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Stock Picking based on Fundamental Analysis (0 viewing)
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Stock Picking based on Fundamental Analysis
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4 Years, 4 Months ago
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When doing fundamental analysis, we are actually analyzing about the company itself, its fundamental or intrinsic values. When doing stock selection using fundamental analysis, it is like you are choosing which company you want to own with your hard earned money…So you need to choose a company that will give you the maximum amount of profit return for your money invested…
Looks simple isn’t it? But how do we know if the company is worth your investment? You can do it from so many different ways… And it is so subjective that everyone tells you a different pick with their own solid reasons… However, there are some more simple and concrete methods or financial ratios that you can try to use as reference… You can use Price Earning Ratio (P/E), Net Tangible Assets (NTA), Dividend Yield (DY), Debt Equity Ratio (D/E), Return on Equity (ROE) and Earnings Per Share Growth Rate (EPSGR).
I will try my best to explain what are they based on my understanding… But try to use them as reference or basic understanding only… Most of these information can be obtained from the company’s financial statement, or you can derive them using basic calculations…
Earnings per share (EPS) can be obtained from the financial statement of the company. The higher the EPS, that means the more money the company is making… They normally would give the basic EPS or diluted EPS or both… It would be best to use the diluted one if it is available…
A few ratios can be obtained from this EPS, one of it is the Price Earning Ratio (P/E), can be obtained by dividing the current price a share to the EPS. For example, if company A’s share has the price of RM1 and the EPS is RM0.20, the EPS would be 1/0.2 = 5. If looking strictly at the P/E ratio point of view, the higher the P/E ratio, the more overvalue the company is. Thus, the more risky it is to buy the share… However, it is important that you compare the P/E ratio of the company with the companies within the same sector…
Another indicator is the Earnings Per Share Growth Rate (EPSGR) which is calculated by calculating the percentage of increase or decrease of EPS… Which means, to calculate how much earnings the company is making more or less compared to last year… It is recommended that a company has the EPSGR of at least 15% consistently for at least five years…
Return on Equity (ROE) is calculated by (Net profits – Dividends) divided by total shareholder’s fund and converted into percentage… Some financial statements state their ROE readily while some you need to calculate yourself… Recommendation of Warren Buffett is at least 15%.. Which means the higher the better…
Take note: Since EPSGR and ROE are derived from EPS, it is better to have a good and consistent record than to have a sudden surge in them…
Debt Equity Ratio (D/E) can be calculated by taking the total debt of the company divided by their shareholder’s fund… The lower the ratio, the safer it is to invest in the company…
Net Tangible Assets (NTA) measures the net worth of the company… NTA can normally be obtained from their financial reports… So you can use the price to NTA ratio.. Which means you take the market price of the company divided by NTA. The higher the ratio, the more risky the investment is…
Dividend yield is the dividend per share divided by the market price, converted to percent… The higher the percentage, the better it is…
Other than these methods, you can also decide on the worthiness of the company by using SWOT analysis… This however is too subjective and as I say, almost everyone have their own picks…
There are two very important point to take note when using the indicators I mentioned above when choosing stocks:
1) Compare the indicators among those companies within the same sector.
2) Consistency over the years are far more important than one or two years surge, especially when it involves earnings.
Good luck in your stock hunting!!
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Ben (User)
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Posts: 267
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4 Years, 4 Months ago
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RL,
Thanks for putting together an informative & useful article for the members here.
I see you fast becoming a Second Buffet.
Keep up your good work.
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4 Years, 4 Months ago
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What is CANSLIM?
What's a CANSLIM?
Zanger is a believer of CANSLIM strategy, as this magic formula contains almost everything he needs to know about a company before buying it. There is a summary of the CANSLIM formula in William O'Neil's essential market bible called How to Make Money in Stocks: A Winning System in Good Times and Bad. O'Neil recommends that you buy only companies exhibiting certain fundamental and technical characteristics. Zanger has added some of his own criteria, and, interestingly, he has discovered over the years that stocks demonstrating interesting chart patterns on volume very often turn out to fulfill most if not all of the CANSLIM criteria.
Here is a summary of the CANSLIM criteria, including Zanger’s way.
C = Current Quarterly Earnings/Share Growth - In the book, O'Neil recommends, "earnings must be up 18 – 20%, the higher the better." Zanger requires double this as a minimum. O'Neil also recommends that quarterly sales be accelerating or up 25%. As well, Zanger looks for companies with both earnings and revenues that demonstrate a continual quarter-over-quarter sequential expansion, known as "ramping up." In retailers, however, he looks for year-over-year expansion (due to the seasonal volatility of the industry).
A = Annual Earnings Growth - O'Neil shows that winning stocks over the last 50 years had a return on equity (ROE) of 17% or more. Any CANSLIM-worthy stock should demonstrate this kind of ROE in each of the last three years. The higher the annual growth, the better the candidate.
