How I Make More Than 200% Return on One Stock Using Graham’s Method?
In 2016, I wrote two articles on a relatively unknown stock in Singapore named “Si2i“. It was an unattractive business but it was selling really cheap. You can read the details here. Over the course of 3 years, I bought and sold this stock twice and make more than 200% return.
So in this post, I want to share with you my thought process behind it and hopefully it is useful to you.
In the world of investing, there are two big school of investors. One group is the “Graham”-style, who invest in severely undervalued stocks by their CURRENT value. While the other group is the “Buffett”-style, who invest in growth stocks with FUTURE potential.
Frankly, I find the debate between the two groups meaningless because it really doesn’t matter which method of investing you use. The most important thing is to MAKE PROFIT.
Si2i was a “Graham”-type of investment. It was selling for almost half its intrinsic value based on my calculations.
Perhaps it was trying to gain more attention, the company subsequently changed its name to “Sevak“. And it also changed its business! While its main business is still telecommunications, it became involved in electric vehicles too.
This, coupled with other cost cutting initiative and divesting loss making business, did eventually turn the company around.
Net Income went up from 400,000 in 2016 to over 3million in 2018.
Cashflow went from -700,000 in 2016 to over 6million in 2018.
These were all good signs. Most importantly, their net book value or NAV remained steady at around $3.50. This is the most important to a “Graham” investor as the book value is the basis of the investment.
Twice the Charm
So in Jun 2016, I bought it at $1.50. I collected a $0.75 special dividend and sold at $1.75 few months later, making a profit of $0.98.
However, when the stock price dropped below $1.00, I invested again. There were some news about their status being on the SGX Watchlist but I frankly don’t see any real problem. At less than $1.00, I am now buying Sevak’s shares at 1/3 of its net book value! I felt that this investment was pretty safe at that level.
Another reason why I bought more was because the company itself was buying back shares like crazy. At one time, it was responsible for more than 70% of the daily trading volume. Overall, it bought back more than 1 million shares in 2017/18.
While the company did not pay any dividend since then, its business (while unexciting) continues. And as they go along, they eventually turned the business around and achieve the positive cashflow over $6mil in 2018. To me, that’s an amazing feat!
However, all parties must come to an end. In Feb 2019, the company announced that they were effectively going to take the business private. The offer price was $4.00 but I didn’t want to take the chance (I will explain later why), and sold my shares eventually at $3.75 in Oct 18.
So in this second investment, it ended being a 275% on my investment for a period of 2 years. Not bad for an unattractive business like Sevak!
Lessons Learnt
Sometimes It Is Better To Reinvest
Investors are often looking for the next “Amazon” or “Google” but if you know the business well, why not deploy your money to the existing investment you know?
After all, your goal is to make profits, and there are no extra points for being fancy.
I knew Sevak is severely undervalued and it was a proven, albeit boring, business. Why bother looking for the next shiny object when I have a proven company in front of me?
Don’t Overstay the Party
When the management of Sevak announced the takeover offer, I was tempted to wait for the takeover to happen and get paid at $4 per share.
However, there was a real uncertainty.
What if the takeover doesn’t happen?
So when the share price gradually increased closer to the offer price of $4 per share, I decided to sell at $3.75 instead of waiting further. It proved to be an invaluable decision on hindsight.
Till date, the business has not been taken private, and the share price has fallen back down to $2.90 as of writing.
As an investor, sometimes it pays not to be greedy. I fully understand the idea of letting your profit run, but in this case, there was an upper limit and the share price was getting close to it. I rather leave some money on the table than to lose it all if the takeover fails. As a “Graham”-type of investment, my goal was to sell the investment at its net book value when it is no longer undervalued. That number was $3.50. So I stuck with the plan
As the proverb goes: a bird in hand is worth two in the bush. I would argue that a bird in hand is BETTER than two in the bush. Because the birds in the bush are not yours
It was a great experience with Sevak in the last 3 years. It remained one of my most interesting investments till date and it taught me many lessons. Now it is time to move on to the next investment! I hope I will continue to be lucky in finding such investments.
Will I continue to invest in Sevak?
The answer is no. Not at these level. It is just not undervalued enough.
See you soon!
Investing Always,
Pete
