Rock Solid Shares once again

You have lousy share, ordinary shares and Rock Solid Shares.

In Jan 2015, the Motley Fools did an article titled “Rock-Solid Shares to Start 2015 With” (read here). In that article, the following shares are termed as the Great Ones:

1. Raffles Medical Group Ltd (SGX: R01),
2. Silverlake Axis Ltd (SGX: 5CP),
3. Kingsmen Creatives Ltd (SGX: 5MZ),
4. Vicom Limited (SGX: V01)

According to the article, these shares fulfilled the following requirements then:

• (1) those with returns on equities of at least 15% on average (with no year dropping below 12%) since 2007, and
• (2) those having more cash than debt since 2007 (with only one year where cash is lower than debt allowed).

After reading the article, I did a blog post in 22 August 2015 about the status of these rock solid shares then.

Rock Solid Shares – where are they now? (read here)

In gist, only Raffles Medical has done reasonably well till then.

In Jan 2016, Motley Fools again did an article on Rock Solid Stocks to start 2016 with (read here). This time there are only 2 stocks. The trio Silverlake Axis, Kingsmen Creative and Vicom Ltd are notably absent. The 2 stocks mentioned in the Jan 2016 article are:

1. Straco Corporation Ltd (SGX: S85) and
2. Raffles Medical Group Ltd (SGX: R01)

According to the article, these shares fulfilled the following requirements then:

1. A strong balance sheet with more cash than debt currently.
2. An average return on equity of at least 12% since 2007 while having more cash than debt.
3. A track record of consistent earnings growth since 2007.

Now the question is, if you had followed the article in Jan 2015, what would your reaction be?

For curiosity sake, what happened to the stock prices of the 4 rock solid shares mentioned in Jan 2015?

The Stock price of Raffles Medical on 2 Jan 2015 is 3.92. On 12 Jan 2016, its stock price is 4.02. That is only an increase of only 2.55%.

The Stock price of Silverlake Axis on 2 Jan 2015 is 1.0625. On 12 Jan 2016, its stock price is 0.59. This represent a drop of approx. 44.4%!

The Stock price of Kingsmen Creative on 2 Jan 2015 is 0.95. On 12 Jan 2016, its stock price is 0.635. This represent a drop of approx. 33.2%!

The Stock price of Vicom on 2 Jan 2015 is 6.26. On 12 Jan 2016, its stock price is 6. This represent a drop of approx. 4.2%.

“People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.” – Warren Buffett in Fortune, December 2001

Now let’s go back to the criteria set by Motley Fools in Jan 2015 and the chart shown in Jan 2015 (see below).

The 2014 ROE and TTM ROE for these companies can be found in Morning Star. Then with these values (including the average ROE in the chart above), I calculate the average ROE from 2007 till 2015.

I searched Yahoo Finance for their cash and debt values.

Below is what I have got.

Base on the initial criteria set by Motley Fools in Jan 2015:

• (1) those with returns on equities of at least 15% on average (with no year dropping below 12%) since 2007, and
• (2) those having more cash than debt since 2007 (with only one year where cash is lower than debt allowed).

These stocks again in Jan 2016 comply. In Jan 2016, Motley Fools added a 3rd criteria (A track record of consistent earnings growth since 2007).

If we study the profits of the 4 companies (data from Morning Star), Raffles Medical and Kingsmen Creatives did not fulfill the criteria of consistent earnings growth (or strictly ever increasing income).

 

The below chart is shown in the Motley Fools Jan 2016 article.

Given the fact that both companies Straco & Raffles Medical above did not show consistent increasing income, shouldn’t Silverlake Axis, Kingsmen Creatives and Vicom be considered as rock solid shares of 2016 as well? Since for these 3 stocks, all other requirements such as ROE and Cash / Debt levels are also met.

 

The unspoken issues with these companies are as follow:

In the case of Silverlake Axis, it is the short seller report by razor99 and Silverlake Axis’ on going rebuttal (Deloitte’s in-depth 55-page report strongly rebutted most of the claims).

Deloitte report refutes short-seller’s allegations against Silverlake Axis (read here).

In the case of Kingsmen Creative it is their recent poor earnings report and gloomy outlook.

Why Has Kingsmen Creatives Ltd’s Stock Dropped By 17% In a Year? (read here)

In the case of Vicom, it is their anemic earnings caused by the shrinking pool of cars that are over three years old in the next few years, and slow down in the construction and oil & gas sector.

Vicom Limited’s Latest Earnings: Revenue Shifts into Reverse (read here)

 

One must really study the narratives of all these companies beyond looking at the figures to determine if these are truly rock solid shares going forward.