As we enter a new year, I want to put my money to work by sniffing out for new investment opportunities. And the first question that came to my mind is this: “How do I achieve triple digit percentage gains in a sustainable manner?” In a bid to find out more, I looked at some companies which had generated such returns over the past five years. That’s because finding out what helped drive these shares to achieve what they did can help give me an idea of what it is that makes for a future winner. So, let’s take a closer look at…
As we enter a new year, I want to put my money to work by sniffing out for new investment opportunities. And the first question that came to my mind is this: “How do I achieve triple digit percentage gains in a sustainable manner?”
In a bid to find out more, I looked at some companies which had generated such returns over the past five years. That’s because finding out what helped drive these shares to achieve what they did can help give me an idea of what it is that makes for a future winner.
So, let’s take a closer look at the quintet of BreadTalk Group Limited (SGX: 5DA), Straco Corporation Ltd (SGX: S85), Silverlake Axis Ltd (SGX: 5CP), Raffles Medical Group Ltd (SGX: R01), and Old Chang Kee Ltd (SGX: 5ML). The table below gives the companies’ share price gains from 1 January 2010 to 7 January 2014. It also includes the average return on equity and cumulative increase in the companies’ earnings per share (EPS) over that five year period.
Source: S&P Capital IQ
If we would take reference to the Strait Times Index’s (SGX: ^STI) 14% returns over the same period, we can see that the quintet has managed to beat the market by quite a fair margin. A closer look at the figures in the table above also gave me three common traits that are identifiable in these big winners.
1) Consistent, strong, earnings per share (EPS) growth
There’s a positive relationship between the growth in a company’s share price and its EPS, with Straco, Silverlake Axis, and Raffles Medical being good examples.
But of course, there’re hardly any perfect correlations in the real world (especially in finance), so you’d see some wrinkles to that relationship when it comes to both Breadtalk and Old Chang Kee; both companies have seen relatively meagre increases in their earnings but yet have delivered some tasty share price gains. A possible reason could be that investors are a lot more optimistic today, as compared to five years ago, about the two companies’ future prospects.
2) Commendable returns on equity
Besides showing strong earnings growth, the quintet have also demonstrated commendable returns on equity too. This ratio is an important measure because it indicates how efficient a company is in generating a return on shareholder’s capital. In general, the higher the ratio, the more efficient management is.
While there is no benchmark to define a good return on equity, as a general rule, figures in the 15% to 20% range can already be considered to be attractive. And as you can see, the five companies mentioned have all achieved an average return on equity of at least 15% over the past five years.
3) Competitive advantage
Individual investors might easily identify three of the five companies in their daily lives.
BreadTalk and Old Chang Kee are food & beverage companies that run well-known retail outlets. The former has the eponymous BreadTalk bakeries and the Chinese restaurant chain Din Tai Fung, amongst others. Meanwhile, the latter’s the owner of the Old Chang Kee outlets which sells curry puffs and other snacks. As for Raffles Medical, the company’s a healthcare services provider which runs the prominent Raffles Hospital as well as more than 100 medical centres around Singapore.
So, the trio already have a strong brand name that may be etched into their customers’ minds – this brand power can give the companies a competitive advantage against their respective peers. This is also partly the reason why some people would prefer to go for BreadTalk’s famous pork floss bun rather than buy a similar and cheaper product at less well-known bakeries.
As for tourism asset owner Straco, it too seems to have developed a strong brand identity for its attractions (two aquariums based in China). This can be seen in the table below, which is taken from my colleague Chong Ser Jing. It shows how Straco has managed to grow its ticketing revenue at a faster pace than its already-strong growth in visitor numbers over the years.
Source: Straco’s filings
This has partly led to the firm’s ability to generate strong cash flows. The company had also recently embarked on some expansion activities by purchasing an iconic Singaporean tourism landmark, the Singapore Flyer.
We now come to Silverlake Axis. Being one of the few software companies listed in Singapore, it is a leading provider of software and technological solutions for major banking and financial services firms. Currently, around 40% of all major banks in Southeast Asia are utilizing some form of software or service from Silverlake Axis.
According to an analyst report dated 4 December 2014, Silverlake Axis’ management had shared that the company has not lost a single customer in 25 years of operation. This suggests that the company’s suite of products and services poses very high switching costs for its clients. Thus, as major banks in the region expand, Silverlake Axis might well be able to tag along for the ride too.
What I have shown above are three traits which successful investments tend to share, though it must be noted that my list is by no means an exhaustive one. I’d also like to point out that none of the above is meant to suggest that the five afore-mentioned shares would continue to do well – I’m merely using them as an example to find out what might help define future winners.
Warren Buffett once said that “If a business does well, the stock eventually follows.” Like my three traits show, it’s the businesses with strong corporate performances that tend to do well. So, aim to find great companies and hold them for the long-term. In this way, you would not be too far off from finding your own huge winners.
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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 James Yeo doesn’t own shares in any companies mentioned.