There will be times when even the best performing companies fall into temporary hardship. When this happens, their share prices will reflect this by falling precipitously to 52-week lows. In the spirit of looking for bargains when the chips are down, these “fallen angels” may be worth a second look as the problems they’re facing may turn out to be temporary in nature. As the “angel” part of the term “fallen angel” implies, there might also be durable competitive business advantages in the companies as well – that’s because these companies have managed to do well over an extended period…
There will be times when even the best performing companies fall into temporary hardship. When this happens, their share prices will reflect this by falling precipitously to 52-week lows.
In the spirit of looking for bargains when the chips are down, these “fallen angels” may be worth a second look as the problems they’re facing may turn out to be temporary in nature. As the “angel” part of the term “fallen angel” implies, there might also be durable competitive business advantages in the companies as well – that’s because these companies have managed to do well over an extended period of time prior to their fall in share price.
With all the above in mind, I would like to look at two high growth companies which have performed well for the past five years (since 1 January 2010) but which have seen their share prices fall to 52-week lows.
In the table below, I have listed down two companies which have achieved capital gains of more than 100% over a five year period, but which are currently trading at 52-week lows. They are namely, Challenger Technologies Ltd. (SGX: 573) and MTQ Corporation Limited (SGX: M05).
Source: Google Finance; excludes stock splits
A quick look at Challenger Technologies
Challenger Technologies is an information technology (IT) retailer. It currently has a network of 44 stores in Singapore, and boasts half a million members in its ValueClub consumer loyalty programme.
Over its past five financial years (note: Challenger Technologies’ financial year coincides with the calendar year), the IT retailer has managed to grow its sales by a total of 42%. However, net income and free cash flow (FCF) has barely budged, increasing 5% and decreasing 4.6%, respectively, compared to the end of 2010. The graph below summarizes the progress of the company’s financials over the past five financial years.
Source: Company Earnings Report; ttm = trailing twelve months
IT retailing is a tough business space. The rise of online retailers, with their better variety and better prices, is another threat. But, Challenger Technologies is not sitting idly by – it will be putting its best foot forward with the growth in its loyalty programme, and its own house brand of products, like Valore. The company also intends to open two new stores in the fourth quarter of 2014. Time will tell if its strategy works.
A quick look at MTQ
MTQ is an oil and gas equipment and services company that has operations in Singapore, Australia, and Bahrain. The S$175 million market cap company is involved in oilfield engineering, engine systems, and subsea marine services. You can read more about the company here. The graph below summarizes the progress of the company’s financials over its past five completed-financial years.
Source: Company Earnings Report
In the time period depicted in the chart above, MTQ has done well to increase its revenue from $82 million in the financial year ended 31 March 2010 (FY2010) to $313 million in FY2014. Its FCF has generally followed suit, turning from a negative figure in FY2011 to $18.2 million in FY2014.
Foolish readers may be aware of the oil price rout that is making its rounds worldwide at the moment. The drop in the price of oil may reduce the capital expenditures of oil producers and reduce the level of associated exploration activities. Hence, the oil price drop may have an adverse impact on MTQ.
That said, if MTQ is able to continue producing positive free cash flow and maintain the strength of its balance sheet (MTQ currently is in a net-cash position; in other words, it has more cash than borrowings), it could very likely weather the stormy waters ahead and come out stronger as a company. My fellow Fool Ser Jing lists MTQ as one of the stronger companies around in the oil and gas industry (as measured by the net debt to equity ratio).
The exercise above is to figure out whether there are “fallen angels” amongst the Singapore share market that may present opportunities for further study. It may not always promise a winning share over the next few years, but looking among areas of neglect in the general market may yield interesting investment ideas.
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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 Chin Hui Leong doesn’t own shares in any companies mentioned.