N = New Products, New Management, and New Highs – The company should offer new products/services, with new management and/or industry innovations. A pivotal technical consideration of this point is to buy only stocks that are emerging from basing chart patterns and that have put in a new stock-price high out of the base or consolidation. Zanger looks for companies that have a global domination in their market space and that are also "under-known and under-owned." This means institution that don't yet have these stocks in their portfolio are to become major buyers, at which point they create demand for the stock and in turn push up the stock price.
S = Supply and demand in share volume/shares that float - The supply part (shares outstanding) is of less importance here than demand. The company should demonstrate increasing volume as price moves out of a basing chart pattern such as a cup and handle, saucer bottom, or head and shoulders bottom. Other patterns such as flags or pennants and bullish wedges also represent excellent buying opportunities when the breakouts are accompanied by greater-than-average volumes. Other major factors are the total number of shares that the public can buy, and this is known as the float. A small number of shares that float means that fewer shares have to be bought to push up the stock price. Dan likes to see stocks with 3 million to 100 million shares that float. TASR, one of Dan's big winners in 2003-2004, started out with just 3 million shares that floated on its 5000% run in one year.
L = Leader (or Laggard)? - Buy market, sector and industry leaders. Sell laggards. Own the industry leaders and sell them when they no longer lead. This also applies to the sectors and groups in which they reside.
I = Institutional sponsorship - Look for stocks with a good degree of institutional (= professional) participation. This includes those with a higher degree of corporate executive ownership.
M = Market direction - As much as 70% of a stock's price movement is determined by the direction of the overall market. Even a winner will be fighting a strong current to get to higher prices in a market that is tanking. It is best to be long winners in a bull market (and short losers in a bear market).
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Read twice if you don't understand, thrice if still not, fourth times if still failed, fifth time if still, or just come to www.talkandshare.com
, the house of all !
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Last Edit: 2007/10/09 21:08 By mrtee.
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" Men wanted for hazardous Journey. Small wages. Bitter cold. Long months of complete darkness. Constant danger.Safe return doubtful. Honor and recognition in case of success."
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Ben (User)
Senior
Posts: 267
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4 Years, 4 Months ago
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Tee,
Good recommendation. I have read this book. Whether you are a beginner or seasoned player, this book is useful.
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Last Edit: 2007/10/09 22:15 By Ben.
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4 Years, 4 Months ago
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Hi Ben and all,
yes, the CANSLIM method by Mr O'Neil is another excellent guide towards helping investors to filter and research for good companies. I have also recently read another excellent book on fundamental work by Charles V. Payne titled " Be Smart, Act Fast and Get Rich". He shows how to read pertinent parts of the balance sheet and cashflows as well as some solid TA observations ( nothing complicated )to guide potential investors.
All the very best
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Ben (User)
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Posts: 267
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4 Years, 4 Months ago
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Fundamental analysis (FA) is a must if you want to identify great stocks. Inter alia , you should also take into consideration the following concerns:
Management
Management must have capability and integrity.
Earnings
Earnings are the life blood of a company. Earnings must be looked at as earnings per share EPS) and there must be growth year after year. Prospective earnings are more important that current earnings.
When you look at EPS, all extra-ordinary earnings and tax must not be included.
Gearing
Low debt is better than high debt.
Core Business
The core business of the company must be competitive locally and globally as well.
Barrier of Entry
The higher the Barrier of Entry the better.
Dividend Policy
A good Dividend Policy is beneficial for the minority shareholders.
Major Shareholders
The controlling shareholders have a great impact
on the destiny of a company. They are normally the management. If you don't like them, simply avoid them. You do not have to associate with those you are not comfortable with.
The above points are some of the attributes you have to consider when you are on the look-out for great stocks.
Cheers!
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soo (User)
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Posts: 12
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4 Years, 3 Months ago
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I read through the some FA term and calculation here. Just wondering if anyone can provide some calculation based on the Price Earning Ratio (P/E), Net Tangible Assets (NTA), Dividend Yield (DY), Debt Equity Ratio (D/E), Return on Equity (ROE) and Earnings Per Share Growth Rate (EPSGR)....
I am new in this field, few annual reports i had gone through, I was confused with thier different types of Word, Terms, Calculattion..
A case study will make me clearer on this. Thank you.
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4 Years, 3 Months ago
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Hi folks, I think that FA is a must to understand before really invest seriously in a company. FA help us to be more like a part of the shareholder of business. A lot of interesting discussion happened on here...cool. Just applied some of the FA that i understand in recent out-perform company-GOOGLE. Is it the right time to buy or is it worth to buy at >USD700? Here is the link to this GOOGLE stock analysis based on FA (partly). http://
bigdealsmalldeal.blo
gspot.com/2007/11/
stock-analysis-
google.htmlI would say FA is very helpful if we apply in a profitable company and vice versa. That's FA i come across. |
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Ben (User)
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Posts: 267
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4 Years, 3 Months ago
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Anyone really serious about learning fundamental analysis should read this book:
MAGIC NUMBERS
by Peter Temple
The 33 key ratios that every investor should know.
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heidan (User)
Expert
Posts: 628
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2 Months, 3 Weeks ago
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