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[Case Study] Nobody Liked This Boring Stock, So We Bought & Profited 56% In 6 Months

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Do you wish they can tell the future of a company? Many investors do.

Driven by that desire, they seek out the best ways to forecast future performance, and make investments based on their ‘calculations’. But the only certainty that any investor will ever have is that the future is definitely uncertain. Today’s dividend stock reminds us of the uncertainty that we have to frequently deal with as investors.

Ellipsiz was a great looking stock with a huge potential, however changes happened relatively quickly. And we were glad we still managed a 56% return in 6 months amidst the changes.

On top of discovering how we analyse dividend stocks, here are 3 more takeaways you can expect from today’s case study:

  • How to uncover hidden gems in the stock market, the profitable way
  • Why boring, inconspicuous stocks tend to provide greater returns compared to the well-known blue chip stocks
  • How we detected warning signs that made us sold the stock

Let’s jump right in:

How We Uncovered This Gem In The Stock Market

Average investors get stock ideas from various sources. It could be from friends, family, financial news or even online discussions. They would then investigate further and decide if the stock is worthy for investments.

However, we do things differently.

We use a quantitative method to evaluate all the listed stocks. This method allows us to screen for stocks that are more likely to be profitable. We then focus our efforts only on the stocks that have passed our criteria. More often than not, the names of these stocks could be unfamiliar and we do not even know what they do.

But we have a lot of trust in the quantitative process because it has been empirically proven to deliver excess returns.


Get a sneak peek at the Intelligent Investors Immersive 

Alvin Chow

School of Graham, Deep Value, Factor Investing, CEO of Dr Wealth

  • Co-founder and CEO of Dr Wealth
  • Bachelor of Engineering from Nanyang Technological University 
  • Recipient of the SAF Academic Training Award
  • Bestselling author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio
  • Featured on ChannelNewsAsia, Straits Times, MoneyFM 93.8, Kiss92 and more
  • Spoke at events organised by DBS, SGX, CPF etc
  • Have achieved market beating returns since 2013
  • Networth: over $1 million  

Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. 


It allows us to keep our biases at bay, hence we do not tweak the model too much.

Who Else Have Not Heard of Ellipsiz?

Ellipsiz (SGX:BIX) was one of the stocks that passed through our screen in Apr 2017.

We run multiple investment strategies for our portfolio. Ellipsiz passed our Gross Profitability Asset Dividend (GPAD) strategy.

Before our screen, we have not heard of Ellipsiz or know of its business. But, if you have been following our case studies (i.e. chemical industries, fu yu,etc ) you would have realised that its usually such inconspicuous companies that brings huge profits.

So, what does Ellipsiz do?

Ellipsiz is the typical ‘boring’ company that keeps its head down and hustles hard in their industry.

They are neither the sexy, trending tech company, nor the big F&B company that constantly have new outlets popping up in almost every mall in Singapore.

Semiconductor_wikicommons

Instead, the company supports the semiconductor industry which has been booming for the past few years. They focus on the downstream manufacturing process, providing probe cards to test the semiconductor wafers. They also have another business segment of distributing equipment to the same industry.

Because of their business nature, most consumers would not have heard of them.

Hence, if you usually hunt for stock ideas from friends, family or keyboard warriors online, you would never have picked up this gem.

Why Did We Invest In Ellipsiz?

During our analysis, we discovered that Ellipsiz has managed to maintain an asset light business model while generating decent profits consistently. This is reflected in their Gross Profitability of 26%, putting them in the top 20% among the SGX-listed stocks.

Their dividend yield was 4.5% at the time of our investment, which also ranked in the top 20% in SGX by dividend yield.

The dividends seemed sustainable too, with a payout ratio of 0.4 and the average free cash flow yield at 5.6%:

Ellipsiz-sgx-gpad-apr17
Ellipsiz’s stats in April 2017

Below is the overview of the Earnings, Dividends and Free Cash Flow, in per share values in the past five years. You can see the rise in all three metrics which drove the stock price higher.

We believe the company is riding on the semiconductor growth. This would become problematic, once the sector experiences a drop in demand.

However the demand doesn’t look like it will wane anytime soon as we embrace more electronics in our lives, especially with the increasing focus on the Internet of Things (IOT) theme.

But, it was trading at a relatively high price…

We bought this stock at $0.555 on 25 Apr 2017. Despite of its relatively high trading price, it wasn’t ‘expensive’ considering its dividend yield and book value.

Share price kept climbing

After our investment, Ellipsiz’s share price did very well and continue to rise. We were sitting on 8% profits within a month.

On 21 Aug 2017, Ellipsiz announced that it has sold its Probe Card Solutions business to Nidec for US$65m or about S$88m in cash. The market capitalisation of Ellipsiz at that point in time was just S$103m. That’s relatively a large sum of cash!

The stock price spiked up as high as 16% after the announcement.

