7 Stocks With High-Return Businesses And Low Valuations

The use of screens in the stock market can be useful.

It can help investors narrow the playing field instead of poring through each individual company. There are many Singapore-listed companies – 767 as of August 2016 – so it can be tough work to sort through them one-by-one.

But, what should investors be screening for? Every investor likely has their own preferred set of criteria. For me, I take my cues from the billionaire investor Warren Buffett, who has often emphasised about investing in businesses with durable competitive advantages at a reasonable price.

Buffett’s point about durable competitive advantages require some qualitative judgements that are hard – if not impossible – to screen for. This brings me to a very important point about screening for stocks: A screen should be seen only as a starting point for further research, not the final word on a stock’s investing merits.

Coming back to Buffett’s point on the competitive position of a company, a useful numerical proxy for the qualitative judgement would be a high return on investment of 15% or more and steady revenue growth. The return on investment is defined as a company’s net profit divided by the sum of its equity and long-term liabilities.

As for the reasonable valuation, this again requires an investor’s judgement. I’m going to keep it simple by focusing on a stock’s price-to-earnings (PE) ratio, price-to-book (PB) ratio, and dividend yield. I will also be using the valuations of the market average in Singapore – represented by the SPDR STI ETF (SGX: ES3), an exchange-traded fund tracking the local market barometer, the Straits Times Index (SGX: ^STI) – as a benchmark.

So, putting everything together, the following are my screening criteria:

  1. An average return on investment of 15% or more over the last five years
  2. Annual revenue growth of 7% or more over the last five years
  3. A PE ratio, PB ratio, and dividend yield that are no more than 50% higher as compared to what the SPDR STI ETF carries
  4. A company with a market capitalisation of over S$100 million (I added this criterion to filter out small companies as they may have more volatile businesses)

When I fired up my screen last Thursday, the following seven companies appeared:

  1. Dutech Holdings Ltd (SGX: CZ4)
  2. Keong Hong Holdings Ltd (SGX: 5TT)
  3. Kingsmen Creatives Ltd (SGX: 5MZ)
  4. Roxy-Pacific Holdings Ltd (SGX: E8Z)
  5. Soilbuild Construction Group Ltd (SGX: S7P)
  6. T T J Holdings Ltd (SGX: K1Q)
  7. Wee Hur Holdings Ltd (SGX: E3B)

At this point, it is important I bring up something I had mentioned earlier: A screen should be seen only as a starting point for further research, not the final word on a stock’s investing merits.

I’ve yet to look through any of the seven companies closely. But it should be a fun exercise. Have fun researching!

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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.