Stock selection process

[arthur]

hi all, i am super new to this forum. and new to investing too.

i have no idea if my content is enuff to be posted here online, but i'll give me a try.

for picking companies listed on sgx, i start from alphabet Z to A. 1 by 1.

1) P/E lower than 15.00
2) ROE higher than 10.00
3) Long and Consistent positive Cash flow from operating activities.

4) read their annual report. ( most imprtant step )

5) using a method from the book "profit from panic" by adam khoo, to calculate the intrinsic value of the share.
taking the history of Cash flow from operating from XXXX to current year, get the growth rate, and project the number for the next 10 years. SUM of all divide by total outstanding shares will be the intrinsic value.

these are my stock selection procress at least for now. ( lazy me still doing the filtering part of all the stocks listed on sgx.)

hi all, i am super new to this forum. and new to investing too.

i have no idea if my content is enuff to be posted here online, but i'll give me a try.

for picking companies listed on sgx, i start from alphabet Z to A. 1 by 1.

1) P/E lower than 15.00
2) ROE higher than 10.00
3) Long and Consistent positive Cash flow from operating activities.

4) read their annual report. ( most imprtant step )

5) using a method from the book "profit from panic" by adam khoo, to calculate the intrinsic value of the share.
taking the history of Cash flow from operating from XXXX to current year, get the growth rate, and project the number for the next 10 years. SUM of all divide by total outstanding shares will be the intrinsic value.

these are my stock selection procress at least for now. ( lazy me still doing the filtering part of all the stocks listed on sgx.)

Hi ! First of all, let me extend a warm welcome to you on joining Value Buddies! Here, we analyze companies in detail and use value investing techniques to pick gems which are considered undervalued. I hope you enjoy your stay here.

To comment on what you had said, is there a reason why you used PER lower than 15x? 15x under normal circumstances would be considered "high" unless you are looking at blue chip or monopoly companies. Note that each class of company (small caps, mid-caps or large caps) may have a PER which is deemed "reasonable", and this also depends on each individual company's characteristics, growth profile and unique fundamentals.

As for ROE>10%, this is actually not too tough; but it must be consistently above 10% for 5-10 years at least. A more stringent criteria I use is >20%; and it must NOT be debt-fuelled. To give a good example, Ezra (which released results today) has an ROE of 12% but most of it was due to an increase in gearing.

The aim of reading the annual report is to ascertain the business model of the Company and also to read about their prospects and plans, so this is definitely something an investor should do. In fact, read 10 years of their annual reports if possible (I do that); and if possible too, get the competitors' annual reports as well!

I have an issue with Adam Khoo's technique (actually, I have an issue with Adam Khoo but that's another story haha). If we take historical operating cash flows and project this into the future, we end up with a distorted and unrealistic discounted cash flow value for the company, as future cash flows are extremely uncertain past the third year. Even the discount rate is notoriously hard to determine, although most books use 10% for conservatism. So before using any DCF method, do note its limitations and do not place too much emphasis on the value you obtain. The number which you eventually get is NOT the intrinsic value; it's just the discounted cash flow valuation using predicted future cash flows. Intrinsic value's definition is to take into account ALL salient aspects of the Company, quantitative and qualitative; and to use these factors as the basis for making an informed investment decision.

Ok I shall stop here.....or I can ramble on and on. Haha.

Hope this helps....!

Hi

Allow me to further add on to Adam Khoo (AK) valuation technique.
The usage of taking the history of Cash flow from operations from XXXX to current year is more applicable to certain industries than others.

For example, taking a look at any firms in financial indsutry, the real changes comes for the Cash flow from Financing rather than Operations.
AK did not address this issue.

If you valuate financial firms with AK technique, you will get much lower intrinsic value, never mind even if its asset base is strong and it has strong economic moat with huge growth potential.

One firm I am talking about is Ping An Insurance in March 09. Pls note i am not saying this is undervalued now. I am just stating an example.

Feel free to throw up your doubts or queries in this forum. There are many experienced investors here to guide you.


PS: MW, you got an issue with Adam? Can share? Me kaypo leh..

[Musicwhiz]

Hi Arthur,

Haha no lah better not mention in this public forum. AK is a big shot famous guy leh, wait I kena sued....I'm always careful about mentioning stuff which may be interpreted or construed as being defamatory....

[PassiveReturns]

As mention before, I am not exactly a value investor but I tend to agree with MW and arthur. I personally think that Free Cash Flow is a better use than the operating cash flow too.

About learning from role masters, I will definitely recommend Mr Benjamin Graham, Mr Warren Buffett, Mr Phillip A. Fisher, Mr Peter Lynch and Mr John Neff, anytime.

