[Case Study] 105% Gain On A Smartphone Camera Module Manufacturer – Cowell (SEHK:1415)

It was 9 Feb 2019 and Cowell (SEHK:1415) was one of the stocks I presented during our Graduates’ Gathering. I mentioned that the stock price was beaten down probably because of poor iPhone sales in China – Cowell makes camera modules for smartphones and Apple was one of their customers.

I calculated a conservative valuation of their net assets (CNAV) to be HK$1.39 per share. The share price was trading around HK$1. Hence, it was undervalued.

The assets were decent too with about 20% in cash. The largest asset was receivables but I wasn’t concern because the customers were big names like Apple, Samsung and LG. Cowell will eventually get the money from them. Likewise, the inventories are materials and camera modules that are contracted to these customers. Nonetheless, I played it safe and discount these assets by 50%. Even so, I still arrived at a value ($1.39) higher than the share price ($1).

But the calculation was based on figures given in the 2017 annual report.

I didn’t invest because I prefer to wait 2 more months to get the audited and updated figures from the new annual report for 2018.

Unfortunately, the market ran up before the report was out. The share price rose from HK$1.00 to as high as HK$1.80, a 80% run up in 3 months!

Tough. Investing is as such, we catch some and we miss some. I wasn’t willing to chase after the stock as it was no longer undervalued.

But I was glad that some of our graduates were able to exercise their own judgment and capitalise on the run.

The run-up wasn’t sustainable and the share price declined from HK$1.80 to HK$1.20, giving me an opportunity to pick it up at HK$1.25 as the stock was even more undervalued based on the 2018 figures. The new conservative value went up higher to HK$1.85 from HK$1.39.

And I was lucky. The share price jumped in Dec 2019 in anticipation of good results for FY19 as the management announced a positive profit alert. Indeed, the results were much better than expected – earnings jumped 110% and most importantly, the management declared a bumper dividend per share of HK$0.46. That’s a 37% dividend yield based on our buy price of HK$1.25!

Share price rallied to HK$2.50 but before I got to sell the stock, Covid-19 struck and brought down the share price to my buy point.

The share price rallied a second time as the dividend distribution drew closer.

I would prefer to exit at Cowell’s book value of HK$3.15 but given the poor economic condition I decided to exit once I get a 100% gain. Moreover, the share price would likely collapse after the dividends have been distributed.

I was also advantaged by a stronger HKD against SGD, resulting in some forex gain. I sold Cowell at HK$2.45 on 13 May 2020 and made a 105% gain after converting to SGD.

It has been a roller coaster ride thus far. First, I missed out on buying it in Feb 2019 and it was too late to chase. Second, I had the chance to enter when the share price declined. Third, I missed out on selling it in Jan 2020 and Covid-19 pulled down the share price. Finally, my second chance to sell emerged and I manage to sell it for a 105% gain.

This is a case of earnings turnaround and the management decided to give out a bumper dividend. I wouldn’t know for sure that these would happen. But I know that buying the stock at cheap prices versus its conservative value would present some surprises. From my experience, surprises tend to increase the share price a lot more than bad news weighing down an undervalued stock.

Value stocks haven’t been doing well in general for the past few years and this trade provided some respite.