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Is This Tiny Stock Possibly A Big Bargain?

With a market capitalisation of just S$79 million at its current share price of S$0.44, waste management and recycling services provider 800 Super Holdings Ltd (SGX: 5TG) can legitimately be said to be a tiny stock in Singapore’s market.

But, the stock’s return over the past two years is anything but tiny. Since 2 March 2014, 800 Super’s shares have jumped by a very impressive 80%. For perspective, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has lost 12% in value over the same period.

Given this, it may be natural to wonder if 800 Super can carry on its winning ways. Turns out, there are signs pointing to the company possibly being a big bargain even now.

What an investing legend says

The signs come from John Neff, one of the best investors the world has seen. In his 31-year tenure as head of the U.S.-based Windsor Fund from 1964 to 1995, Neff had delivered annualised returns of 13.7%, enough to turn a $1,000 investment into $53,000.

For context, the U.S. stock market had climbed by just 10.6% per year over the same timeframe, turning $1,000 into just over $23,000.

Given Neff’s investing track record, it’s logical to think that there’s plenty that investors can learn from him. Fortunately, Neff had shared his lifetime of investing experience and wisdom in the book, John Neff on Investing. In it, Neff had written about several defining elements of how he had invested with the Windsor Fund.

Hallmarks of stock market winners

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

1. A low price-to-earnings ratio

Neff was a bargain-hunter at heart and he specifically sought after stocks that were cheaper than the market. In Singapore’s context, the market could be represented by the SPDR STI ETF (SGX: ES3), an exchange-traded fund that tracks the fundamentals of the Straits Times Index.

At the moment, the SPDR STI ETF has a price-to-earnings (PE) ratio of 11.1 and that could be the benchmark for stocks to be compared against.

2. Strong fundamental growth in excess of 7%

Stocks with growing businesses can help build value for shareholders. That’s why Neff liked to invest in stocks that were not only cheap, but also had an expanding business. In Neff’s case, he often looked for growth of between 7% and 20% – a growth rate that’s too low would mean that the business can’t compound value quickly enough while a growth rate that’s too high may be unsustainable.

3. Having yield protection

Neff described it well in his book by writing that a stock with a high dividend yield “lets you snack on the hors d’oeuvres while waiting for the main meal.” The SPDR STI ETF can again provide a good basis for comparison; the ETF has a yield of 3.7% currently.

4. A business with strong fundamental support

Over the long-term, the price of a stock is governed by how well its business performs. That’s why it’s important to observe the strength of a stock’s business fundamentals. To Neff, a good gauge of a business’s quality is the return on equity.

The return on equity measures the return that a business can generate with the capital from shareholders that’s invested in the business. In general, a return on equity of 12% or more is a healthy figure. But, it’s worth noting that a company can employ high debt to juice its return on equity.

Since excessive borrowings may increase the financial risks that a company faces, it may make sense for investors to watch the balance sheet as well when looking at a company’s returns on equity.

Putting it all together

Keeping Neff’s investing criteria in mind, here’s how 800 Super’s business looks like, according to data from S&P Global Market Intelligence:

  • The waste management outfit has a trailing earnings per share of S$0.10. With its current share price of S$0.44, it has a PE ratio of just 4.4.
  • Over the past five years, its net income has grown at a compound annual rate of 31%. That’s higher than Neff’s preferred range, but those are attractive growth rates.
  • In its latest fiscal year (the 12 months ended 30 June 2015), the company had a dividend of S$0.02 per share, thus giving it a historical yield of 4.5%.
  • Its trailing return on equity is an impressive 34.8%. But, it’s worth pointing out that 800 Super’s balance sheet currently has S$46 million in total debt but just S$12 million in cash; that’s not exactly a strong balance sheet

If I pull it all together, 800 Super has ticked a number of the right boxes with its low valuation, high dividend yield, and commendable growth rate. The snag here is that the firm had delivered its strong return on equity figure largely via the use of heavy borrowings.

But while there are things to like about 800 Super as an investment based on all the above, do note that Neff’s criteria is meant to narrow the field – it should not be the final investing word on 800 Super. Further research needs to be done before any investing decision can be reached on the company.

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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.