There are many, many professional investors around. But not every one of them can be called a legend. Benjamin Graham is one investor who has rightfully cemented a place for himself in the pantheon of investing greats because of his many achievements. Here’s a partial list: While running his investment operations, Graham had delivered long-term returns of around 20% per year; billionaire investor Warren Buffett considers Graham to be one of his most important mentors; and, Graham’s the author of the highly influential investing texts, Security Analysis and The Intelligent Investor. It’s a real pity that investors today can’t find…
There are many, many professional investors around. But not every one of them can be called a legend. Benjamin Graham is one investor who has rightfully cemented a place for himself in the pantheon of investing greats because of his many achievements.
Here’s a partial list: While running his investment operations, Graham had delivered long-term returns of around 20% per year; billionaire investor Warren Buffett considers Graham to be one of his most important mentors; and, Graham’s the author of the highly influential investing texts, Security Analysis and The Intelligent Investor.
It’s a real pity that investors today can’t find out what Graham might think of the companies in Singapore’s stock market as he had passed away 40 years ago in 1976. But, he did develop a 10-point investing checklist during his career. Let’s see what it can tell us about Graham’s possible thoughts on food producer QAF Limited (SGX: Q01).
But first, here’s a brief background on the company. QAF is involved in bakery operations, pork production, food processing and distribution, and more. Some of the company’s consumer food brands include Gardenia and Farmland.
With that, let’s get going with the checklist:
1. An earnings-to-price yield at least twice the triple-A bond rate
Based on QAF’s latest earnings (the 12 months ended 31 March 2016), it has an earnings per share of S$0.10. At its current share price of S$1.07, QAF thus has an earnings-to-price yield of 9.33%.
Meanwhile, the Singapore government 10-year bond has a yield of around 2.0% right now, according to the Monetary Authority of Singapore. Currently, there are a few credit rating agencies that have given Singapore a triple-A rating.
In comparing the figures we have here, it’s clear that QAF’s earnings-to-price yield is over twice the triple-A bond yield.
2. P/E ratio that is 40% or less than the highest P/E ratio the stock has had over the past five years
QAF’s peak P/E ratio over these last five years is 17.7. It currently has a P/E ratio of 10.7, which is just 60% of the highest P/E ratio.
3. A dividend yield of at least two-thirds the triple-A bond yield
Thanks to its annual dividend of S$0.05 per share in 2015, QAF has a dividend yield of 4.7% at its current stock price. That’s higher than the triple-A bond yield we saw earlier.
4. A stock price that’s below two-thirds of the tangible book value per share
QAF currently has a tangible book value per share of S$0.794, which is lower than its stock price.
5. A stock price below two-thirds of net current asset value (total current assets minus total liabilities)
QAF has a market capitalisation of S$598 million right now. It also has total current assets of S$411 million and total liabilities of S$255 million, which gives rise to a net current asset value of $155 million. As you can see, QAF’s market capitalisation is nearly four times as high as its net current asset value.
6. Total debt less than tangible book value
The food producer has total debt of just S$87 million right now; this compares with its S$446 million in tangible book value.
7. Current ratio (total current assets divided by total current liabilities) greater than two
With the total current assets seen in point 5 and total current liabilities of S$207 million, QAF has a current ratio of 1.98, which just falls short of the mark.
8. Total debt less than twice of net current asset value
QAF’s total debt is already lower than its net current asset value even before multiplying the latter by two.
9. Compound annual earnings growth rate of 7% over past 10 years
QAF’s earnings per share had grown from S$0.035 in 2005 to S$0.094 in 2015. That translates into a compound annual growth rate of 10.4%.
10. Stability of earnings: No more than two years of declining earnings of 5% or more over the past 10 years.
Over the course of the 10-year stretch from 2005 to 2015, QAF has suffered numerous declines in earnings of over 5%. For instance, in 2007, the company’s earnings tumbled by 79%; in 2008, the company clocked a loss; in 2012, earnings fell by 43%. There’s more, but you get the point.
Of Graham’s 10 criteria, QAF has managed to meet only four of them. As such, QAF will probably not interest Graham much at the moment.
That said, investors with a different investing slant as compared to Graham can have a completely different view of QAF. That would be fine too.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned.