The Peter Lynch Playbook: 3 Singapore Stalwarts You Should Look At

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This would be the second article of our 7-part Peter Lynch Investing Playbook series.

If you’ve missed the first part, fret not, as you can read it here: Part 1 of The Peter Lynch Investing Playbook. Don’t worry, this article would not be going anywhere so you can come back to it anytime! 

The Peter Lynch Investing Playbook is essentially a guide inspired by the book, One Up on Wall Street, where the legendary investor, Peter Lynch, revealed how his ‘amateur’ approach in managing Fidelity’s multibillion-dollar Magellan Fund led him to become one of America’s number one money managers, and, one of the most successful investors of all time. 

So What Is A ‘Stalwart’?

Stalwarts are former fast-growing companies which have matured into larger companies with slower, more reliable, growth (3% per year is the expected average).

In addition, stalwart companies produce goods that are necessary and always in demand (think food, water, electricity, oil), which ensures a strong, steady cash flow.

Although they are not expected to be top market performers, if purchased at a good price, stalwarts offer significant profits of around 50% or so over a 4-5 year holding period.

Due to their strong cash flow generated from needed products, stalwarts are generally able to pay a dividend.

Examples of Stalwarts include Macdonald’s, SBS Transit, and Procter&Gamble.

In addition, Peter Lynch required Stalwarts to have a P/E growth ratio (PEG) of less than 1.0. The PEG ratio is calculated by dividing a company’s Price-to-Earnings (PE) ratio by its Earnings Growth Rate.

Lynch considered companies with PEG below 1.0 to be underpriced, and companies with a PEG of below 0.5 to be a real bargain. This is easy to understand, since if you buy a company with a PEG of less than 1, you are paying less than one dollar for a dollar of earnings growth. And paying less for more is the fundamental principle of all investing.

Investopedia

For dividend-paying companies, Lynch further factored in the dividend yield to arrive at a yield-adjusted PEG ratio. Walmart has often been cited as a good example of Lynch’s Stalwart stock methodology.

At a point in time, Wal-Mart traded for close to 20x PE. Which meant the average investor would be paying $20 per dollar of earnings.

Lynch determined that the company was still growing at 20-30% with much more room for growth.

This means the real price to earnings an investor would be paying would be 20-30% less every year for the next couple of years. $20 was a bargain. And Wal-mart did not disappoint, going on to grow at 20-30% for the next 20 years.

So How Do We Find Stalwarts?

We now know some of the characteristics of Stalwarts.

  • A previously fast grower that has become a mature company, but with decent long term growth potential (3% per year)
  • Produces needed goods/services that allow for strong cash flow generation
  • Is able to pay a dividend and reward shareholders with that strong cash flow
  • Has a PEG ratio of less than 1, or ideally less than 0.5

We have added some additional criteria to be extra stringent with our stock selection, and narrow our focus down to only the best stocks to be investigating. These are the final criteria for which we will be using to find Stalwarts in Singapore.

  1. Mid-Large Market Capitalization (above $80m Market Cap) 
  2. High Dividend Yield (Within Top 50 Highest Div Yield stocks in SGX) 
  3. Regular Dividend Distribution
  4. Earnings & Average Free Cash Flow > Dividends Distributed
  5. Increasing Revenue Growth Y-O-Y (Earnings calculated in Point 4) 
  6. Not in a Sunset Industry (old & declining industry, for eg, textiles)
  7. PE ratio within Industry Average
  8. PEG ratio of less than one. Ideally 0.5 even.

The above criteria should be rather self-explanatory.

  1. Mid to Large Market Capitalisation means the company has achieved a certain level of scale and maturity in addition to being more liquid for investors.
  2. Higher Dividend Yield is a measure of squeezing out companies with less dividends
  3. Regular and Uninterrupted Dividend Distribution is a measure of a company’s ability to be financially disciplined and a reflection of its strong cash flow, which we covered earlier as necessary
  4. Think of free cash flow as a company’s savings after paying all of its bills for the month/year. If dividends exceed savings, the company has less cash in its account. Period. Repeat this for years straight and the company will go bankrupt much like Hyflux, which experienced 5 years of negative free cash flow.
  5. The price of a company in the stock market is often tied to its reported earnings. Good earnings see good appreciation in stock prices. So Increasing Top Line Growth Y-O-Y is necessary.
  6. Not being in a sunset industry should be self-explanatory. Sunset industries are dying trades. Such as shoe shiners. When was the last time you paid good money to have your shoes shined? Never? Well, now you know why I won’t invest in generic shoe-shining businesses. Low earnings reflect a lack of ability to pay dividends to shareholders, which naturally follows falling stock prices. Buying a stock in a Sunset industry would be like buying a dying puppy hoping it becomes a full-grown dog. Its the exact reverse of buying a growth stock.
  7. A PE ratio within the industry average means that the stock is not overvalued relative to its peers in the industry. This ensures we’re not overpaying.
  8. A PEG ratio of less than one. Ideally, even 0.5, which reflects that we’re paying less than a dollar for a dollar’s worth of earnings growth.

Given the above criteria, we shortlisted 3 Stalwarts that we will cover today, which we feel have significant growth potential. In addition, all of the stocks will have one or more of the following traits of a tenbagger, representing a potential return 10X of what you invested.

Adopted from The Swedish Investor

#1Jumbo (SGX:42R)

Market Cap.$253M
Historical Dividend Yield3%
Not in Sunset Industry Yes
PE Ratio21.73
Industry Average PE ratio 23.8
Jumbo’s Revenue in $‘000

As seen in the chart, Jumbo’s revenue has been growing year on year with a 5% growth from $145m in 2017 to $153M in 2018.

We would also potentially expect the revenue growth to maintain or even increase as Jumbo looks towards gaining a firmer foothold in China and other regions.

Jumbo has been distributing dividends for the past 3 years since its Initial Public Offering and its earnings and free cash flow has been more than the dividends distributed with the exception of 2017.

This was due to its unprecedented expansions into Beijing, Shanghai, Taiwan and Ho Chi Minh City. This does justify the fall in Free Cash Flow in 2017 and the subsequent fall in dividend distribution in 2018.

Jumbo’s Growth Potential 

Jumbo aims to tackle its growth prospects with a three-pronged approach: 

  1. Expanding to other F&B brands such as Ng Ah Sio Bak Kut Teh, JPot, Chin Hui Lim Teochew Cuisine and Tsui Wah cafe
  2. Identified PRC as a key growth market and ventured into China which has a much larger addressable consumer base
  3. Grew its franchising model throughout Asia – it has sprung up in Vietnam, Taiwan, Hong Kong, Korea and Bangkok

By diversifying its restaurant portfolio, it is able to replicate some parts of its successful seafood business model onto other brands such as Ng Ah Sio Bak Kut Teh. This could thus be another profitable venture for the group should they be able to execute it well. Jumbo intends to introduce Ng Ah Sio Bak Kut Teh to China and will open at least one more Ng Ah Sio Bak Kut Teh outlet in Taiwan and one more Tsui Wah Hong Kong-styled “Cha Chaan Teng” outlet in Singapore over the next 12 months.

Furthermore, by expanding into foreign consumer markets, Jumbo is exposed to a larger addressable consumer base.

Should they be able to build their brand as successfully as they have done in Singapore, there would be bright prospects ahead for the group. 

The Edge Singapore just reported today that Jumbo opened its first franchised outlet in Gangnam, Seoul. This brings the tally of Jumbo seafood across Asia to 18 with franchised outlets in Bangkok, Fuzhou, Ho Chi Minh, Taipei and Taichung. 

The photo is adopted from the Jumbo Investor’s news release

We are enthusiastic about the opening of our first JUMBO Seafood restaurant in South Korea and to bring a part of Singapore’s heritage dishes to the country. We believe that the opening will strengthen the Group’s market position in the region, especially within North Asia, as we seek to steadily expand our network of F&B outlets.” 

Ang Kiam Meng, Group CEO and Executive Director of JUMBO

Jumbo’s investment and expansion into China have begun to ripen as it currently accounts for approximately 20.4% of its Revenue. Such figures are a strong testament to its success in China. 

Should the leadership and management build their market position within the different regions by expanding their outlets as successfully as it has done in China, we could potentially see unprecedented growth of the Company’s sales. 

In the home base, which still forms the bedrock of the company’s earnings growth, Jumbo opened an outlet at ION Orchard.

This marks a significant milestone as their first restaurant in Orchard, the premium shopping and entertainment belt. This shows that while Jumbo is in the midst of overseas expansions, it still makes it a point to remain relevant and expand in the local market to maintain its main source of sales.

Peter Lynch’s Trait Checklist

It’s got a Niche

When you hear the name Jumbo, the picture that first pops into your mind is definitely a Chilli Crab/ Pepper Crab. That is exactly Jumbo’s Niche, selling one of Singapore iconic/ famed local dishes and being renowned for it. 

Other than honing their Chilli Crab Expertise, having a Niche makes Jumbo very word-of-mouth friendly, which means more opportunities to get the word out about your business. 

Having such a competitive advantage over its counterparts is important for restaurants like Jumbo which reside in a highly competitive F&B industry. This ensures that its sales would not be affected immensely in the presence of new seafood entrances due to high customer retention rates.  

Skin in the Game (Insiders are buying/owning shares) 

If the Chairman or the CEO of a company owns more than 50% of shares in the company, their interests are more likely to be more aligned with the shareholders.

That is because they are unlikely to take actions to harm their own wealth and would look towards improving the prospects of the company.

“There’s no probable success of stock than that people in the  company are putting their own money into it.”

Peter Lynch

As can be seen, insiders of the company owned a majority of the shareholder-ship. Therefore, it proves that the management has skin in the game. 

The Company is buying back Shares

Buying back shares is the simplest and best way a company can reward its investors, according to Peter Lynch. 

If it has faith in its own future, then it would invest in itself, just as shareholders do. 

“When stock is bought by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price.”

Peter Lynch 

Jumbo has been doing just that, posting notices from 31st May – 11th June on their daily share buy-backs.

#2 – Japan Foods (SGX:5OI)

Market Cap.$81M
Historical Dividend Yield4.27%
Not in Sunset Industry Yes
PE Ratio24.22
Industry Average PE ratio 23.8
Japan Foods’ Revenue in $‘000,000

As seen in the chart, Japan Foods’ revenue has been growing year on year, albeit not substantially from 2018 to 2019. However, we would expect the top line to grow with the growth potential lined up for Japan Foods. 

Japan Foods has been distributing consistent dividends for the past 5 years and its earnings and free cash flow has been more than the dividends distributed for all 5 years.

Japan Foods’ Growth Potential 

Similar to Jumbo, Japan Foods business growth model focuses on three things: 

  1. Expanding to other F&B brands (refer to the image below)
  2. Rejuvenating its oldest and most established brands to remain relevant
  3. Growing its franchising model throughout Asia – it has announced a 50-50 venture in Dec 2018 with Minor Food Group to expand into Japan, Thailand and PRC

Japan Foods’ approach moving forward seems logical and sound. Their joint venture under the franchise “Dining Collective” is a great leap forward in their overseas ambitions, allowing them to unlock a larger customer pool by expanding their outlets and having a presence in foreign markets. 

They also managed to secure and launch a new franchised ramen brand “Konjiki Hototogisu”, known for its clam-flavoured broth. The restaurant chain also has One Michelin Star.

They have since opened four restaurants under this brand in Singapore, with the latest one being launched in Jewel Changi.

This is definitely not a form of diworseification as Japan Foods aims to tackle the premium market in Singapore whilst maintaining more affordable brands for the general crowd. This caters to the tastes and wallets of the consumers, unlocking more potential for growth. 

Lastly, they launched two brand extensions of “Ajisen Ramen”, named “Den by Ajisen Ramen” and “Kara-Men”.

By refreshing and rejuvenating brands, it allows Japan Foods to remain competitive and relevant in the market. To date, the response to the two variations has indeed been well with an increase in same-store sales following the rebranding. 

Peter Lynch’s Trait Checklist 

It’s got a Niche

Lynch found that if a company focused on a particular niche, it often had little competition. Japan Foods is one of the leading F&B groups in Singapore specializing in Japanese cuisine. With 19 Dining Brands under their name and 50 locations islandwide, it seems that their restaurant network is stable and well-built. 

