I was honoured to have been chosen as a judge for CanTech Letter's Canadian Tech Stock of The Year. The company I voted for ended up taking home the top honours. Interestingly enough, it was a value stock when the year began, and saw tremendous price appreciation throughout 2010. Therefore, I did a write-up of the company (reproduced below) identifying its value traits to help us recognize similar situations in existence today:
Glentel (GLN) has seen its stock rise by approximately 100% in the last 12 months. Usually, stocks that see such sharp price increases have a speculative element to them that precludes long-term investors from participating. But this is not the case for Glentel, a company that traded at a low P/E twelve months ago, and yet generated strong returns on equity; instead, Glentel's stock performance illustrates how value investors can profit from such companies in two ways: earnings growth, and multiple expansion. When these two forces combine, as they did with Glentel over the past year, returns for investors can be phenomenal.
Glentel generates most of its revenue from selling mobile phones and related items through retail stores in shopping malls and other locations. Twelve months ago, the company traded for $150 million despite $30 million of cash, negligible debt, and trailing 12-month earnings of $12 million. Therefore, adjusted for its cash balance, the company traded at a P/E of 10.
Companies trading at P/E's of 10 or below tend to be in decline or in a lot of debt, but Glentel was neither of these. The company was generating returns on equity of around 20%, so its business model was working. As such, the company expanded and thus grew its profits throughout 2010.
As profits grew, so did the company's P/E multiple, providing the double-whammy effect on the stock referred to in the opening paragraph. Glentel now trades at a P/E of 16, which is much more reasonable considering the company's ability to generate earnings and cash flow.
Undoubtedly, Glentel's business has been helped by strong consumer demand for smartphones. But it should be noted that the company nevertheless faces competition in this space from both very strong retailers and upstarts who face low barriers to entry. The fact that the company is able to generate strong returns despite such competition is a tribute to management's capabilities.
Looking forward, Glentel may have room to grow profits, both organically and through acquisition (the company recently purchased a US chain of mobile phone retailers). But gains to the stock are unlikely to be nearly as strong. The company's P/E is no longer low, and the company is now more risky as it has taken on debt to expand (in contrast to the net cash position it enjoyed a year ago). As a result, investors would be well-advised to seek out companies that currently exhibit the low P/E and high ROE properties that Glentel experienced one year ago.