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Can This Phenomenal 780% Winner Continue Its Winning Ways?

Investors looking for a great long-term success story in Singapore’s stock market can find one in luxury watch retailer Hour Glass Ltd (SGX: AGS).

From the start of 2005 to today, a time when Singapore’s market barometer the Straits Times Index (SGX: ^STI) had climbed by merely 63%, Hour Glass has seen its shares jump by 780% from S$0.10 apiece to S$0.88.

This raises the question: Can Hour Glass’s shares continue doing as well in the future as it did in the past? It’s not an easy question to answer, but some clues could perhaps be found from an investing checklist that the legendary investor Peter Lynch had used himself.

Lynch, who wrote about the checklist in his best-selling investing text One Up on Wall Street, ran the U.S.-based Fidelity Magellan fund from 1977 to 1990 and posted an astounding record of 29% annualised returns. At that rate, every $1000 would have turned into more than $27,000 in 13 years.

Seeing as how Lynch’s accomplishments gives his views on investing massive weight, let’s see what his checklist can tell us about Hour Glass.

1. The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Hour Glass retails luxury watches (as mentioned earlier) and it does so under its 38 namesake as well as brand-specific boutiques that are scattered across the Asia Pacific region. With its line of business, its closest industry peer would be fellow luxury watch retailer Cortina Holdings Limited (SGX: C41).

Hour Glass valuation table

Source: S&P Capital IQ

As the table above shows, Hour Glass has a valuation that’s nestled comfortably between Cortina Holdings and the SPDR STI ETF (SGX: ES3), an exchange-traded fund mimicking the fundamentals of the Straits Times Index. That’s not too bad. But, we can go a step further and look at Hour Glass’s historical PE ranges.

Hour Glass PE ratio from January 2010 to today

Source: S&P Capital IQ

The chart above shows how the company’s PE ratio is clearly at the upper range of where it’s been over the last five-plus years since the start of 2010; that would not sound like music to the ears of a bargain hunter.

2. What is the percentage of institutional ownership? The lower the better.

Lynch had included this criterion because he felt that companies that flew under the radar of institutional investors (big money managers) may make for better bargains due to neglect from the investing community.

In Hour Glass’s case, there simply isn’t much room for institutional investors to grab a meaningful interest.

According to Hour Glass’s latest 2015 annual report, Dr Henry Tay and Dato’ Dr Jannie Chan, who are respectively the Executive Chairman and Executive Vice Chairman of the firm, collectively own a 62.39% stake in the company as of 8 June 2015. In fact, there are no institutional investors in Hour Glass’s list of substantial shareholders as of 8 June 2015 (substantial shareholders are those who own 5% or more of a company).

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, there have been sporadic instances of buying by Hour Glass’s insiders. On 9 April 2015, Dato’ Dr Jannie Chan had bought 20,000 shares of the company for a total sum of S$15,500. Then, on 22 April 2015, Dr Henry Tay had purchased 281,200 shares of Hour Glass for S$222,148 through his investment vehicle, AMSTAY Pte Ltd.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

This is an area in which Hour Glass has delivered a good showing.

Hour Glass EPS table

Source: S&P Capital IQ

Over the past decade, the luxury watch retailer has been consistently profitable and has had a decent track record in growing its earnings. There was a big blip in FY2009 (fiscal year ended 31 March 2009) when the company suffered a non-cash S$14.1 million impairment loss in an investment it had made in Gems TV Holdings. But, Hour Glass’s profit growth resumed thereafter without skipping a beat.

That said, there’s been a noticeable slowdown in the company’s earnings growth rate over the past three years and that could be an area of concern for investors.

5. Does the company have a strong balance sheet?

Based on its latest financials (for the quarter ended 31 March 2015), Hour Glass has a solid balance sheet with US$101 million in cash and just S$61 million in borrowings.

6. Does the company have room to grow?

As a retailer of luxury time pieces, Hour Glass’s ability to thrive rests in the hands of the rise of the affluent and wealthy who appreciate high horology. The following’s what Dr Henry Tay wrote in Hour Glass’s latest 2015 annual report on the company’s future opportunity (emphasis mine):

“Even with its multitude of domestic challenges, in 2015, China displaced the United States as the world’s largest economy. Additionally, the combined wealth of Asian highnet-worth individuals will for the first time in modernity, exceed those HNWIs in America.

By 2022, China’s middle class will have grown to 630 million, half its population, and by 2030, Asia will account for two thirds of the world’s middle class. Five years from now, the number of Mainland Chinese travellers will double to reach 200 million per annum, increasing the absolute quantum of the travel retail spend.

Such tectonic shifts in the centre of the world’s economic power and gravity of wealth pose an incredible opportunity for luxury businesses such as ours. But that does not mean that our journey will not be fraught with multiple speed bumps.”

Hour Glass had also spent S$56.8 million in capital expenditures in total in FY2015 for the acquisition of Watches of Switzerland and two quality Australian retail properties. The investments were not made with small sums of money, especially when considering the size of Hour Glass’s balance sheet. But, Dr Henry Tay believes that these investments have “laid the building blocks for [Hour Glass’s growth] for the next decade and beyond.”

With what we’ve seen here, it’d appear that there’s a long way for growth for Hour Glass.

A Fool’s take

In tally of the final score, Hour Glass hasn’t fared too badly: It has low institutional ownership; it has arguably demonstrated some share buybacks from insiders; it has had a nice history of consistent and growing profits; it’s in good financial health with its solid balance sheet; and it does seem to have a long runway for growth.

The only snag here is that the firm’s valuation is near the higher end of its historical ranges. That though, is an important risk to consider because even the best businesses can become poor investments if bought at too high a price.

In addition, investors might also want to be on the lookout for another regional or global economic crisis. During the Great Financial Crisis of 2007-09, there was a noticeable decline in the firm’s revenue (some 10% in FY2009). If the world were to be dragged into a prolonged economic malaise in the future, Hour Glass’s business – due to its status as a luxury goods retailer – may be pulled into the mud as well.

All told, investors would need to weigh the risks and rewards with the firm in order to come up with an intelligent investing decision.

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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.