Growth Story In the Making - D&O (7204)

Hi Readers,

Growth stocks are associated with companies whose earnings are expected to continue growing and generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. As it is a growth stocks, investors generally see such stocks having great worth and willing to pay more. That's how the high P/B and PE ratios come about. For me, there are two types of growth stocks:

1. Unsustainable growth stocks - one that has rapid increase in profit growth outpacing sales growth, profit growth via one-time gains, or cost savings, one that is becoming the talk of the town (high euphoria). Such stocks will eventually lose its euphoria over a longer period of time due to unsustainable growth
2. Sustainable growth stocks - one that has constant increase in sales growth outpacing profit growth, one that continues to re-invest its earnings. Such stocks will eventually perform better than the unsustainable growth stocks. 

On the other hand, a value investor may see growth stocks as expensive and overvalued. Value stocks are traded at a lower price comparing to its fundamentals due to short term issues (weak sentiments or short term setbacks) and are considered cheap compared to their competitors.

It is never easy when it comes to deciding whether to go for growth stocks or value stocks when it comes to investing for a longer period of time. Its just two different types of investing style. Personally there is no harm to have both types in your portfolios for longer term. Now, trends of technology is driven by market demand. Hence, that's the idea behind looking for a tech stocks that will grow over time which led me to D&O (7204). D&O Green Technology Berhad primary business currently is in the automotive lighting business. Back in 2015, the company decided to exit the semiconductor and TV lighting business and focus on the niche/specialized automotive lighting business. It currently has sales and marketing presence in 6 countries - EU, US, China, India, South Korea and Malaysia. D&O is based in Melaka, Malaysia. 

Future trends:

What makes automotive lighting business interesting is that the new trends of autonomous driving is creating a new market segment. Light sources and lighting technology adapted to autonomous vehicles driven by data obtained from sensors has to go through changes for the future traffic environment. There is definitely opportunity for D&O in this area in the future. 

Coming back to D&O, I decided to dig a little deeper into its financial performance and below are the summary of the data extracted and plotted into graphical representation as shown in Image 1. Looking at its revenue (sales) growth %, profitability % (net margin, ROE, ROA) and capital spending, one should be able to notice that the performance is becoming more predictable post 2015 business streamlining. The decision is starting to pay off gradually based on the data extracted. There is definitely an opportunity for the company to fit into my criteria of sustainable growth stocks. The sales is growing at a high single digit and when it starts growing in double digits, that's when it will start to catch attentions. 

Image 1: D&O Sales Growth, Profitability and Capital Spending

The next upcoming annual report for 2018 is estimated to be released by end of Apr'19 and will definitely be the one that will further confirm that D&O continues to grow or starting to see a stagnant growth. Do keep an eye on the report especially its sales growth.

Technically, an interesting chart pattern is repeating towards its annual report. The first one happened between Dec'17 to Apr'18 whereby consolidations happened during this period of time before it got out from consolidations after its annual report showing improved sales and profitability. The same pattern is happening again whereby current consolidations started since Oct'18 to currently as shown in Image 2. 

Image 2: D&O Charting

At the point of writing and combining both its fundamentals and technical, it is definitely an interesting counter that should be watched closely both short term and longer term. I am looking forward to review its upcoming report as to whether any doubts that D&O should not fit to my definition of sustainable growth stocks.

Possible trade setups in coming days:

Aggressive trader:

Entry: $0.685 +/- 3%

Stop Loss: $0.635 or below

Target Profit: According to your rate of returns or the levels above

Remarks: Watch for bottom at $0.67 followed by $0.635, follow the commentary for this article as i will be updating its performance after the annual report

Conservative trader:

Entry: Breakout above $0.72 or reversal upon hitting support at $0.635

Stop Loss: $0.635 or below

Target Profit: According to your rate of returns or the levels above

Remarks: Watch for bottom at $0.67 followed by $0.635, follow the commentary for this article as i will be updating its performance after the annual report

Good luck and all the best!!!

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the fundamental data and price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence before initiating a position as this article is not a recommendation to buy/sell.