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A 2016 Post Mortem on Super Group Ltd’s Buy-Out: The Importance of The Bull and The Bear

As I cross over to a new year, it seems like a good time to look back at the investment decisions that I have made over the past year to find lessons that could be useful for other investors.

One standout event from 2016 was the buyout of Super Group Ltd (SGX: S10). In early November, a subsidiary of Jacobs Douwe Egberts BV (JDE) offered to fully acquire Super Group’s shares for S$1.30. At the buyout price, my total profit (including dividends) will be around 20%.

A 20% increase seems like a fair gain, but my investment in Super Group did not always look in good shape.

A look back at what happened

In May 2014, I purchased my first position in Super Group at around S$1.48 per share. Yes, that’s right; this is a stock price that is above the buyout price of S$1.30. On 23 June 2016, I added to my position in Super Group at a price of S$0.81. The second position I took has delivered an overall gain of 58%, thereby resulting in a positive return of around 20% for my total investment in Super Group.

If you had looked closely though, you may have noticed that my initial position in Super Group had fallen by a gut-wrenching 45% when I bought my second position.

The Bull versus The Bear

When a stock’s price falls by 45%, it is tempting to conclude that its business must be doing badly. Reversely, if a stock’s price soars, it is easy to be lulled into thinking that everything is fine and dandy with the business.

This is why it is crucial for investors to keep putting brutal truths about the business of a stock on the table. And that means laying out both the bull case and bear case for a company, regardless of whether the stock’s price is soaring or falling badly.

In February 2016, I wrote about how Super Group’s profit had taken a beating. For the whole of 2015, Super Group’s bottom-line was sliced by 31% compared to the prior year. To add to the woes, the company had cut its dividend from 3.1 cents per share in 2014 to 2.2 cents in 2015. Back then, its stock price was down to $0.735 and it would have been easy to throw in the towel at that point.

But, I also noted that Super Group’s balance sheet at the end of 2015 had strengthened compared to the end of 2014. Its free cash flow also more than doubled in that year.

Super Group’s stronger balance sheet and free cash flow was something I had noted in an article I published in November 2015. At the end of the article, I summed up by saying that Super Group’s free cash flow gave it options, but it needed to continue innovating and coming out with new products.

The statement captured my thoughts on Super Group’s bull and bear thesis.

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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 Chin Hui Leong owns shares in Super Group.