How To Analyze A Stock -- How to determine if a stock is a good growth or value stock.

Evaluating Quality first, then Price. Fair price is one associated with adequate return at acceptable risk.

1.   The most important task in buying a stock is to determine that the company is a good company in which to own stock for the long term.  (QUALITY)

2.  However, no matter how good the company, if the price of its stock is too high, it is not going to be a good investment.

3.  A stock price must pass two tests to be considered reasonable:
(i)  The hypothetical total return from the investment must be adequate - enough to contribute to a portfolio average of around 15% - sufficient to double its value every 5 years.  (REWARD).
(ii)  The potential gain should be at least 3x the potential loss.  (RISK)

4.  To complete these tasks, you have to have learned how to do the following:
(i)  Estimate future sales and earnings growth.
(ii)  Estimate future earnings.
(iii)  Analyze past PEs (Check the current PE with the average past PEs)
(iv)  Estimate future PEs.
(v)  Forecast the potential high and low prices.
(vi)  Calculate the potential return.
(vii)  Calculate the potential risk.
(viii)  Calculate a fair price.

5.  If you take each of these steps in 4(i) to 4(viii), cautiously and shun excesses, your actual results is likely to be as good or better than the forecast at least four out of the five times.

6.  And you will have a track record to rival any professional.

That's all folks!

Characteristics you will like in a company

What I like to see in a business:

1.  Consistent earnings growth
2.  Good return on equity
3.  Manageable or no debt
4.  Quality management that's committed to the company.
5.  A simple business model.

Always judge the success of your company by the proper metrics - sustained growth and good returns on equity - rather than by a company's stock price.

Stock price, is not always a reflection of a company's quality or value.

Berkshire Hathaway's Acquisition Criteria: Telling it like it is.

Berkshire Hathaway's Acquisition Criteria: Telling it like it is

Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.

ACQUISITION CRITERIA

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units).
2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations).
3. Businesses earning good returns on equity while employing little or no debt.
4. Management in place (we can't supply it).
5. Simple businesses (if there's lots of technology, we won't understand it).
6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminary, about a transaction when price is unknown).

The larger the company, the greater will be our interest. We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we may make in the general stock market.

We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don't participate in auctions.

Warren Buffett and PetroChina - Great lessons for investors on how he selects, buys and sells a stock

How to select the better company to invest in? Comparing Companies.

If the companies you wish to compare are in different industries, you should use the industry as another subjective criterion.  You can compare investments in different industries if you're interested in the best investment opportunity.  Some criteria; e.g., profit margins, differ from industry to industry so you will want to overlook those items.  You may find one industry to be more appealing to you than another and should allow that criterion to help with your decision.

The criteria you should use for comparison are not limited to the "value" and "quality" criteria.  The most important criteria are those that address "quality."  Beyond that, the price-sensitive "value" criteria will address the potential rewards and risk.  However, such items as the industry or company size may have a bearing on your decision as well, although they are less critical than some of the others.

For comparison, you should select no more than 5 companies.  More than five companies becomes a "screening" exercise and becomes unwieldy.  While companies may be in a variety of industries, some comparison criteria such as profit margins may be valid only when comparing companies in the same industry.

You should circle a value if it's better than most of the others.  Circle the values that are better than most for each criterion.  It may be more than one - or all - if they are close enough not to be obviously ruled out.  All you can hope to accomplish by circling the criteria is to sharpen your judgement and separate the chaff from the wheat.

Pick a winner on the basis of your overall subjective assessment.  Base your decision on your overall subjective assessment, using the number of circles as a guide and the more subjective items such as the industry the company is in, the size of the company, etc. as tie breakers.  The number of circles is important only as a starting place and guide; and should be tempered with your assessment and "gut feeling" about the company when the numbers are close.  

Wondering when you should exit the market? Use Lynch's rule of thumb.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Should we all exit the market to avoid the correction?  Some people did that when the Dow hit 3000, 4000, 5000, and 6000. 

• A confirmed stock picker sticks with stocks until he or she can't find a single issue worth buying. 
• The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent. I didn't buy bonds for defensive purposes. 
• I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically. 

I have since followed this rule: 
When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds. 


As I write this, the yield on the S&P is about 2 percent and long-term government bonds pay 6.8 percent, so we're only 1.2 percent away from the danger zone. Stay tuned.

So, what advice would I give to someone with $1 million to invest? The same I'd give to any investor: Find your edge and put it to work by adhering to the following rules:

With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play?Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
Stocks do well for a reason, and poorly for a reason.

