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Finding The Next Big Winner

My fellow Fool David Kuo recently shared a number of Singapore-listed shares that have managed to achieve 10-bagger status over the last 10 years, meaning to say they have given investors total returns in excess of 1,000%.

These shares include Jardine Strategic Holdings (SGX: J37), Dairy Farm Holdings, Ezion Holdings (SGX: 5ME), Raffles Medical Group (SGX: R01), and HO Bee Investment (SGX: H13).

Finding shares that can grow to 10 times our initial sum certainly sounds like the type of investment that any investor would covet (yours truly, included!).

But, it entails hard work in trying to dig out shares with such unusual potential, and when the money’s plonked in, investors would need unwavering persistence and patience in holding those shares for the long-term to allow the strong underlying fundamentals of the business to shine through.

Fortunately for us, great investors who have blazed the trail have left us some great frameworks to work with. One such example would be the checklists found in One Up on Wall Street, an invaluable investing tome for individual investors penned by superstar American fund manager Peter Lynch.

Let’s dig into Lynch’s checklist for “stocks in general” using healthcare provider RMG as an example to see how we can find the next big winner.

1) The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

RMG’s currently trading at S$3.23 a share. At that price, it’s selling for 28 times its trailing earnings, more than twice the corresponding figure of 13 for the general market as represented by the Straits Times Index (SGX: ^STI).

Industry peers for the company, such as Healthway Medical Corporation, IHH Healthcare Berhad, and Q&M Dental Group, carry PE ratios of 4, 39, and 59 respectively.

On an absolute basis, a PE of 28 is considered high, so RMG might seem like it would not get a tick in the box for this criterion. But, the company does carry a PE ratio lower than its peers (Healthway Medical Corp’s earnings multiple is artificially deflated from the sale of financial assets) and that could tilt the balance in its favour.

2) What is the percentage of institutional ownership? The lower the better

A quick glance at RMG’s 2012 annual report shows that Dr Loo Choon Yong, executive chairman and co-founder, owns more than half the company. In comparison, institutions like the asset management firm Aberdeen only own a total of around 13% of the company.

The percentage-ownership stats have fluctuated since the end of 2012, but as it stands, the changes have not been significant with Loo still owning the lion’s share of the company.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs.

There have been frequent bouts of insider buys from both directors and substantial shareholders since the start of the year. In particular, RMG’s executive chairman Loo Choon Yong just bought 642,641 shares personally at the end of June for a total of S$1.9m.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

RMG’s earnings growth has averaged 9.7% a year from 2007-2012, and has actually been very consistent (besides a slight dip during the Great Financial Crisis period) as seen in the chart below:

chart

5) Does the company have a strong balance sheet?

The company has a very strong balance sheet and has been operating with minimal debt for a number of years. RMG’s balance sheet for its latest third-quarter earnings saw it carry S$146m in cash with only S$4.4m worth of debt.

6) Does the company have room to grow?

This criterion was mainly for fast growers – those with earnings growth of 20-25% a year – but it could be applied for companies with slower growth rates like RMG too.

For RMG, growth opportunities in Singapore – where the bulk of its operations lie – can come from expansion of its flagship Raffles Hospital to include more clinical services and specialist offerings. In addition, the company’s making further inroads into China (where it already has one medical centre) with tentative plans to co-develop a 300-bed international hospital in Shanghai with the Shanghai Binjiang International Tourism Development Company.

Foolish Bottom Line

So there we have it: a quick run-through of how we, as individual investors, could use Peter Lynch’s check-list as a tool for assessing companies or reviewing the different shares we already have in our portfolio.

Use it wisely, and you might just be able to unearth the next big winner for yourself.

Click here now  for your  FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by  David Kuo ,   Take Stock Singapore  tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Raffles Medical Group.