We sold out of Memtech International yesterday at $0.14 (25,000 shares), reaping a tidy profit on our cost price of $0.12 (in April 2010). We have also collected a $187.50 dividend on our holdings, adding substantially to total profits (over 20%). While the company still remains cheap, we are happy to take profits on a lower-quality company like Memtech (just as we did for Gallant Venture, albeit a little early).
We continue to endorse long-term investing, but will prefer to hold companies which have the wherewithal to survive economic downturns via strong business moats (as Warren Buffett would allude to), well-financed positions, or a combination of both. Such companies within the portfolio would include SPH, Keppel Corp, Noble Group and Capitaland. We would even consider a company like Fraser and Neave with its high leverage (given its property exposure) as well-financed, as we believe that the company's strategic assets and portfolio of brands would allow it to access financing even under distressed market conditions.
We identify that access to financing is far more critical than temporary balance sheet strength, as in the case of the US government's continued ability to refinance at ridiculously-low yields, despite already being heavily indebted. All things equal, we would prefer companies which have both strong balance sheets and easy access to financing, but we remain cognizant that strong balance sheets can sometimes be a temporary blip. We recall several apparently well-financed S-Chips on the local Singapore bourse whose balance sheets were suddenly burdened by trade receivables that could not be identified, or the inability to service debt obligations due to cash remmittance issues.
We are not saying that Memtech International falls into such a category; the company has a healthy track-record of keeping its balance sheet in order. Unfortunately, the company's business moat is nearly non-existent, and we buy such companies to sell once the stock price moves from "deep-undervaluation" to "slight-undervaluation".