This Stock Is Up 78% In 3 Years: Can It Continue Winning?

Micro-Mechanics (Holdings) Ltd (SGX: 5DD) is a tiny stock in Singapore’s market. At its current share price of S$0.785, the company has a market capitalisation of only S$110 million or so.

But, the stock’s been a big winner over the past three years. Since 18 July 2013, Micro-Mechanics’ share price has increased by a handsome 78%, absolutely smoking the 9% price decline that the Straits Times Index (SGX: ^STI) has delivered over the same period.

Micro-Mechanics’ big returns may lead to the question: Can the company continue its winning ways? There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up annualised returns of 29%. In One Up On Wall Street, Lynch had written about a general checklist he had used when he was searching for investing opportunities. Let’s look at each criterion and how Micro-Mechanics fares.

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)?

At just 9, Micro-Mechanics’ PE is lower than the SPDR STI ETF’s (SGX: ES3) PE of 12. The SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of the Straits Times Index.

Meanwhile, you can see how Micro-Mechanics’ PE has looked like over the last five years in the following chart:

Micro-Mechanics PE ratio since 18 July 2011
Source: S&P Global Market Intelligence

So, Micro-Mechanics has a PE ratio that is lower than the market and near a five-year low.

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

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In the case of Micro-Mechanics, there were no institutional investors in its list of substantial shareholders (shareholders that control 5% or more of the company’s shares) as of 1 September 2015. Moreover, Christopher Borch and Low Ming Wah collectively controlled 57.86% of the company’s shares. Borch and Low are Micro Mechanics’ chief executive and chief operating officer, respectively.

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

There have been no instances of buybacks or insider buying with Micro-Mechanics over the past six months.

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

Here’s a record of Micro-Mechanic’s earnings over the past decade:

Micro-Mechanics' EPS table
Source: S&P Global Market Intelligence

Micro-Mechanics has been consistently profitable and has even seen its earnings more than double from fiscal 2005 to fiscal 2015. But, there have also been wild swings in its earnings, with fiscal 2009 being a good example, when earnings caved in by over 90% compared to fiscal 2008.

In fact, it was not until fiscal 2015 when Micro-Mechanics’ profit surpassed a previous high of 6.397 cents per share that was seen in fiscal 2008.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 31 March 2016, Micro-Mechanics has a rock-solid balance sheet. There’s zero debt and the company holds S$17 million in cash.

A Fool’s take

To sum up, Micro-Mechanics is a company with a low valuation, no institutional ownership, consistent profitability, and a strong balance sheet. The negatives are the lack of buybacks and insider buying, and profits that have fluctuated wildly.

All that we’ve seen above can be useful starting points for further research on Micro-Mechanics. It’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as a tool to narrow the field of stocks to a more manageable number for deeper study.

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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.