Will (the) SUN keep shining?

One of my current holdings at the moment is Surgical Innovations (SUN). I bought shares in SUN for under 2p just over a year ago. At today’s close the shares are priced at 7.3p. When I purchased the shares, they were valued around or below tangible net asset value; the company was profitable with an un-demanding p/e ratio. The outlook statement read very positively, clearly suggesting that this was a company that could grow quite rapidly. These are the type of companies that really interest me, a growth stock that you can buy below the value of the tangible assets on its balance sheet.

So why could you buy the shares at rock bottom prices. Three reasons (I think) at the time:-

1)       The company was under the radar of most professional and private investors.

2)       They had missed broker forecasts because of a delayed contract payment.

3)       The SP performance had disappointed in the past, and consequently investor sentiment was a little negative.

The second reason shows just how ludicrous stock market reaction can be at times. The company had emphasized that payment had been delayed, not cancelled. As a Private Investor these are the opportunities to pounce upon, where there is clearly a mismatch between a company’s true worth, and its market capitalisation.

Now don’t get me wrong, I had no idea that the share price would multi-bag from under 2p to over 7p in little over a year, but when you can buy a profitable, cash-generative company with clear growth prospects for less than its wind-up value, then the balance of probabilities are on your side. Whilst there is no guarantee the share price will multi-bag, it’s unlikely you are going to lose money (unless of course the management team are completely reckless and useless).

Surgical Innovations have already indicated that trading for 2010 was in line with current expectations (results are published on Tuesday 19^th April) which put the shares on a current p/e of around 18. Broker forecasts for 2011 are for an EPS of 0.6p, and hence a forward p/e of around 12. If SUN can continue the level of growth they are achieving then the shares still look cheap.

I shall continue to hold and will read the results and outlook statements with interest.