This Small Share Might Be a Hidden Gem

When it comes to finding investing opportunities, the legendary John Neff is someone who can lend us a helping hand.

Neff managed the Windsor fund in the U.S. from 1964 to 1995. During his tenure, Neff managed to generate compounded annual returns of 13.7% – that’s enough to turn every $1,000 invested with him in 1964 into $57,000 by 1995. In comparison, the same investment into a broad U.S. market index like the S&P 500 would have become only $22,700 in the same duration.

The following’s a brief summary of what Neff looks out for in a share (for more details, you can check out here): A lower valuation than the broader market; a bottom-line that’s growing at annual rates of between 7% and 20%; a dividend yield that’s higher than the market; and a strong return on equity.

Given that the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has a price/earnings (PE) ratio and dividend yield of 13.5 and 2.6% currently, the Neff-inspired screen can be fine-tuned as follows. The share must have:

  1. A PE ratio lower than 13.5
  2. Grown its earnings per share at a compounded annual rate of between 7% and 20% over the past five years (more aggressive investors might choose a growth rate of between 7% and 30%)
  3. A dividend yield higher than 2.6%
  4. A return on equity of 15% with the balance sheet carrying more cash than debt (for an explanation of why the return on equity criterion is so, check out here).

Funneling Singapore-listed shares through the aforementioned screen would see GDS Global Ltd (SGX: 5VP) emerge, amongst other shares.

GDS's financials

Source: S&P Capital IQ

GDS, which is a relatively new share that got listed only on April 2013, is involved with a niche business of providing commercial and industrial door and shutter solutions. From its numbers, this small share (GDS has a tiny market capitalisation of only S$44.8 million) has had great earnings growth, a low valuation, a high dividend yield, a strong balance sheet, and also seems to have desirable economic characteristics.

A Fool’s take

At this point, it’s important to highlight that investors can’t just stop here. Neff’s criteria is meant to help narrow the field and is not meant to pick shares. As such, investors would still have to dig deeper and determine if GDS can extend its great historical track record into the future.

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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 does not own shares in any company mentioned.