I am not an investment analyst. I subscribe to investment research websites to find out ideas of good stocks. For US stocks I find Motley Fool and Seeking Alpha very useful. For Malaysian stocks, I follow Insider Asia's reports in The Edge magazine, Tong's Portfolio of The Edge and Absolutely Stocks.
However, I don't simply buy their recommended stocks. Most of the time analysts rely too much on management's narratives and future projections. They underrate the importance of historical financial data. I am a very good Accountant. :-) I check the financial statements of these companies before I buy the stocks of these companies. My most important rule of investment is "Don't buy a stock that does not have good historical financial numbers".
My stocks selection criteria:
The stocks I bought meet ALL the criteria above. The only exception is FB on item 6 above.
I call the stocks that meet these criteria as defensive growth stocks. Their prices will grow when the market is good, yet their prices will still hold strong when the market retreat.
Notes:
Net Cash or borrowings is an extremely important factor in these ways:
I also avoid certain industries due to their business natures or size of balance sheets that makes profit manipulation easy and detection difficult, i.e. banking, property development, etc.
Historical data improve the odd of buying into a good company even though it means you may lose out the first mover gain.
However, I don't simply buy their recommended stocks. Most of the time analysts rely too much on management's narratives and future projections. They underrate the importance of historical financial data. I am a very good Accountant. :-) I check the financial statements of these companies before I buy the stocks of these companies. My most important rule of investment is "Don't buy a stock that does not have good historical financial numbers".
My stocks selection criteria:
- Cash rich. It must be net cash position and not net borrowing position. Don't buy stocks with borrowings more than its cash;
- High growth of revenue and earnings. 15% annual growth rate is good. 11% annual growth rate is barely acceptable. Anything with growth rate lower than 11% is simply wasting our time and money;
- High profit margin. Don't buy stocks with profit margin below 8%;
- Strong balance sheet as such that inventory is lean, debtors is lean, non current assets is small, intangible assets is small, only cash pile is huge. Be careful of stocks with inventory turnover or debtors turnover above 4 months, or with huge fixed assets or intangible assets. Such long turnover or huge size of assets may indicate bad operations management or manipulation of earnings figures;
- Strong cash flow. It must be a cash generator even after paying for capital expenditure for expansion;
- It must give dividend. My only exception is FB where its profit margin above 40% and its earnings growth is 40% - 60% to compensate its sin of not giving dividend; AND
- Buy at good valuation. PEG ratio (Price/Earnings to Growth ratio) around 1 or below is good value.
The stocks I bought meet ALL the criteria above. The only exception is FB on item 6 above.
I call the stocks that meet these criteria as defensive growth stocks. Their prices will grow when the market is good, yet their prices will still hold strong when the market retreat.
Notes:
Net Cash or borrowings is an extremely important factor in these ways:
- sustainability during bad time
- with cash you have strategic advantage during bad time to eliminate or takeover competitor or for strategic expansion
- sensitivity to interest fluctuation and exchange rate fluctuation
- possibility of profit manipulation
I also avoid certain industries due to their business natures or size of balance sheets that makes profit manipulation easy and detection difficult, i.e. banking, property development, etc.
Historical data improve the odd of buying into a good company even though it means you may lose out the first mover gain.
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