1. *Pay attention to facts, not forecasts.
2. *Ask yourself: What will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.
3. *Before you invest, check the balance sheet to see if the company is financially sound.
4. *Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.
5. *When several insiders are buying the company's stock at the same time, it's a positive.
6. *Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
7. *Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
8. *Enter early -- but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you're taking an unnecessary risk. There's plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
9. *Don't buy "cheap" stocks just because they're cheap. Buy them because the fundamentals are improving.
10. *Buy small companies after they've had a chance to prove they can make a profit.
11. *Long shots usually backfire or become "no shots."
12. *If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
13. *Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate 50 and you're likely to find 5.

http://myinvestingnotes.blogspot.com/2012/01/whats-best-way-to-invest-1million-peter.html

The real world of investing

There are 10,000 publicly traded companies in the US markets.  There are 1,000 publicly traded companies in the KLSE.  With so many companies out there to pick from, only a small minority will be suitable as LONG-TERM INVESTMENTS.

This means the great majority of companies you investigate will be unsuitable.  You should take some pains to screen for companies that meet your requirements.

If you don't realize this up front, and accept discouragement as a normal part of the process, you may tire of discarding company after company and give up.  Worse yet, you may relax your requirements and accept companies that don't come up to snuff. Either way, you'll lose.  

Remember:  You need to own only about 10 to 20 good stocks - that's all!  And there are plenty of companies to choose from to populate your portfolio.  So be patient and disciplined.  

Assemble a list of companies based on your quality criteria.  You will usually find that even if performance on your quality criteria has persisted - and this is usually the case for most - you'll find the price for many of these stocks unattractive.  When you first assemble this list, make no effort to assess the price, just the quality.

Some of these companies have been around a long time and are familiar to you: others are not so well known.  All have been publicly traded for at least 5 years on the major exchanges and all have revenues of more than $100 million.

The moral of the story here is that you should keep the faith.  There are plenty of fish in the sea for you, even though the sea is enormous and there are many more losers than winners.

How to Pick Good Stock for Financial Freedom During Retirement

Pick Good Stock
And You'll Be as Successful as Warren Buffet


Investing in stock for retirement is not a new idea, but many are still sceptical of becoming rich from stock market income. If you are one of them, you might hear bad things about making money in stock market, bad enough that keeps you away from putting any money in any stock. Instead, you should learn how to invest in stock if you determine to become financially free.

The truth is, many succeed and why you can’t?

Once you’d master all the techniques, you are on your way to make fortune way beyond your wildering dreams. And these financial ratios are enough to get you started.

Minimum 15% Earnings per Share Growth Rate (EPSGR)

EPSGR is an incremental value of Earnings Per Share (EPS) annually. Stock with the highest EPSGR means it grows the fastest in that year than the rest. Consistently performing 15 per cent EPSGR is an indication of outperform, and 20 per cent EPSGR is superb. High EPSGR for the past five to ten years shows that the company has excellent products with great demand. Growing demand will eventually give the company some leverage opportunity through economies of scale.

You can ride on their very strong growth by owning these stocks.

Minimum 15% Return on Equity (ROE)

Return on Equity (ROE) is a comparison of the stock’s net profits to its shareholders’ equity.

ROE indicates how much you can gain if you had decided to invest in the stock at that period. Companies with 15 per cent ROE or better is able to utilise their shareholders’ money for maximum profits. On the other hand, ROE of less than 10 per cent is a sign of lack in management and business skills. In fact, you shouldn’t buy stocks that have ROE 5 per cent or less. Virtually, you can get the same return with zero risk with cash deposit.

After all, what’s the point of taking greater risk and yet get the same return?

Maximum 60% Debt to Equity Ratio (D/E)

D/E shows how much debt the company is taking to finance its business operation. You can calculate it by dividing the company’s total debt by the total number of available equity. You will know that the company is gearing too much if its D/E is greater than 1. This will give you an overview on how sensitive the stock is from the ever rising interest rates. Nevertheless, there are capital intensive industries which require huge financing sum from others due to their business nature.

Try to avoid these stocks to preserve your capital for the golden age.You must take into consideration these financial ratios in total to define how valuable your investment decision is. Picking one with dying business doesn’t make any sense to me, and the same should apply to you too! But don't forget to use some qualitative methods as well to pick good stock. After all, picking a good stock requires homework and effort. Trust me, it is well worth it.

http://www.stock-investment-made-easy.com/pick-good-stock.html

Unlimited Profits From Good Stock Pick. Be Choosy and Consistent in Your Stock Selelction Criteria

Having A Good Stock Pick
Is Your First Step to Make Money in Stock Market

Summarized Overview

In this article you will find information about how to select a good stock quantitatively, why the strategy is so important and the critical key financial ratio.

You will also find information on what is important in corporate annual reports.

Reasons to Have Good Stock Pick Strategy

Though there are thousands of stocks in stock market nowadays, not many of them are worth investing. In ever changing business environment, it is not easy for companies to remain profitable.

