Back in August 2014, I bought shares of Riverstone Holdings Limited (SGX: AP4) for a split-adjusted S$0.47 per share. In 4 years, shares of the glove-manufacturing company have risen to S$1.16, giving me a 150% return on my investment. As such, I thought it would be useful to take a step back, review the situation to see if now is a good time to lock in my profits.
There are two key questions in my mind.
Our FREE SGX stock pick!
1. Has the company’s fundamentals changed?
Is the share price appreciation warranted? To answer this question, we need consider whether its earnings per share have risen in tandem with its share price increase.
Back when I bought shares in Riverstone Holdings, the company had achieved an earnings of RM0.08 per share in financial year 2013. In the last 12 months, its earnings per share has risen to RM0.18, which is equivalent to a 125% increase since 2013. Riverstone’s revenue has increased by 129% during the same time frame.
In addition to its earnings and revenue growth, Riverstone Holdings continues to invest for the future by increasing its production capacity. It is expected to increase its annual production capacity by another 36.8% by the end of 2019, putting it in a good position to continue growing.
2. Is its current valuation warranted?
From the above, we can tell that the company’s share price has increased at a slightly faster tick than its earnings. Back when I purchased shares in the company, it had a price-to-earnings multiple of around 17.6. Now, its shares trade at around 19.4 times its earnings.
That said, even though its share price is slightly more expensive than it was when I bought it, the stock’s valuation looks reasonable to me.
We might also want to consider that its earnings growth potential and impressive track record may be the reason why market participants are willing to price the stock at a slightly higher multiple than before.
Why I’m not selling
Some investors might be tempted to lock up their profits once a decent return on investment is achieved. However, I am staying firm on my investment in Riverstone Holdings for a few reasons.
First, as Peter Lynch said, “Time is on your side when you own shares of superior companies.” Riverstone Holdings Limited has demonstrated that it is a well-managed company that has planted the seeds for growth. It operates in a fast-growing industry, and continues to expand its output capacity.
Second, even though its share price has run ahead of its earnings, I believe current valuations are still not too expensive. We must remember that in the last four years, the company has demonstrated remarkable growth and if is able to continue, market participants will continue to be willing to pay more for the stock.
Third, frequent trading has been shown to be a key factor that causes poor returns in the stock market. That’s why we should try to avoid trading in and out of positions as much as possible.
With all that said, as a Foolish investor, who believes in long term investing, I will only sell my shares if the company becomes outrageously overpriced or its business fundamentals change suddenly.
The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock -- Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.
Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on Riverstone Holdings Limited. Motley Fool Singapore contributor Jeremy Chia owns shares in Riverstone Holdings Limited.