with over 20 years experience advising both foreign and domestic publicly-traded and privately-held companies, including development stage companies.  Presently, Mr. Grey is an Affiliate at Forefront Capital, an investment banking and wealth management firm based in Manhattan, NY.  Mr. Grey also serves as the Capital Markets Editor of the Middle East Business Magazine & News. 

Mr. Grey is a graduate of Carnegie Mellon University, where he received a Bachelors of Science for both Economics and Industrial Management, and Vermont Law School, where he received the Award of Academic Excellence for Law & Economics. 

Mr. Grey sits on the Advisory Board of The Relationship Foundation, a not-for-profit educational initiative that incorporates a social and emotional learning curriculum for high school students nationwide (2013 – present).  Previously, Mr. Grey sat on the Board of Directors of Collaborative Arts Project 21, a professional theater company and conservatory that instructs the New York University Tisch School of Arts students Musical Theater (1996 – 2004), and was on the Benefits Committee of Jennifer Muller / The Works, a Manhattan-based modern dance troupe (2000 – 2007).

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