Fundamental Stock Selection Criteria
There are various ways of killing a cat. There are various ways or methods you can use to make money from the stock market. Technical and financial analysis are commonly used.
Technical analysis
Basically, when there are more buyers than sellers, the share price will go up and when there are more sellers than buyers the price will come down.
I am not an expert in charting. I only look at the price trend, whether the share is on an up or a coming down. I will only buy if it is on an up trend because it is most likely the price will go up higher for some time.
I will not buy any stock if it is on a down trend because it is most likely the price will continue to drop for some time.
Financial analysis
When you buy a share, you expect to make money from its dividend yield and price increase.
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 are selling below their NTA. 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, currently, 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 is profit growth prospect:
Among all the stock selection criteria, the most powerful catalyst to move share pr ices 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 that Lii Hen went up from 40 sen in mid 2013 to Rm 3.00 in Oct 2015, an increase of 750% within 2,5 years. Its 2015 annual report showed that I was the 2nd largest shareholder, holding 19.80 million shares.
The above chart shows that Latitude went up from Rm 1.00 to Rm 8.00, an increase of 800 % within 2.5 years. Its 2015 annual report showed that I was the 4th largest shareholder holding 6.32 million shares.
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 566 % 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.
Dayang is a good example. When I saw its profit growth for its 2 consecutive quarters 2nd and 3rd quarter, I started to buy it. When it reported 10.13 sen for its 4th quarter, its share price shot through the roof.
What is my target price for Dayang?
Based on the rate of profit growth in the last few quarters, it is most likely that Dayang will report EPS higher than the previous quarter of 10.13 sen. So, you can imagine what should be its price.
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 bear 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. After the monsoon, it is most likely to report increased profit. 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.
Readers must check all the shares they are holding to see if they comply with my share selection golden rule. If they do not, they should sell.
