I analyse stocks in two perspectives:
(A) Business Perspective
(B) Financial Perspective
1. What business the company is doing?
I will not buy the stock if I don’t like their business, regardless how good the rating given by the analysts or how frequent the recommendation from my friends. I will never analyse the company in detail or pay attention to the related news if I don’t have any interest in the business or the industry the company in.
2. Does the company has certain core competency and sustainable competitive advantage to have a wide economic moat?
I don’t invest in those companies which business model is to compete in cost and without any product differentiation. These kinds of companies face fierce competition in the industry with low entry barriers and very unlikely to be sustainable in the long run. So, why bother to waste time to analyse and monitor these companies whether they will survive eventually? Furthermore, these companies are very unlikely to have consistent and nice profit margin year over year. Some examples are EMS companies (Electronics Manufacturing Services), low end plastic injection company.
Companies with niche technology or solution (e.g. Intel – every computer need microprocessor, Microsoft – every computer needs operating system), reputable global brand name (e.g. SIA – airline), niche environmental solution provider (e.g. Hyflux – water treatment), monopoly business (e.g. SPH – media, SGX – Stock Exchange), companies that backed by Temasek Holding (e.g. Chartered Semiconductor), companies that forms the pillar of Singapore’s economy (Banks & Finance, Property), are the stocks under my monitoring portfolio.
(B) Financial Perspective
1. Does the company have consistent growth in Sales Revenue, Net Income & Cash Flow?
I read the company financial statement to check whether the company has minimum 10% annual growth in Sales revenue, net income and cash flow. I also check whether the company has minimum 10% net profit margin year over year as this number give me a rough idea whether the company has certain competitive advantage in their business. Operating Cash Flow is also another key thing to check because I want to make sure the company is generating positive cash flow from their operation due to business expansion year over year. Although some companies are making money in certain years but not necessary they are making money from their core business. Creative Technology is losing its competitive advantage and its business has shrunk significantly. However Creative Technology still reported profit a few quarters ago but when I deep dived to analyze Creative P&L Statement & Cash Flow statement, I found out that Creative Technology made profit by selling its headquarter building & won $100M patent lawsuit from Apple MP3. I have to watch out for any abnormality in one time profit reporting or one time write off as this will distort the financial statement and mislead me in the analysis.
2. Does the company have lots of debt or lots of cash? Does the company liquid enough to pay off its short term liabilities obligation?
I look for the company with low debts or have lots of cash, Current Ratio (Current Asset / Current Liabilities) > 1, Long Term Debt < 3 x Net Income.
3. How efficient is the company?
I use ROA & ROE to judge the efficiency of the company.
ROA (Return On Asset) measures how the company uses its asset to generate profit.
ROE (Return on Equity) measures how the company uses the money from shareholder to generate profit.
My criteria for ROA is > 10% and ROE > 15%.
Besides analysing the stocks from Business & Financial Perspectives, I also pay attention to whether any insiders (Chairman, CEO, COO, CFO, Board of Directors) are buying or selling the stocks. Insiders know the company inside out as they are managing the company daily. They have the most updated company information, financial status and future business plan compare to other peoples. I have to be very cautious if the insiders start selling the stocks in a massive way although the stock is still meeting all the criteria. It is better to avoid the stock than buying blindly base on the selection criteria.
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I applied the Critiria 1, 2, 3 (which using base on your post – (B) Financial Perspective’s critiria) for our STI components Stocks (the 30-list), I discover most of them does not fulfil all the Critiria, and some of them are even already ‘Fail’ in the critiria 1 ( some are fail in either Earning, or Renevue or Cash Flow )
1. I understand it is possible that company easily cannot fulfil all the critiria (especialy the lousy companies), but How can I have a quick glance thru for the good company ? (as i am quite exhausted if to filter all the STI 30-list (as a starting point to start for good company search)), and at the end none of them cannot fulfil all critiria ?
2. May i know what is your recommendation? or.. is there any Priority-Way/Root-Critiria, that in any circumstances where no matter how bad the result of the other critiria is/are), there is Priority/Root-Rule which ‘die die’ must to Follow/Fulfil as a ‘Key’ ?
Thanks again for your explanation.
Welcome to STI! Yes, you are right that there are not many STI component stocks that pass the criteria. The Singapore Stock Market is just too small compared to US market. I suggest you take a look at US market and you can see the gems there.
There are some general rules like “Never Buy at High” or “Don’t Chase the Market” but it all depends on your risk appetite. Some people will tell you that “Buy Higher Sell Higher” or you still can make profit when you chase market. It is up to you to set your own “Die-die must follow rule”. You can also use the Intrinsic Value calculation to choose “BAD” companies so that to short the stock when the stock is over value.
My suggestion to you is to choose one method that suitable to you and help you to make money in the stock market. Other people method may not suitable to you because they have different risk appetite, holding power, different objective and different time frame.
Right, some of US stocks (mostly Warren Buffet’s selected stocks) fulfilled those critiria..
hence, in the situation of stocks in singapore, if we wanna to satisfy the ‘Value Investing’ Rules to Singapore stocks, may i know which Critiria or Fundamental Indicator that we should look at as Priority?
You can relax some of your selection criteria base on your risk appetite.
Pay special attention of the Current Ratio (>1) and Operating Cash Flow (Positive). The company still can survive if they lose money but the company will go bankrupt if they do not have enough cash flow to run their operation.
Thanks Marubozu for your comments.