Fundamental Investing
Updating my selection criteria
My original selection criteria: http://klse.i3investor.com/blogs/shinado/85991.jsp
I have done a bit of fine-tuning my selection criterias to aid me in selecting good fundamental stocks. Below is the list:
Must-have criterias:
- Company must be public-listed for at least 5 years (did not realize I left it out in the first time!)
- Increasing revenue, net profit & owner's earnings for the past 5 years.
- Consecutive 2 year drop in revenue & net profit is a big no-no for me.
- Some form of dividends paid each year for the past 5 years.
- Increasing ROIC & CROIC in the past few years AND/OR high percentage (>10%).
- FCF vs Revenue > 5%.
- ROAE > 15%.
- Good gross, operating, & net profit margins compared to peers.
- Company must have healthy cash balance, but not too much cash sitting idle.
- No debt or manageable debt company.
- NO CHINA COMPANY.
- Don't invest in sectors that I am not familiar with (e.g. Banking/plantation/airline/financial).
- Avoid companies whose stocks constantly in the 'Top Active Stock' list (unless you want to try your luck trading against the big fishes).
Optional criterias (good if can meet most of it):
- Share buybacks when company is undervalued, NOT when it's overvalued.
- Directors are not constantly buying and selling their shares.
- High DY
- No sudden resignation in board members, management team or audit team. Avoid rumour mill companies.
Valuation methods:
- EV/EBIT first
- Modernised Graham Growth Valuation Formula second (only for growth stocks or whenever suitable)
- P/FCF (only if suitable or necessary)
A 5 year public listed company will allow me 5 year historical figures to figure out if the company is stable and capable of more profit and cash each year. Boring stocks are really after all boring, but hey, I take care of the downside and leave it to the upside to do the job. Also, I do not have a crystal ball and cannot predict the future. But honestly tell me, do you feel more comfortable letting a young, fresh grad doctor diagnose your health problems? Or a doctor already in the medical field for 10-20 years? You decide.
I have also switched to EV/EBIT first valuation because Graham's Formula is more suitable chasing after high growth stocks.
I hope you enjoy my selection list. Do note that this list is suitable for me and not neccesarily for others. In whatever you do, make sure you research beforehand and feel comfortable with it. Feel free to drop a comment, critize or suggest how I can further improve it. Thank you.
shinado
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Discussions
2 people like this. Showing 24 of 24 comments
Boss, point no.10 considered cover this part.
Posted by RosmahMansur > Mar 8, 2016 06:13 PM | Report Abuse
debt over equity ratio must be less than 50%
2016-03-08 18:21
What abt Net tangible assets? for me, i prefer a stock trading at a lower price than its NTA.
2016-03-08 18:25
Shinado..thanks for your sharing.
Im curious to know more about point no. 6 & 7 especially 7..
what is that...and why does it matter?
6. FCF vs Revenue > 5%.
7. ROAE > 15%.
2016-03-08 18:26
I prefer on earnings and cash flow. If you go for NTA, make sure to employ Margin of Safety.
2016-03-08 18:44
Probability, FCF means free cash flow. The amount of 'free cash' generated from operations cash flow after minus out capital expenditure. High FCF vs revenue means high free cash generated from sales which is good(usually above 5%).
ROAE is a slight variantion of ROE which is Return of Equity but i calculate based on average equity to offset any spike in equity portion. Usually high ROE is good. But I would say ROIC will be a better indicator for calculating return of capital employed.
2016-03-08 18:52
If follow no 3 Pantech is out.
Must-have criterias:
1. Company must be public-listed for at least 5 years (did not realize I left it out in the first time!)
2. Increasing revenue, net profit & owner's earnings for the past 5 years.
3. Consecutive 2 year drop in revenue & net profit is a big no-no for me.
4. Some form of dividends paid each year for the past 5 years.
5. Increasing ROIC & CROIC in the past few years AND/OR high percentage (>10%).
6. FCF vs Revenue > 5%.
7. ROAE > 15%.
8. Good gross, operating, & net profit margins compared to peers.
9. Company must have healthy cash balance, but not too much cash sitting idle.
10. No debt or manageable debt company.
11. NO CHINA COMPANY.
12. Don't invest in sectors that I am not familiar with (e.g. Banking/plantation/airline/financial).
13. Avoid companies whose stocks constantly in the 'Top Active Stock' list (unless you want to try your luck trading against the big fishes).
2016-03-08 19:17
I got a better suggestion.....just focus on the opposite....in other words, look for turnarounds, only buy when it is low volume and consolidating at low volumes at a historical low price and awaiting turn around like AA and AAX.
or Bornoil
the charts, the patience and the concept then becomes the key.
2016-03-08 19:22
there are lots of companies traded at historical lows now.
Coastal eg.
focus on stuffs other people don't want. but you want.
2016-03-08 19:27
So many criteria ...pening. It's a conservative approach. You can hardly find a company with high growth and low gearing couple with low PER.
2016-03-08 19:31
Yes my list is more conservative than what others might have. My next post will identify a stock that fits these criterias.
2016-03-08 21:59
Pintaras, PresBhd out if follow Shinado criterias.
Must-have criterias:
1. Company must be public-listed for at least 5 years (did not realize I left it out in the first time!)
2. Increasing revenue, net profit & owner's earnings for the past 5 years.
3. Consecutive 2 year drop in revenue & net profit is a big no-no for me.
2016-03-09 04:31
maybe another criteria about management especially the boss - CEO must NOT always be in the news - for the wrong reason - like General Lee of KNM n Tey fella of Nexgram or the one tat makan gaji buta like Ayatollah Shah of Scomi or the sleeping beauty Anto ex boss of Mudatidor :)
2016-03-09 04:42
Too many conditions
In real life, you can't pick stocks like that
There is nothing left to be picked as many will be excluded
Sorry shinado, my honest opinion
2016-03-09 07:28
Item 2 alone will guarantee you the stock is trading at high PE multiple
You will end up buying blue chips
2016-03-09 07:32
U will totally miss out last year export run
None have growing profit in past five years
And u can't buy hevea, it has high gearing (right before boom). It's warrants went up 500%. Your stock sift will have eliminated it in round one
2016-03-09 07:35
Thank you all for the honest feedback. Hopefully, today I can write a post about identifying a stock with these criterias.
2016-03-09 10:59
shinado,
It is better to be safe than sorry.
Your criteria are stringent no doubt. But if you can find a few to invest in, you can sleep soundly.
I believe you can find many during market down turn, especially when there are a lot of margin calls. Margin calls appear to be very common nowadays. It is certainly good for those looking for bargain like you do.
2016-03-09 11:05
KC, no doubt I can sleep soundly each night whether market rally or crash. My selection criteria enable me to throw out the weak ones and list down the remaining strong ones.
However, valuation wise might be tough. Not all can be bought at this moment. I'm sure most can be bought during market downturn just like you said.
Am I too stringent? Perhaps time will tell.
2016-03-09 11:44
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RosmahMansur
debt over equity ratio must be less than 50%
2016-03-08 18:13