How to Earn A 2,700% Return

We often hear of how investors must have a certain contrarian bent in them in order to invest well. This is also exemplified by sage words from great investors like Sir John Templeton and Warren Buffett.

The former has a famous quote that reads, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” With Buffett, his famous words along those lines are “Be fearful when others are greedy and greedy when others are fearful.”

Both Buffett and Templeton have expressed in simple words, an important part of what it takes to being able to invest well. We’ve certainly seen how following the crowd doesn’t work in investing, but can standing apart from the crowd really bring in great gains?

My colleague Stanley Lim recently pointed out that Sarine Technologies (SGX: U77) has been one of the best performing shares in our local market since the Straits Times Index’s (SGX: ^STI) rebound from its trough during the Global Financial Crisis of 2007-2009.

Turns out, the company had hit a low of S$0.08 per share on 24 Feb 2009 and now sits 2,725% higher at S$2.26 barely five years later. In contrast, the Straits Times Index had rebounded from its own March 2009 lows by only 115% to its current level of 3,137 points.

Sarine Technologies creates software and precision technology products that helps in the planning, processing, evaluation, and measurement of diamonds and gems. It was listed in Singapore in April 2005 and prior to the crisis, had seen its business grow substantially from having revenue of US$14.7 million in 2003 to US$37.1 million in 2007. Meanwhile, its profits also increased by a fair bit, from US$5.3 million to US$8.0 million.

However, the crisis affected the company badly, resulting in reduced demand for its products from its customers (which include Kiran Gems, one of the world’s largest rough diamond processing groups). This was what Daniel Benjamin Gilnert, Sarine’s executive chairman, wrote in the company’s 2008 annual report:

Affected by a surplus in polished diamonds, as the global demand rapidly dissipated, and by production over-capacity, as well as by a credit crunch from shaken financial institutions, the [diamond] manufacturers opted for extended shutdowns, partial re-openings accompanied by staff layoffs and, in some instances, closures.”

At that point in time, most of Sarine’s revenue was derived from a one-time sale of its products and software. Without consumer demand for diamonds, the manufacturers, who are Sarine’s key customers, stopped purchasing the company’s products. Revenue in 2008 and 2009 fell to US$33.1 million and US$21.4 million respectively, while profits declined dramatically to US$1.6 million and US$1.5 million in those two years; that huge drop in profits was likely what lead to nobody wanting Sarine’s shares as it fell by some 82% to its Feb 2009 low from where it was at the start of 2007.

In 2009 however, the company started to shift its business model and began to introduce its GalaxyTM family of products and services. The GalaxyTM suite helps evaluate inclusions (a type of clarity characteristic found within a diamond that’s formed when the precious stone’s first formed in the earth) in diamonds in a far shorter amount of time compared to traditional methods and would generate recurring revenue for Sarine as the company’s customers have to purchase the product before being charged on a per-use basis.

It’s also good to point out that Sarine Technologies had some strong fundamentals even during the tough times in 2008 and 2009. For instance, in both years, it managed to generate positive cash flow and remain debt free.

Investors who saw the changes going on; who thought that the business would emerge stronger from it; and who invested in it, would have reaped fantastic rewards. Sarine’s revenue and profits have since grown to US$73.9 million and US$23.3 million respectively, with 30% of its overall revenue coming from recurring sources.

Foolish Bottom Line

To be certain, not every share that falls hard becomes a bargain. For instance, Singapore Airlines (SGX: C6L) fell by half from its pre-crisis peak to a trough of S$9.49 on March 2009. Since then, shares of the full service carrier have scarcely recovered and are now barely 10% higher at a price of S$10.40.

But during times of distress, when share prices of fundamentally sound companies undergoing positive changes collapse, it could be a great time for investors with a contrarian bent and an eye for a bargain to make their mark. It’s something we all should keep in mind when the next big crisis hits.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.