1 Small Stock, 1 Huge Winner, 1 Big Bargain

Transit-Mixed Concrete Ltd (SGX: 570) is a company that most investors in Singapore would likely have not heard of. That’s because it is a tiny, tiny company – at its current share price of S$0.60, it has a market capitalisation of just S$42 million.

But this is one small stock that has been a huge winner in the local market. Over the past 12 months, Transit-Mixed Concrete’s share price has jumped by 25%. That’s already a healthy gain, but it is all the more remarkable considering that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), had declined by over 22% in the same period.

The 25% gain in the past year is not the only “big” thing about the tiny Transit-Mixed Concrete – there are signs pointing to it possibly being a big bargain even now.

Wisdom from an investing legend

The signs come from John Neff, a legend in the investing business. As head of the U.S.-based Windsor Fund from 1964 to 1995, he had helped the fund achieve compound anualised returns of 13.7% over those 31 years. For perspective, the U.S. stock market had comparable annual gains of ‘just’ 10.6% in that same timeframe.

While outperformance of ‘just’ 3.1 percentage points over the market may not seem like much, a $1,000 investment compounding at 13.7% for 31 years will grow to over $53,000. The same sum that’s compounding at 10.6% for a similar period of time will end up at only $23,000.

In his book John Neff on Investing, Neff had shared a number of defining elements on how he had invested for the Windsor Fund.  

Signs of a winner

There are four of those elements which I think may be useful for us investors here in Singapore in helping to narrow down the universe of stocks into a more manageable number for further research. They are:

1. A low price-to-earnings ratio

Neff liked his stocks to be cheaper than the market. In Singapore’s context, the market could be represented by the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the fundamentals of the Straits Times Index. At the moment, the SPDR STI ETF has a price-to-earnings (PE) ratio of 11 – that could be used as the benchmark for local stocks to be judged against.

2. Strong fundamental growth in excess of 7%

Neff also liked growing businesses. This makes sense as a business that grows can help compound value for shareholders.

That said, Neff didn’t like growth numbers that are too high either. For him, the sweet spot is a growth rate of between 7% and 20%. Too low, and a business can’t compound value quickly enough. Too high, and there’s a chance that the business’s growth could be unsustainable.

3. Having yield protection

In Neff’s view, a stock with a high dividend yield “lets you snack on the hors d’oeuvres while waiting for the main meal.” In other words, a stock with a high yield can pay the investor while he or she waits for the market to recognise the value of the stock.

We can take our cues from the SPDR STI ETF once more. The ETF’s yield of 3.7% at the moment can be the basis of comparison for local stocks.

4. A business with strong fundamental support

A strong business is something prized by Neff. This is where the return on equity metric comes into play – it can give investors insight into the strength of a business.

A general rule of thumb for a healthy return on equity is a figure of 12% or more. It’s worth noting too that a company can juice up its returns on equity through borrowing heavily. But, high debt adds risk. As such, while studying a company’s returns on equity, it may be good practice to keep an eye on its debt levels too.

Ticking the boxes

With Neff’s criteria in mind, here’re some of Transit-Mixed Concrete’s numbers, according to data from S&P Global Market Intelligence:

  • With its trailing earnings per share of S$0.0954, it has a PE ratio of just 6.3 at its current price of S$0.60.
  • Over the past five years, it has achieved an impressive compound annual growth rate of 20.6% in its net income, which is marginally within Neff’s limits.
  • Its dividend yield is at an attractive 5.8% thanks to its dividend of S$0.035 per share in its fiscal year ended 28 February 2015.
  • Its trailing return on equity is a strong 28.6%. Moreover, the company’s latest balance sheet (compiled on 31 August 2015) showed that it had cash of S$3.4 million and total debt of just S$2.0 million; in other words, the firm has a strong balance sheet too.

So as you can see, Transit-Mixed Concrete has ticked all the right boxes with its low PE ratio, solid earnings growth, high dividend yield, and high return on equity with a strong balance sheet.

But that said, it’s worth repeating that Neff’s criteria is meant to help with just narrowing the field, as I had mentioned. A deeper look into Transit-Mixed Concrete, especially the drivers of its future revenue growth, is needed before any investing decision can be made.

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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.