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Is Valuetronics Holdings Limited A Bargain Right Now?

Electronics manufacturer Valuetronics Holdings Limited (SGX: BN2) has seen its stock price double over the past year to S$0.98 currently. This impressive gain may raise an important question amongst investors: Is Valuetronics still a bargain now?

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 an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Valuetronics through the checklist and see what turns up.

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)?

Right now, Valuetronics has a PE ratio of 12.9. The chart below shows the company’s PE ratio over the past five years, and you can see that Valuetronics’ current valuation multiple is near a five-year high. This suggests that Valuetronics’ PE is high.

Source: S&P Global Market Intelligence

For another perspective, we can look at the PE ratios of companies that are in a similar line of business as Valuetronics. These include Venture Corporation Ltd (SGX: V03) and Memtech International Ltd (SGX: BOL). Right now, the duo have PE ratios of 20.6 and 11.8 8.7 respectively. From this angle, Valuetronics’s PE ratio appears reasonable.

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 Valuetronics, as of 27 June 2017, there were no institutional investors that owned 5% or more of the company’s shares.

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

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

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

Here’s a record of Valuetronics’s earnings over the past decade from FY2007 (financial year ended 31 March 2007) to FY2017:

Source: S&P Global Market Intelligence

It turns out that Valuetronics has been consistently profitable for a long period of time. But, it’s also worth noting that there has been no sustained long-term growth trend in the company’s earnings per share.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Valuetronics had HK$627.5 million in cash and equivalents, and zero debt. That’s a robust balance sheet.

A Final take

On the positive side, Valuetronics has a reasonable PE ratio in relation to its peers, a low level of institutional ownership, a good record in generating profits, and a strong balance sheet. The negatives are a PE ratio that’s near a five year high, the absence of buybacks and insider buying, and a lack of consistent growth in profits.

Judging from the results of the checklist, Lynch would probably have some interest in Valuetronics at its current price. But, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.

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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 Valuetronics Holdings.