Over the last 12 months, the stock price of electric cabling and wiring solutions provider Tai Sin Electric Ltd (SGX: 500) has jumped by 32% to S$0.415 currently. This is an impressive performance from the small stock – its market capitalisation is just S$183 million at the moment – considering the fact that the Straits Times Index (SGX: ^STI) is up by just 10.7% in the same timeframe. But even after that strong climb, there are signs that the company is still worthy of a deeper look by investors who are on the hunt for long-term bargains. An investing legend…
Over the last 12 months, the stock price of electric cabling and wiring solutions provider Tai Sin Electric Ltd (SGX: 500) has jumped by 32% to S$0.415 currently.
This is an impressive performance from the small stock – its market capitalisation is just S$183 million at the moment – considering the fact that the Straits Times Index (SGX: ^STI) is up by just 10.7% in the same timeframe.
But even after that strong climb, there are signs that the company is still worthy of a deeper look by investors who are on the hunt for long-term bargains.
An investing legend
The signs come from John Neff, who ran the U.S.-based Windsor Fund from 1964 to 1995 and led the fund to a compound annual return of 13.7% in those 31 years. In that timeframe, the US market’s annual gain was just 10.6%.
For some perspective, Neff’s returns would turn a $1,000 investment in 1964 into $53,000 in 1995. Meanwhile, the same initial investment into the US stock market would have become only $23,000.
Given Neff’s accomplishments, there’s plenty that investors can learn from him. In his book John Neff on Investing, Neff shared the defining elements of how he invested at the Windsor Fund.
Signs of winners
Within the elements Neff wrote about are four that I think investors here in Singapore can use to help them efficiently narrow 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 liked his stocks to be cheaper than the market. In Singapore’s context, we can use the SPDR STI ETF (SGX: ES3) as a proxy for the market since the exchange-traded fund (ETF) closely mimics the fundamentals of the Straits Times Index.
At the moment, the SPDR STI ETF has a price-to-earnings (PE) ratio of 12.8. This PE ratio can be used as the valuation-ceiling for the stocks we’re looking at.
2. Strong fundamental business growth in excess of 7%
Neff also liked growing businesses. This makes sense, since a business that can’t grow would find it very hard to build value for its shareholders.
3. Having yield protection
A high dividend yield was an attractive proposition for Neff as it meant that he could be paid to own a stock while he waited for the market to recognise its value.
We can use the SPDR STI ETF’s current dividend yield of 3.0% as the floor for the yield that a stock must have.
4. A business with strong fundamental support
A strong business is an important thing for Neff. In his view, the return on equity can be an effective yardstick for measuring the strength of a business.
While Neff did not specify what is a healthy number for the return on equity, a general rule of thumb is that a figure of 12% (on a strong balance sheet that has minimal debt) is reasonable.
The case of Tai Sin Electric
With the four signs from Neff in mind, here’s how Tai Sin Electric’s business looks like according to data from S&P Global Market Intelligence:
- At its current price, the company has a trailing PE ratio of 7.3 and a dividend yield of 5.7% (thanks to its annual dividend of S$0.0235 per share for its fiscal year ended 30 June 2016).
- Its net income has grown at a compound annual rate of 13.7% over the past five years.
- It has a return on equity of 15.7% over the last 12 months while currently having a balance sheet that has S$22.4 million in cash and equivalents and just S$14.4 million in total debt and capital leases.
I trust it’s obvious to see that Tai Sin Electric has ticked the right boxes here with its low PE ratio, high dividend yield, double-digit earnings growth, high return on equity, and strong balance sheet.
But, it’s worth noting that Neff’s checklist is only meant to help with narrowing the field, like I had mentioned earlier. A deeper study of Tai Sin Electric’s business fundamentals (such as the market opportunity it has) is needed before any firm investment decision can be made.
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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 owns shares in Tai Sin Electric.