Value investors are investors who aim to invest in companies that are trading at a big discount to their real economic value.
In a previous article, I had pointed out reasons why value investors may find luxury watch retailer Hour Glass Ltd (SGX: AGS) an interesting candidate for further research. But, the company also has negative traits that investors should be aware of; in this article, I want to discuss two such traits.
Weakening financial performance
Value investors are generally misunderstood as those who are seeking to buy only cheap companies, with little attention given to the performance of the underlying businesses. But in reality, some of the best value investors in the world. such as Warren Buffett and Charlie Munger, seek companies that have strong track records.
The idea is simple: A company with a good operational track record has a higher probability of being able to produce good business performances in the future, which will in turn sustain or build its intrinsic value. It’s important that a company can at least maintain its intrinsic value. This is because time is needed for its stock price to reflect its intrinsic value, a process which might take months, if not years, to happen.
In the case of Hour Glass, it has seen a decline in its business numbers in the last two years. Its revenue has declined by 5% from S$734.9 million in FY2015 (fiscal year ended 31 March 2015) to S$696.1 million in FY2017. Over the same period, net profit has fallen by 17% from S$59.7 million to S$49.6 million. With these numbers, it’s clear that Hour Glass’s fundamentals have deteriorated in recent years.
Dividends are also important to value investors, and one thing about a company that should be looked at is its track record in paying a dividend. The key here is to look for stable – or even better, growing – dividends over time.
In the case of Hour Glass, its dividend in FY2017 was S$0.02 per share, down 9% from FY2015’s dividend of S$.022 per share.
Though the magnitude of the decline is not large, investors need to ask a crucial question: Will Hour Glass’s dividend continue to fall in the future, especially given its weaker financial performance in the last two years?
A Foolish conclusion
There are things to like about Hour Glass from the perspective of a value investor, such as its low valuation and strong balance sheet. But, Hour Glass has also seen its revenue, profit, and dividend decline in recent years. These are risks investors should also take into account of.
How We Made an 88% Return in Just 19 Months! Members of David Kuo’s personal investing club Stock Advisor Gold were recently rewarded with the biggest winner Motley Fool Singapore has seen to date In a special, 100% FREE report we’ve put together, we take you behind the scenes to show you exactly how we first uncovered this stock… every article and piece of research we released on it… and what ultimately led to our decision to SELL for an 88% gain. Click here to claim your copy now!
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.