The Straits Times Index has
been green for 8 consecutive working days and finally came flat on last Friday,
2nd December. Most share prices are getting "expensive" again and
probably pricing in more effects of OPEC’s oil production cut and the much anticipated
Fed's rate hike. Personally, I feel it is more of a hold or sell period now
unless value is found.
With reference to Benjamin
Graham’s The Intelligent Investor, Mr. Market is always there to make business
with us. He visits us on different days, influencing and offering us a price to
buy or sell. That price may be too high or too low but Mr. Market does not
care. As long as you are willing to make the trade, he is willing to take your
offer. This was found in Chapter 8 of The Intelligent Investor, which Warren
Buffett had commented that it would probably be the most important chapter which
he read in his life. Mr. Market is a
distraction and usually encourages us to look short term and make rash
decisions. As the book mentioned, Mr. Market can be irrational in his prices
and “is there to serve you, not to guide you”. It is up to your behavior to resist
his persuasions.
Given that there are so
many stock options in the market, some may find it hard to filter out the noise
despite knowing what fundamentals to apply. One method which I came along when
I just started investing is the use of the SGX’s platform. Under “Company
Information” > “Stock Facts”, you are allowed to filter the stocks according
to the set criteria which you input as shown in below image. This may be useful
for new investors.
There are many different
criteria to play with, accordingly to your own
liking and risk appetite - Industry,
Market Data, Valuations and
Financials As an illustration and based on my preference, I have filtered
the criteria as per below. Please note that this does not mean any filtered results
provide a definite list of potential stocks. After all, not all data can be
proven accurate unless you do more research into each company.
 |
| Criteria Filtering |
My Filters:
1. Total
Market Cap: This relatively shows
the financial strength of the company as a whole. I have filtered to view any
firms with more than $50 million capitalization.
2. Price/Earnings
Ratio (P/E): This is just a
comparison of share prices to the companies’ earnings. Any P/E above 15 is a
warning sign so my preferred P/E is around 10.
3. Dividends
Yield: As an investor who
prefers growth over dividends, I have selected a yield of 5 or less. Higher
yield usually means more risks while lower yield can at times indicate
potential in growth. It is very subjective.
4. 3-Year
Revenue Growth: This indicator focuses
on the revenue growth of the company’s most recent 3 years records. Ideally,
6-7% of annual earnings growth is optimal. Too fast in growth can lead a
company to “burn out”. In other words, slow and steady wins the race.
5. Debt/Equity
Ratio: To my liking and safety
margin, I have inserted about 60% on this ratio. This also can mean with every $60
of debts, the companies will have $100 of equity (total assets-total liabilities)
to rely on.
Other useful criteria to
be considered:
1.
Price/Book Value (P/BV): Basically, this is the share price as compared
to its book value. Any value more than 1 generally means the stock’s current
price is overvalued while those with less than 1 are undervalued.
2.
Net Profit Margin: This is a percentage of profit after taxes as
compared to the revenue of the past fiscal year.
With that, you were be given a list of stocks which falls into all the criteria you have inserted and that will be where you can start to "shop" for value. However, this might only be the first and one of many steps of the stock picking analysis. We still have to look beyond its ratios and quantitative measures. It is the qualitative measures that are difficult to identify in terms of competitive advantage, future potential to grow, resistance to competition, resilience to market breakdown, product and business nature, write off risks, industrial prospects and many more. Addition to this, we will have to get back to the share price and ask ourselves if the current price is of value to buy or to sell. If you are able to value a company at $1 per share and it is only selling for 80 cents per share after your good analysis, then it is probably a potential buy. It is about striking the right move on the right place at the right time.
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