The management increased their dividend payout with a final dividend per share of 6.5 cents. This was 3.6 times more dividends than the previous year!

We anticipate more cash distribution once the sale is completed.

How We Detected Warning Signs: 3 Things That Made Us Sell The Stock

Everything looked rosy for the business and its stock price reflected the positive sentiments.

However, we soon spotted 3 worrying signs that broke the deal for us.

#1 – Significance of the sold business on Gross Profits

Ellipsiz released their quarterly report on 7 Nov 2017. And if you understand financial reports, you would be very worried too.

The impact of losing the probe card solution business became more telling after the company separated the continuing business from the discontinued one:

At a glance, you should immediately notice the significance of the discontinued business on the company’s Gross Profit. This suggests that the loss of the discontinued business will  greatly affect the Gross Profitability, an important metric in our investment process.

The distribution business (Con) and the Probe Card business (Dis) contributed S$2.7m and S$7.3m respectively. The latter also contributed larger gross profit margin and EPS to the company.

#2 – Negative Impact on the company’s Gross Profitability

Because Gross Profitability is derived by taking ‘Gross Profits’ divided by ‘Total Assets’, it is not enough to judge based on the Gross Profit alone. We bring the “total assets” into the analysis as well:

There are 2 scenarios we considered.

i) Effect of the Proceeds from Sale of Probe Card Business on Total Assets

The Probe Card business is worth S$80.388M in the balance sheet. Assuming it would be fully converted to cash after the sale, the total assets would remain the same. This means the Gross Profitability is likely to decline tremendously to ($2.7 x 4 / $158.873) = 7%. (from 26% when we invested)

ii) Distribution of Sales Proceeds

Assuming the management distributed all the sale proceeds as dividends, the total assets will drop to $78.485M. The Gross Profitability would become better at ($2.7 x 4 / $78.485) = 14%.

However, this is still not good enough to put Ellipsiz in the top 20% in SGX by Gross Profitability.

Either way, Ellipsiz will no longer rank high in terms of Gross Profitability and it is a sell signal.

#3 – Loss of Good Management

The last blow was dealt when the CEO and CFO have announced their retirement from the company, which we deem as a great loss.

Hence, it is a sell call for us.

1 Bonus before we sell…

Because we have held Ellipsiz beyond the Ex-Div date on 30 Oct 2017, we will be entitled to the 6.5 cents dividends even though we have sold the stock.

With that, our total gain for this stock would be 56% after holding it for 6 months. We wish we did not need to sell it so early, but the business fundamentals have changed.

Conclusion

Ellipsiz (SGX:BIZ) is yet another example of a listed company that is exemplary but remains relatively unheard of, only because of its business nature. There were 3 main learning points within this case study that we hope will help improve your investing;

  • Having a replicable and reliable method to screening stocks allows you to pick out stocks that most average investors would not be able to detect, until its too late.
  • Why boring, inconspicuous stocks tend to provide greater returns compared to the well-known blue chip stocks
  • Dividend yield alone is not a safe way to analyse dividend stocks; you would have missed the 3 warning signs.

6 thoughts on “[Case Study] Nobody Liked This Boring Stock, So We Bought & Profited 56% In 6 Months”

  1. Isn’t there an element of luck as well? Because an obscure unloved stock can (and often does) remain obscure and unloved for years, while the share price stagnated. That the price rose 56% in 6 months (as opposed to 6 years) is a bit of luck, isn’t it?

    • I would say it is about odds. By picking stocks according to certain factors (eg value, profitability) would provide us a statistical advantage in achieving higher returns. The overall portfolio does 13.2% annually in the past 4 years which is pretty worthwhile for us to stick to the factors. And not all stocks make money but we have a time stop if things don’t work out.

  2. Hi,

    I understand that your company DrWeath provide paid courses, but do you provide paid subscription service whereby we get recommended stock to buy instead? Thanks Philip

    • We believe that understanding the philosophy and principles of our investing process is important so that an investor has the conviction to buy and sell according to the strategies. So education comes first.

  3. Dear Alvin

    After looking at this particular case study, I am intrigue by the way the stock is being analysed for entry and exit.

    In the article you stated, “Ellipsiz released their quarterly report on 7 Nov 2017. And if you understand financial reports, you would be very worried too.”

    Q1) I need to find out if participating in your Factor Based course would be a platform where you will teach me how to analyse financial statement across all the stocks in different sectors (mainly Bank, Law & Property, Marine) in Singapore?

    Q2) Also, by participating, will we get unlimited access to your platform and your mentoring?

    • Hi Chris,

      Q1) We will educate attendees on the interpretation of financial statements that are key to support the Factors and investment strategies we use. The strategies in turn could be used to analyse various industries excluding financials like banks and REITs. This is because banks are special and REITs are regulated with different capital structures. The rest of the companies are largely applicable.

      Q2) You can continue to ask questions after the class as we provide lifetime email support for graduates.

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