Worse, hardly any of them have shareholders' interest at heart. That is why, stocks represented by quality companies with effective management team is the key to get a higher investment return.

My Five Stock Screening Criteria

A good stock pick should've consider effective management as it is everything in sustainable stock investment. Thanks to financial ratios, picking good stock is just a simple math away.

Above average EPSGR and excellent ROE is my first stock screening criteria to filter rubbish stocks in the stock market. You can choose any figure which you feel comfortable. But, the figure 10 I chose is because:

• 10 per cent EPSGR shows that the company has reliable high demand products or services.
• 10 per cent ROE shows that the company are managing shareholders’ fund effectively.
• 10 consecutive years means the company able to survive the ups and down of the market, business cycles or the ever-increasing competition.

Past performance doesn't guarantee anything in the future for sure, but it is the best information for good stock pick. Should there be no changes in it's business foundation and it's management, profit will continue to be sustainable. For any circumstances, effective management will find ways to stay ahead of competition.

On top of that, i did consider:

• less than 0.6 debt to equity ratio (D/E) so that the company has manageable debt during economic crisis.
• high profit margin which shows the management really did a great job in reducing operating cost to maximise profits.

Be Consistent in Your Stock Selection Criteria

You have to be choosy and determined in selecting which stocks you'll be investing in.


If you love speculative stocks, this method is not for you. Rumors and hot tips are just not my taste.

But if you are serious ininvesting for long-term, or value investing as what Warren Buffet did, this good stock pick can easily get rid of junk and worthless stocks straight from the beginning.

Test yourself, and see the result!

http://www.stock-investment-made-easy.com/good-stock-pick.html

It sure beats FD rates and it is safe too.

It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html

Revisiting this old spreadsheet reveals many lessons on "stocks selection" and "buy and hold" strategies.

There are 9 stocks in this portfolio. 

Buying prices:  
Nestle:  10.20, 15.5, 22.80
PPB:  3.85, 6.80
Guinness:  4.38, 5.35
DLady:  1.70, 11.30
Tenaga:  3.32
GENM:  1.19
PBB: 4.48, 5.98, 6.80, 6.70
PetDag:  3.98, 5.75
UMW:  2.975

The returns of the stocks were calculated based on the their prices on 5.3.2009 when the market was at its lowest in the recent Global Financial Crisis.  Even at these "low" prices, it is "safe" to hold onto these stocks in the portfolio.

Always buy QUALITY.

Click:
*****Long term investing based on Buy and Hold works for Selected Stocks

Good stock selection and timing works well in any stock market

The stock markets are very unpredictable.  It can collapse in the midst of prosperity just as it can zoom upwards in the midst of recession.  Some stock markets are often subjected to manipulations.  The small investors can lose a very large percentage of their capital if they invest blindly.  On the other hand, if the small investors can pick the correct stocks at the correct time, they can make a great deal of money.

Good stock selection and timing works well in any stock market, whether it is American, British or Malaysian.  However, good stock selection usually requires careful and meticulous work.  Some of the masters of the art take more time while others take less but they all have to work at it consistently.  The amount of work they need to put in would depend on how gifted they are.  Even the great Warren Buffett works onit on a full-time basis.

Many are very interested in buying shares as an investment.  However, many do not have the time or inclination to spend a few hours on it every day.  Even if they have the time and inclination, some may not have the necessary training to read company or economic reports and understand what has been written. 

It would be much easier for them if they can just pick up newspapers or magazines and follow their advice and recommendations.  Almost all newspapers have a columnist or two writing on business or stock market affairs.  In addition, there are business magazines which also carry regular features on the stock market and individual companies. 

However, experts are also not immune to making serious errors of judgement.  In the final analysis, investors will have to draw their conclusions regarding the usefulness of relying upon professional advice.

How to Select Best Stocks?

Monday, March 30, 2009
How to Select Best Stocks?

I have already posted two posts; one with best stocks for long term investment and another with best small cap stocks. Although I have mentioned the criteria that I considered while selecting the stocks, I would like to describe in detail about those factors in this article.

As we all know, there are more than 5000 companies listed in the Bombay Stock Exchange (BSE) and in my view there are at least 500 decent companies to choose from. So, as an individual investor we need to develop or follow some sort of criteria to select the best possible stocks that suit everyone’s risk profile. I did follow few things to select the stocks that I have listed in my previous posts and would like to share with you.



Criteria to Select Stocks

1) Earnings Per Share (EPS) and PE Ratio

EPS and PE are probably the most used criteria around the world in selecting stocks and it’s not without any reason. EPS and PE values are arrived from important information and that’s why people tend to use it as a single significant factor. But I would actually start with EPS and PE Values and then go on to drill down more about other factors. There is no particular PE Value you can stick with. Lower the PE of a stock (when all other things remain good), better the value. But instead of looking at current year PE, I would suggest to take the average of 10 year PE (At least 5 Yrs) and make sure the stock price is not more than 25 times of that average PE Value. Also look at the forward PE ratios to get the sense of what lies ahead.

