Over the past 10 years, Singapore’s stock market has seen its fair share of multi-baggers. According to Yahoo Finance, blue-chips like the conglomerate Jardine Strategic Holdings (SGX: J37), stock exchange operator Singapore Exchange (SGX: S68), and casino & resort owner Genting Singapore (SGX: G13), have gone on to gain 761%, 356% and 296% respectively.
Meanwhile, Singapore’s stock market in general, represented by the Straits Times Index (SGX: ^STI), have increased in value by ‘only’ 91%. What gives those three shares the secret sauce? Wouldn’t it be great if investors can find out what makes those shares tick so that future opportunities would not be lost?
While each of the three blue-chips managed to get to where they are today because of their own unique reasons, a book titled The Outsiders might just contain invaluable insights on finding the next big multi-bagger.
Written by William Thorndike, The Outsiders profiles eight iconoclastic chief executives of publicly-listed American companies who led their businesses to glorious corporate results, which in turn resulted in – you guessed it – equally glorious stock market returns (the long-term link between corporate results and shareholder returns never gets tenuous).
There’s a common thread with each CEO profiled in The Outsiders: it’s easy to see how they were all great capital allocators. They knew when to spend money, how much to spend, and what to spend on.
It can be said that a good number of CEOs have operational back grounds and are perhaps, not keenly suited for the act of capital allocation, which is a very important part of the job that investors sometimes miss.
Henry Singleton from Teledyne was one of the eight on the list. The American conglomerate’s shares had compounded annualised returns of 20.4% a year from May 1963 to 21 June 1990. Every dollar invested with Singleton’s Teledyne at the start would have become close to $150 at the end.
In particular, Singleton’s leadership of Teledyne provides an interesting model for evaluation of future investing opportunities.
The table below, referenced from The Outsiders, shows part of the corporate results Singleton managed to achieve at Teledyne.
|Sales||$4.5||$1,102||244 times||$1,102||$3,494||2.2 times|
|Net Income||$0.1||$32.3||556 times||$32.3||$261||7 times|
|Earnings per share||$0.13||$8.55||65 times||$8.55||$353||40 times|
|Shares Outstanding||0.4||6.6||14 times||6.6||0.9||(0.9 times)|
|Debt||$5.1||$151||29 times||$151||$1,073||6.1 times|
|*Amounts in millions|
Note how Singleton managed to achieve fantastic growth in earnings per-share from 1961 to 1971 even when its share count expanded by fourteen-fold. Singleton had been busy making acquisitions during that time and most of them were paid using newly-issued shares of Teledyne.
It’s easy to grow net income by issuing shares to acquire other companies. But existing shareholders would never benefit if per-share-growth does not materialise.
Acquisitions that result in solid growth in per-share figures is actually a hallmark of a leader who knows how to acquire and is something investors can use to determine the acquisition smarts of management by tracking such changes.
There’s another great point to note from the table that’s related to the change in share count from the period of 1961 to 1971. The 10-year period was an era where Teledyne’s shares were highly valued in the market, ranging from earnings multiples of 20 to 50.
During that period, Singleton paid for his acquisitions almost exclusively through Teledyne’s shares, as mentioned earlier. That’s actually another stroke of genius that investors can use as a lens to filter management’s ability to allocate capital.
When Singleton used highly-valued shares of Teledyne to pay for profitable companies at low valuations, he was – by way of analogy – using 50 cents to buy two dollars’ worth of quality goods. If that’s not supreme bargain hunting, I don’t know what is!
Finally, the change in share count for the period from 1971 to 1984 also contains a lesson for us all. Notice how net income ‘only’ grew by 700% while earnings per share jumped by 4,000%. That happened because Singleton was busy buying back shares to reduce the company’s share count.
But, that’s not always a move that makes economic sense. It worked in Teledyne’s case because the buybacks started in a time where the company’s shares were selling for very low price to earnings ratios.
Teledyne, through buying back its own shares, was in effect paying 50 cents for every dollar of value. It’s also a shareholder-friendly move: there’s nothing wrong with determining that the most valuable asset that a company could purchase with its cash would be its own shares.
In fact, buying back undervalued shares is far more lucrative for shareholders than companies throwing good money after bad in ill-conceived business expansions or acquisitions.
In summary, Singleton’s use of capital during his tenure with Teledyne could be summarised (albeit in an overly simplified manner) as: 1) buying up “profitable, growing companies with leading market positions” for very low price to earnings ratios; 2) Issuing Teledyne’s shares to acquire companies when its own shares are deemed to be overvalued at PEs of 20 to 50; and 3) Buying back its own shares when it’s deemed to be undervalued at low PEs
Singleton’s judicious use of shareholder’s resources, in turn, provides three keys that investors can use to sieve out future investing opportunities:
1) A history of solid growth in per-share figures
2) An ability by management to recognise situations where its own shares are overvalued and use it as some form of currency to take advantage of inflated prices
3) An ability by management to recognise situations where its own shares are undervalued and start buying back shares at low valuations to create even greater growth in per-share figures
Unfortunately, I’ve not been able to locate any Singapore-listed company that exhibits such characteristics but that does not mean they don’t exist either. At the very least, having a good framework in place ensures that we have the ability to pounce on the next such opportunity we see. It has never hurt anyone to get ready.
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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 doesn’t own shares in any companies mentioned.