OSIM International Ltd (SGX: O23) is a company that is very likely viewed as a disappointment by its investors. Over the past 12 months, OSIM has seen its shares fall by nearly 60% in price. But there are signs that OSIM, at its current price of S$0.82, may be worth at least a deeper look by investors. A legend in the business Those signs come from investing legend John Neff, who ran the U.S.-based Windsor Fund from 1964 to 1995. In his 31 years managing the fund, Neff had generated compound annual returns of 13.7%. The U.S. stock market, in…
OSIM International Ltd (SGX: O23) is a company that is very likely viewed as a disappointment by its investors. Over the past 12 months, OSIM has seen its shares fall by nearly 60% in price.
But there are signs that OSIM, at its current price of S$0.82, may be worth at least a deeper look by investors.
A legend in the business
Those signs come from investing legend John Neff, who ran the U.S.-based Windsor Fund from 1964 to 1995. In his 31 years managing the fund, Neff had generated compound annual returns of 13.7%. The U.S. stock market, in contrast, had climbed by ‘only’ 10.6% annually over the same period.
For perspective, Neff had turned a $1,000 investment in 1964 into more than $53,000 by 1995 whereas the market had turned the same investment into less than $23,000.
Neff had given the investing world deep insight into his investing style through his book John Neff on Investing. In the book, he had shared a number of elements that defined how he invested with the Windsor Fund.
Signs of a bargain
Among the elements Neff shared were some that even investors here in Singapore can use to help them narrow the universe of stocks into a more manageable field when it comes to the search for investing opportunities. They are:
1. A low price-to-earnings ratio
Neff liked stocks that were cheaper than the market. In Singapore’s context, the market can be represented by the Straits Times Index (SGX: ^STI), which currently has a price-to-earnings (PE) ratio of 10.54. That PE ratio can be the hurdle which stocks have to clear.
2. Strong fundamental business growth in excess of 7%
Beyond a cheap valuation, Neff also liked to see a business which can grow its earnings at a rate of between 7% and 20%. This is important as a business would find it very tough to build value for shareholders over the long-term if it can’t grow.
Neff thought that his chosen range was in a sweet spot that avoided anaemic growth (on the low-end) and unsustainable growth (on the high-end).
3. Having yield protection
In Neff’s eyes, a high yielding stock is akin to an investment which is paying him to wait while the market recognises its value. Again, in here we’d take our cues from the Straits Times Index.
At the moment, the index has a yield of 3.7% and that shall be the benchmark that the yields of individual stocks can be compared against.
4. A business with strong fundamental support
Neff also wanted to invest in stocks with strong businesses. And to him, the strength of a business can be seen in its return on equity. According to Neff, the “return on equity furnishes the best single yardstick of what management has accomplished with money that belongs to shareholders.”
Neff did not specify what a good number to see for the return on equity is. But as a general rule of thumb, a figure of 12% or more (on a strong balance sheet with minimal debt) is reasonable.
With these in mind, you can see just why OSIM may be worth at least a deeper look by investors. According to data from S&P Capital IQ, at its current stock price, the company has:
- A PE ratio of 9:
- A yield of 7.5% (thanks to its annual dividend of S$0.06 per share in 2014);
- A compound annual growth of 7.9% for its earnings per share over the last five years;
- And a trailing-12-months return on equity of 14.5% (with more cash than debt on its balance sheet as of 30 September 2015)
A Fool’s take
What I’ve shared about OSIM may be useful, but it must be noted that further research is needed before any investing decision can be reached.
In the firm’s latest earnings release (for the three months ended 30 September 2015), its quarterly revenue and profit had fallen by 11% and 62%, respectively, compared to a year ago. Is this a temporary down-cycle? Has its market opportunity shrank? Have its competitors grown much stronger? These are just a few examples of the kinds of questions investors need to answer before a more definitive picture of OSIM’s investing merits (or lack thereof) can emerge.
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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.