This Share Might Be a Tiny Hidden Gem

Cable installation outfit Lantrovision (S) Ltd (SGX: Q7W), with its market capitalisation of just S$140 million, might be a tiny hidden gem in Singapore’s market.

An investing legend

When it comes to finding investing gems, John Neff would be someone worth listening to.

As manager of the U.S.-based Windsor Fund from 1964 to 1995, Neff cemented a position for himself in investing folklore by generating annualised returns of 13.7% over his 31-year tenure.

For some perspective, a $1,000 investment made in the Windsor Fund in 1964 would have become $53,000 by 1995; in contrast, the same thousand bucks invested in the S&P 500 – a widely-followed U.S. stock market barometer – would have grown into ‘only’ $23,000.

Important investing criterion for the legend

Neff had laid out several defining elements of the investing strategy he had used at the Windsor Fund in his book John Neff on Investing. Within these elements are a few which are also useful even for us investors in Singapore when it comes to seeking out potential investing opportunities.

Here they are:

  1. A low price-to-earnings (PE) ratio

Neff liked his stocks cheap and for him, a share’s cheap if it’s trading at a PE ratio lower than that of the broader market’s.

Singapore’s market barometer the Straits Times Index (SGX: ^STI) is valued at around 14 times its trailing earnings at the moment; so, shares which carry a PE ratio lower than 14 could make for potential bargains in Neff’s eyes.

  1. Strong fundamental business growth in excess of 7%

Having a cheap valuation is not enough. Neff also liked businesses that were able to grow their earnings sustainably at a rate of between 7% and 20% per year.

A company that’s able to grow helps to improve the odds that its shares would become more valuable over time; as for the 20%-ceiling, Neff felt that shares with businesses that were growing too quickly will find it increasingly hard to maintain such growth-momentum.

  1. Having yield protection

By yield protection, Neff meant that “a superior [dividend] yield at least lets you snack on the hors d’oeuvres while waiting for the main meal.”

With the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which closely mimics the fundamentals of the Straits Times Index – carrying a yield of 2.6% at the moment, that can be used as the benchmark with which to compare the dividend yields of different shares.

  1. A business with strong fundamental support

Besides wanting a share with low valuations, a high dividend yield, and growing earnings, Neff also wanted a business with strong fundamental support. One of the measures he likes to look at when it comes to this is a firm’s return on equity. Neff describes:

“Return on equity (ROE) furnishes the best single yardstick of what management has accomplished with money that belongs to shareholders.”

Although Neff did not specifically mention what’s considered a “good” figure for the ROE metric, the experience of another great investor in Warren Buffett suggests that a useful benchmark here would a be ROE of 15% or more on strong balance sheets that have little or no debt.

Measuring up

With that, here’s how Lantrovision has fared against the four criteria (numbered in the same order as above):

  1. At its current price of S$0.515, the company has a trailing PE ratio of just 11.
  2. Between FY2014 (financial year ended 30 June 2014) and FY2010, Lantrovision grew its net income at a compound annual rate of 11.8% – that’s comfortably within Neff’s benchmark of between 7% and 20%.
  3. Based on its dividend of S$0.03 per share for FY2014, Lantrovision has a historical yield of 5.8%. That’s twice the yield of the SPDR STI ETF.
  4. Lantrovision’s return on equity of 12.2% over the last 12 months falls a little short, but it’s still an acceptable figure. In addition, the firm has a strong balance sheet – as of 31 December 2014, it had total cash and short-term investments of S$76.7 million and total debt of just S$116,000.

Although Lantrovision has ticked most of the right boxes, it’s important to note that Neff’s criteria is meant to help narrow the field and should not be the final word on picking investments.

Investors would still have to dig into the share carefully and answer other important questions. For instance, what’s the company’s cash flow situation like? Is its management team both capable and filled with integrity? What are its future prospects like?

Only when these questions and more are answered can an investing decision be reached.

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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 company mentioned.