On a sidenote, is there anyone using Graham's formula instead of the common DCF method ?

[jianjian]

As mention before, I am not exactly a value investor but I tend to agree with MW and arthur. I personally think that Free Cash Flow is a better use than the operating cash flow too.

About learning from role masters, I will definitely recommend Mr Benjamin Graham, Mr Warren Buffett, Mr Phillip A. Fisher, Mr Peter Lynch and Mr John Neff, anytime.

On a sidenote, is there anyone using Graham's formula instead of the common DCF method ?

hi, by any chance do you mean this?

Value = Current (Normal) Earnings x
(8.5 + (2 x Expected Annual Growth Rate)

found it on http://www.grahaminvestor.com/articles/h...sic-value/ , however i have no idea how the expected Annual growth rate is calculated.

[PassiveReturns]

hi, by any chance do you mean this?

Value = Current (Normal) Earnings x
(8.5 + (2 x Expected Annual Growth Rate)

found it on http://www.grahaminvestor.com/articles/h...sic-value/ , however i have no idea how the expected Annual growth rate is calculated.

jianjian, yes. But if I'm not wrong, that is the 1960s version; in 1970s, he revised it to be :

Value = EPS x (8.5 + [2 * g]) x [4.4 / Y]

where
g = growth rate
Y = bond yield

My personal view on growth rate is that, we can use three major ways to determine :

1. Concensus growth on the company (Opinions by analysts)

2. Stage of growth of the company - infancy or mature state (eg Ubuntu vs Microsoft)

3. Industry where the company is in - Blooming or Dying (Space tourism vs stationery suppliers)

For infancy or blooming stage of a new company, we may want to assign a higher growth rate to it; whereas, for mature or dying industry, we tend to give it a much lower growth rate close to none.

The above is just my humble view. Please feel free to add any thought you have.

[miyaki]

Hi all

I have a noob question regarding CAPM ..

Do you guys use CAPM to find the discount rate for DCF model ? if so , how do u all get the value for market return since R = Risk free rate + (market risk - risk freerate )*B and we need the market return to get the discount rate.

is it possible to use the avg returns of the sti index ?

[PassiveReturns]

Hi all

I have a noob question regarding CAPM ..

Do you guys use CAPM to find the discount rate for DCF model ? if so , how do u all get the value for market return since R = Risk free rate + (market risk - risk freerate )*B and we need the market return to get the discount rate.

is it possible to use the avg returns of the sti index ?

miyaki, CAPM ... humm, it sounds complicated.

I ever read WallStraits Sage's recommendation to use "the current yield of relatively risk-free investment like U.S. Treasury bonds. Personally, I think I prefer and merely use the known or expected inflation rate (eg GST 7%) and add another 2% buffer as the discount rate, because afterall, the value of money will shrink as what it costs today will cost more in the future, barring any deflation circumstance arising.

[Miley Tipton]

hi everyone,
Well I am new investment and learning from you guys, that how to invest and where to invest.
Thanks for sharing your views and giving me opportunity to learn

[PassiveReturns]

hi everyone,
Well I am new investment and learning from you guys, that how to invest and where to invest.
Thanks for sharing your views and giving me opportunity to learn

As a starting point, there are only 4 things that you need to have/do, to begin your journey :

1. Money
   
2. Knowledge
   
3. Style
   
4. Patience
   

1. Money

This is the most self explainatory. With enough amount of investible money, you can start to acquire necessary knowledge on business, economy and finance; with sufficient money, you can begin to invest in good and reasonable companies to grow your wealth.

2. Knowledge

Without adequate knowledge, we are just another delicious meal for the lions in the financial wild life scene. As mentioned in point #1, the basic necessary knowledge will be business, economy and finance.

3. Style

When you are better prepared, it is time to decide whether you wish to be a value, growth or income investor. For example, I invest for income.

4. Patience

Lastly, be very patient with stock investing. Let the price come to you before you put your money in. Avoid the latest hot stocks and IPOs in town, because they are probably over valued during this period.


There are many resident experienced investors here (I am not in this list), so feel free to ask when you have doubts.

[FFNow]

Jianjian, I use something like your IV method too. But, I don't take the figure obtained as holy grail. It's just a ball-park figure to let you know if the investment is worthy at the point of time. We use past cash flows as we believe the company has been doing well historically by consistently increasing their cash flow FY after FY. If they are consistently doing that, it is quite safe to say they would do so in the future, so we project their cash flow into the future to obtain IV. Personally, I don't take cash flow from ops per se. I use average free cash flow (this year's cash flow from ops - average capex over the years concerned). I feel this method is more conservative. Anyway there's no perfect IV or IV calculation. They are all smart/informed guesstimates. Hope this helps.