There are a number of criterias to take into consideration when I start looking for good undervalued stocks. My method is 80% FA and 20% TA. For myself personally all of these must be present, no exceptions.

1. P/E must be between 1 to 8.

This is because my bank account last 4 digits are 1188 which is very auspicious for the Chinese and also for me. 

P means your current share price which E means earnings. Let's say a share has a P/E of 8. So what does this means? This means that it will take the Company 8 years based on current earnings/year to breakeven to the current share price or get back what you've invested. So based on the normal rule the lower the P/E is the better.

A few things to note though:

a) High growth stock or technology stock tend to have higher P/E. MyEG around 17.17 if based on i3investor data. Glove stocks also have quite high P/E currently. Pesonally I won't focus my attention to those that have high P/E. Blue chips which consistently pay good dividends every quarter also tend to have high P/E which is rediculous for me. Bursa Malaysia is not Nasdaq and never will be. This is a fact. If you noticed, blue chips which pay high dividends historically have a high % of capital loss during the drop in March 2020 even if you compare to its current price. It tells you something about P/E.

b) You must have a knowledge of the industry specific P/E across the Company you wish to buy and compare to its peers if it's indeed undervalued. Different industry have their own P/E range. Sometimes when you check and realised a deal is too good, you need to go further and verify, because usually there is no free lunch in this world. Always ask questions you have doubt on and inestigate further for the answers.

I won't touch about EPS, but generally my take is that EPS must be high which is at least 12 sen for a stock valued at RM1 or below. Those below RM1 you can pro-rate accordingly. But still it will come back to the above P/E I mentioned, which is 1 to 8.

When my EPS is high it will always add on to my NTA and accumulate over time. That tells you that the retained earnings or reserve of the Company from year to year increase.

2. Company must be making profit every year in the past 3 years, which if you breakdown means every quarter. One quarter you make loss, I won't choose you, even if its due to Covid-19. I will say bye bye to our relationship.

Does not matter if you don't have 3 consecutive revenue and profit growth like Mr. Koon Yew Yin's golden rule selection is. As long as every year the + and (-) for your revenue and profit after tax is around 10 - 15%. fluctuation I'm okay. As long as it's making profit means my NTA increase and increase every year, which is value creation. Got dividends or not does not matter for me, I'm aiming for capital appreciation over time. For those who like dividends you must consider this factor. As a matter of accounting, Company with retained earnings only can pay dividends. Company with accumulated losses, I don't care how much you have in the bank say RM1billion, you can't pay dividends. If you are those investor like dividends, be sure to check the statement of changes in equity (SOCIE) under retained earnings make sure it is written retained earnings and not accumulated losses.

3. Cash and bank balances vs Borrowings

When you're doing business, sometimes you need to see what business/industry are you operating and for some growth, yes you do need borrowings, but depends how much the ratio is. I can't give you a ratio because it differs from industry to industry. For example if you're a developer, it is posssible not to have borrowings? I tend to favour Company that have large/considerable amount of cash in its assets. This is because cash is liquid and could be use immediately and in any time of difficulties this is like an insurance to get out of hard times and the Company will be able to have more opportunities.

Aside, when I'm saying cash and bank balances this also means positive operating cash flow from operations. If during a financial year (12 months result) I see there is a net decrease due to bad management, I'll also say bye bye to you. What's the use of making good profit but you can't collect amount owed from your customers? Another one is when you pay too much interest in terms of borrowings, which is reflected in the financing activities in cash flow statement.

4. High Net Tangible Assets (NTA)

High NTA means your Company is worth so so so so much more. Like I mentioned, earnings will make your NTA keep increase and increase and increase. All the points actually are related. However, it also depends on industry you're in. Property stocks have high NTA mainly due to the land they're holding for development. In addition, high amount of unsold units also will lead to the high NTA. 

That's why sometimes you see a Company with high NTA, profit also good, cash flow okay but how come share price so undervalued and don't know how to move? Example I can give you is KSL. Look into the Company to learn. A guide is if there are things you're unsure off, go and investigate and if after trying to find out the reason but you can't, it's better to leave a Company alone. This is because there is always an answer to that which you do not know.

5.  Good management and corporate governance

Directors and management remuneration is alligned to the performance of the Company be it in LTIP or ESOS or in the form of Bonus. There are a lot of Company in Bursa loves to do buyback shares after their Directors exercise the ESOS. So it's left to right hand, in the expense of the Company because it fork out money indirectly to buy the Directors share. I'm sure you can relate to this. You can also see the way the Company published their quarterlly report, some companies they will tell you in detail about everything but most will just give you a general explanation like a kindergarden student with no value adding materials in it to tell your shareholders how you're doing. However, this criteria I would rate it last out of the importance of others.

6. Buy low, sell high with lots of patience...

This is the most difficult and how much you profit make ultimately is done to this , because you need a lot of patience and patience and patience. It is because it goes against human nature, and you require a very well control of yourself and admitting your mistake when you go wrong. Manage your emotions well, and avoid overtrading. 80% of profits usually comes from the 20% transaction you have.

Technical analysis can help you with this. Go and learn about resistance, support, moving averages, MACD, RSI and some skill to draw some simple trend line. Basic skills is enough. This is because whatever indicators you're using the sharks nowadays can even setup the kind of chart you wish to see, and retailers are always blind. Technical analysis is not a sure win thing. Hence I always use 80% FA and 20% TA. This gives you an expectation of how you're going to war and kill all your opponents in the battlefield. (ie. What strategies are you going to use, how you going to attack, where is my enemies are? Are they on a higher ground? What advantage do I have? War and stock market is the same.)

7. Be precise and follow through your plan

Once you have decided go with it. Without action, you can't get to buy low and sell high. Not being decisive is a liability after considering the whole scenario properly.

I would want to thank Mr Koon Yew Yin for his contribution of recommending Comfort as I've make a considerable amount of money. I have learned from experience that the very first time he mentioned about a stock and buy it you will make money from it. When opportunity knocks on your door and you know you're make money go for it. For those who have bought at the end/later stage I have seen a very ugly ending for those people be it in HengYuan, JAKS or Dayang. My exception to my 7 pointers above it when Mr Koon mentioned a stock for the very first time. So those people who are still holding gloves stock I wish you the best and be cautious. Making money is really not easy.

Thanks for reading!

Gadang Premium Detailed Report covering all the details about the Company and some strategies based on 8 hours research of reading every page of latest Annual Report and quarterly report to date and available infomation. It is summarised in a detailed manner so readers could understand every detail about the Company and prospects. It is available from 3/8/2020 @ RM150. It will be posted via Pos Express/Pos Laju to your address. Please email babyace1188@gmail.com for further enquiries.

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