Investing

Fundamental Stock Selection Criteria

 

Over the years, I must have read thousands of commentaries on the i3investor forum. I notice many commentators do not even know how to select a good share to buy or sell.

For example, in the case of Dayang, many said that its share price will drop on Monday because its account is so bad that even its substantial shareholder Kumpulan Wang Persaraan was selling at 50 sen and KWP will continue to sell on Monday. You must remember KWP is not known to be a good investor. But I believe it will continue to go higher.

There are many share selection criteria such as NTA, dividend yield, cash, debt, profit, loss, cash flow, number of shares issued etc.

Many investors like to look for good asset backing (NTA), for example some property companies. But their share prices will not move higher for a long time.

Many investors like to look for good dividend yield, for example Nestle or Public Bank. But their share prices move up very slowly.

Almost all the listed companies in Malaysia are young and they do not give out better dividend than Bank interest rate.

Smart investors always aim for share price increases to make money.

I read several books by Benjamin Graham, Warren Buffett, Peter Lynch, William O’Neal and others. All of them preached value investing.  After having following this value investing for some time, I found out that it took too long to make money.

For example, many of the property companies are selling below their NTAs and if you buy them you will have to wait a few years before you can see their share prices increase to make money.

The most important criterion to move share price:

Among all the stock selection criteria, the most powerful catalyst to move share prices is profit growth prospect. Based on this criterion, I discovered Lii Hen, Latitude Tree and VS Industry a few years ago and became the 2nd largest shareholder. Lii Hen and Latitude went up more than 800 percent within 2.5 years.

The above chart shows V S Industry went up from 30 sen in June 2014 to Rm 1.70 in Dec 2016, an increase of 550 % within 18 months. Its 2015 annual report showed that I was the 2nd largest shareholder, holding 102 million shares.

Based on this well tested formula, I have formulated my share selection golden rule.

KYY Golden rule for share selection:

The company must report profit growth for 2 consecutive quarters before I decide to buy it. Moreover, it must be selling below PE 10. 

When do I sell?

I will start to sell as soon as I see the company report less or reduce profit for 2 consecutive quarters. You must bare in mind that many company’s product or services are seasonal.

For example, Carimin reported less profit than its previous quarter because it could not do more maintenance work for Petronas during the N-E monsoon period. If it continues to report less profit for the next quarter, I will start to sell. In any case it is cheap, selling below PE below 10.

Important notice:

All readers should examine their track record honestly. If they have not been so successful or making much money by using charts or other methods, they must follow my well tested KYY Golden rule.   

 

 

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