2) Book Value

Book Value per share is the total asset value of the firm divided by the total number of shares. Looking at this value might give some confidence about the firm’s worthiness. Also book value per share would be the amount shareholders might get if a company sells all the assets and distribute the proceeds for some reason. If you are able to get good stocks with a stock price less than the book value, it would be good. But make sure you do not pay more than 1.5 times of the book value unless you have some credible evidence about any particular company’s growth.


3) Debt / Equity Ratio

If you divide the total debt by the total equity value, you get this debt/ equity ratio and it gives you the sense of company’s indebtedness. If a company has less than 1 DE ratio, then you can say that the company is in a good financial condition. So, I prefer to invest in companies with less than 1 DE ratio.

4) Current Ratio

If you divide the current assets by the current liabilities, you get the current ratio and bigger this value, better the company among peers.Because current ratio indicates the company’s ability to meet short term financial dealings and we need to make sure that a firm is in a decent position in terms of short term financial needs.

5) Profit Margin

If you divide the net profit by revenue, what you get is the net profit margin and you can calculate net operating margin and other similar values in the same way. Better the margin, better the business and we need to make sure that any particular company earns a decent margin. Select the company with better margins among the peers.

6) Return on Capital Employed (RoCE) and Return on Equity

Return on Capital Employed and Return on Equity indicates the company’s profit making ability in return to the capital employed or the equity position. Again, better the value; better the company and its business. So, peer level comparison might be helpful to select better stocks.

7) Dividend History

If a company has paid dividends continuously over a long period of time, then you can be sure of its intention to share profit with you and also the better handling of the surplus cash available. Hence, looking at the dividend history is important and might help you to make a better decision.

8) Profit Growth

Consistent and decent profit growth over a long period of time is an important factor that we need to look into if we are going to stick with that stock for lengthy periods. There is no single number to think about but we can select the stock with consistent profit growth among peers.

9) Cash Flow Details

As I wrote in one of my previous articles, cash flow is as important as a balance sheet and looking into it gives you an idea about company’s financial health including cash inflow and cash outflow. Consistent growth in cash inflow and better use of it is essential to any company’s success. Hence, carefully look at the cash flow statements (including footnotes) if you are going to invest large amount of money.

10) Business Segment and Future Potential

In stock investments, it is very important to look at the business segment in which the company operates and also the future potential of that particular business as a whole. As you might have seen, a company might be good and if the business is not doing well, it makes little sense to invest in it. You also need to consider if the business is cyclical or non-cyclical or consumer oriented or government owned etc…to get real understanding about the risk of any particular stock. If you are interested in small cap stocks, this is most important factor that one needs to consider in my point of view.

11) Size of the Company

Size of the company is positively associated with the risk potential most of the times. Conservative investors prefer to invest in large cap stocks and risk taking investors who wants to make more money invest in mid cap stocks and also the so called “Multibagger” small cap stocks. So, it really depends on the individuals risk appetite as mid caps and small caps are the ones go down much during the bear phase and go up much during the bull market. Large cap stocks usually have economies of scale benefits and they always stand to gain the volume advantage. Hence lesser volatility.

12) Competitive Advantage

Competitive advantage in the market place is essential for consistent financial performance. If a company operates in a segment where barriers to entry are huge, then you can be sure of your capital at least and your margin of safety is more. Warren Buffet calls this as “Economic Moat” and no wonder he has been so successful.

13) Brand Value or Product Differentiation

Good brand value brings customers on a more consistent basis and that’s the reason FMCG companies command higher valuation all the time. If a company produces a product which is different from others and is difficult to replicate, then that particular company will always command better valuation as investors are confident about its survival over a long period of time.

14) Goodwill

This is an intangible asset companies create over a period of time and it is gained with help from media, political support and solid client base. It usually has some effect on investors.

15) Market Scenario

Finally market scenario comes into play and no matter how big the company is and which business segment it operates, the stock price move according to the market scenario and I am sure most of the people would have good idea about it as we are witnessing once in a life time situation these days.


These are the factors I considered or consider while selecting stocks and it is not necessary to analyze a stock through all of these parameters. You can leave out some criteria for a particular company or you can give more importance to a particular factor and things like that. You can be flexible based on your risk profile. For example, I give more importance to business segment and future potential along with market scenario while selecting small caps and individuals can follow similar patterns according to their skills and risk appetite.


Kumaran Seenivasan.
Stockanalysisonline.com


http://www.stockanalysisonline.com/2009_03_01_archive.html