Skin in the Game (Insiders are buying/owning shares) 

As can be seen, insiders of the company owned a majority of the shareholder-ship. Therefore, it proves that the management has skin in the game.

The Company is buying back shares

Japan Foods has also been posting notices in Aug 2018, Sep 2018, Dec 2018 and Feb 2018 on its daily share buybacks. Such notices can either be found on the SGX website or their investor relations website

#3 – ISEC Healthcare Ltd (SGX:40T)

Market Cap.$186M
Historical Dividend Yield6.12%
Not in Sunset Industry Yes
PE Ratio21.53
Industry Average PE ratio 47.95
ISEC’s Revenue in $‘000,000

As seen in the chart, ISEC’s revenue has been growing year on year with a 9.19% growth from $37m in 2017 to $40.4M in 2018. We would also potentially expect the revenue growth to increase due to the region’s aging population and increasing awareness towards seeking early treatment for ophthalmology issues will continue to drive demand and sales upwards. 

ISEC Healthcare has been distributing consistent increasing dividends for the past 5 years and its earnings and free cash flow has been more than or equal to the dividends distributed for all years. 

ISEC Healthcare’s Growth Potential 

We see growth potential in ISEC Healthcare’s business due to 3 key reasons: 

  1. Ageing Population leading to greater demand for Eye Care
  2. Rising Income Levels and Private Insurance Covering leading to more affordable healthcare
  3. ISEC Healthcare’s regional expansion into larger population markets

Due to ageing populations, requirements for eye health care will increase. This is because there are higher incidences of Cataract, Glaucoma, Age Macular Degeneration, Dry Eyes and Vitreoretinal. 

Furthermore, not only is government spending on healthcare services increasing across the region in line with changes in demographics, rising income levels and subsequent private insurance coverages has led to an increase in individual spending on private eye-care services. 

ISEC Healthcare is also keen on regional expansions with large populations. They took a positive step towards this direction by announcing the incorporation of ISEC MYANMAR. They are also keen on leveraging upon the aforementioned trends to continue pursuing investment opportunities and explore up-and-coming markets such as China, Indonesia and Vietnam. 

Peter Lynch’s Trait Checklist 

It’s got a Niche

In terms of devising a business strategy, a niche company can remain focused on its area of specialization. Over time, a niche company can develop a reputation for its work in a given field. This reputation allows a niche company to position itself as a leader and expert in the field. Niche companies focus on doing one thing well rather than doing many things only adequately. ISEC Healthcare definitely has an Eye Specialist Niche. This gives it better margins as a specialist clinic than a generalist. 

Skin in the Game (Insiders are buying/owning shares) 

As can be seen, insiders of the company owned a majority of the shareholder-ship. Therefore, it proves that the management has skin in the game. 

Not many Institutions own it

Adopted from Markets FT

Peter Lynch states that if you find a stock with little or no institutional ownership, you’ve found a potential winner. Such companies have not been discovered by the smart money, giving it an extra potential upside. 

Conclusion

So there you have it. The Stalwart Category explained in accordance with Peter Lynch’s guidebook.

Lynch expected stalwarts to deliver gains of 30% to 50%, after which he would sell them and find new, undervalued counters. These are the stocks that he would frequently replace with others in this category. 

Dr Wealth was started because we believe that the average Singaporean is overworked, underpaid, and underappreciated.

We can no longer survive on just salaries.

To lead better lives, all of us must learn to grow and scale our income in one way or another. Investing is simply our way of doing it.

If you choose to invest as a vehicle for growing your wealth, however, it is important that you do it correctly.

Just as you wouldn’t approach opening a business haphazardly, you shouldn’t approach buying a stock randomly. All good investors, just like Peter Lynch above, follow proven frameworks.

Pilots train every day of their careers to know exactly what to do in every situation. If A or B happens, I eject. If X happens, I perform Y emergency drills.

Investing works in the same way.

You absolutely have to know what to do in case things go south.

At Dr Wealth, before we invest in anything, we already know what we will be doing in the unfortunate case of our investments turning sour on us.

This is because we are guided by a framework.

Built on the back of teachings from Benjamin Graham and Fama and French, our portfolio has outperformed the STI significantly over the past 6 years since inception.

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And good luck!

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