Stock Selection/Fundamental Analysis- part 2 collated by xela.hc...

Stock Selection/Fundamental Analysis- part 2
collated by xela.hc



Poster: 952i

Date:25/03/16
Time:02:29:59
Post #:17360079
Just read through all the posts;
I find myself better at specific FA digging up peculiar facets about a stock, however lack and am newbie at the basic FA (valuations of a company) which is far more important. So the posts so far has helped a tonne, not many books can teach you this kind of FA especially with penny's so quite lucky to be able to read all this.
I cant contribute much to the topic as I'm new to all this kind of FA but most I can do for others reading is post shots of the summary notes I've made reading through the posts into my journal.
Hope my handwriting is readable lol
Once again, thankyou to contibuters
its been of much help for me




Poster: Sector

Date:26/03/16
Time:11:03:00
Post #:17363554
TheGladiator said: ↑

@heraclitus and @john435 highlighted yesterday how we need to take our analysis to the next level.

Sure working out MC & EV are important and we definitely need to know what these figures are, but this shouldn't be what we use to decide whether we are going to buy in or not. MC & EV are good to help us shortlist not really decide that it's good enough to buy.
Click to expand...


Yes, just the start TG. (might shorten your nik now)

Correct MCap - sometimes getting the right number of shares on issue can throw you off track from the start.

PE and EV, and then PEG can come next but only if you actually have some metrics to work with.

Most of the stocks in the STT thread are not able to be valued on traditional FA methods. Most of our tips do not have any earnings, and only the odd few have a few years track records.

Many of the tech, shells, explorers (I'd say 75-80% of STT tips at a guess) can only be worked out on "potential" and forecasts of growth.

Very rarely do "presentations" live up to the reality. It would be the tiny few stars that beat projections, whether from the company or from over exuberant HC punters

How many times do you see the "Billions of $$$ market" "World Class" etc in spec stock pressies.

So many other considerations like your first post need even more weight than basic FA metrics.

Poster: Sector



Date:26/03/16
Time:11:26:07
Post #:17363623
Sector Lead said: ↑
EV is something I see getting constantly mixed up on HC.

Enterprise Value is simply

1. Market Cap (number of shares x shareprice)
2. ADD Debt (any debt, long and short)
3. MINUS Cash and other liquid investments (like holdings in listed companies)

Why is it more important to know EV. You could get 2 companies with same market cap and earnings but one could be cash strapped, and the other could be 80% cash.
The PE ratio will be the same, however if company B (with high cash) deploys the cash in an earning positive manner, they will have an advantage on company A...

and that's where we should look at PEG ratios (worth further reading for newbies - google it), and the PEG ratio adds in the expected future 12 month growth rate into the PE.
If a company is growing earnings faster than current PE ratio, then this is considered better than a company on a PE of 10 growing earnings at 10%pa. As if another company is growing at 20% pa, the PE will become cheaper on paper if the shareprice doesn't shift.

You might also consider payable and receivables into your EV valuations, although not common, I ALWAYS looks at payables vs receivables in the reports, as this can change EV dramatically, especially for those mining/ resources companies in large capex phase, ie drilling or building plant.

I don't consider options UNLESS they are in the money and unconverted as the cash conversion add cash to the balance sheet and EV remains the same.

Escrow shares should be in the total issue, they are just not sell-able during a set period, but have no effect on EV whatsoever.

Remember, the market is always trying to price in future profits and growth, whether actually or potential, and then reacts daily to actual results, news.

* If any newbie wants me to do an actual EV calculation and show how I got it, just ask, and I will have a look at your stock this weekend.
Click to expand...

PEG ratios

Price Earnings/ Growth ratio.

This is a useful extension of the basic PE ratio. I find this is important as all of the instos are always looking for growth stocks with lower than average PEs. Many ASX stars come from this area. Dominos, Blackmores etc. Until the balance is tipped the other way, and the PE figure is many times the earnings growth figure.

Simple example:

Company A: Market Cap $100m/ NPAT $10m = PE 10x
If company A is growing earnings @ 20% then forecast NPAT would be $12m, and the forward PE is 8.33

To get the PEG. Take the current PE (10) and divide by growth rate (20%).
The PEG = .5

A PEG under 1 is considered better value and more likely the stock will appreciate.

If the above example was actually listed AND in a good sector, then it's unlikely you'll find a stock as good as that.
A cheap multiple AND growing faster than PE figure.

Company B: Market Cap $100m/ NPAT $10m = PE 10x
If company B is struggling to grow earnings/ tough sector and just 2% is expected

PE (10) divided by (2% growth) = PEG of 5
Little reason for much change in the company market cap.

http://www.investopedia.com/terms/p/pegratio.asp

A study from the Fool

Some things to ponder
Here are a few more interesting tidbits from my study:
o 92% of companies with PEG ratios of less than 1 beat the market over three years.
o 68% of companies with PEG ratios of between 1 and 2 beat the market.
o 47% of companies with PEG ratios greater than 2 beat the market.

http://www.********/investing/value/2006/04/06/how-useful-is-the-peg-ratio.aspx


I like using PEG, and a EV/NPAT ratio.

Poster: forrestfield


Date:26/03/16
Time:14:47:51
Post #:17364154
@fungicide @raywang5
Okay different strategies for different things... First of all, everyone investing in market needs to find their own strategy... be it based on TA or FA based on time frame etc... once established, lets take the second step...

Spot the trend, gains made here are larger and easier... Try to spot it earlier and then enjoy the rewards... even if you arrive late, don't worry try to find the cheapies... Like in Lithium I joined the party late but yet found 3 winners... I am not saying there wont be any winners out of the sector but easier gains can be made within the sector...

How to spot a sector? You can either be the late comer or you can be the early spotter... There are always signals... Follow the giants, billionaires, trend setters etc they always know more... For example, our iron ore giants were investing in dairy, agriculture and beef well before the Chinese changed their 1 child policy... we have seen the result, stocks made 3-10 bags in no time... Also check whats happening in Fintech now... you will see what I mean...

How to find these signals? Simply research and reasrach and more research... you don't have to spot every trend, one trend is enough to set you up well... and if invested the right amount of money at right time, you are done for life.

Other than sporting the trend and your own strategy... find your strengths and weaknesses... What impacts your judgement the most? For example, I try to invest in stocks where I personally se multi bagger potential... But I realised that waiting for those multi bag gins I quite often lose short term gains in the similar stock... and while I try to gather these short term opportunities, I over do it and let go my actual goal... So after heaps of experiments and analysis of my own trading patterns I now trade based on % and parcels... For example, if I buy something and it shoots within days I lock in gains rather than waiting for multi bags... however, if something runs smoothly< I just hang in... let the runners run I guess... Secondly, I now hold real short term, short term and medium term parcels for the stocks I think can do multi bags...

On top of this, I have established criteria's for minows, small caps, medium caps and I rarely invest in Large caps not even in my super...

Simply, the larger the market cap is the harder it becomes to analyse the stock and its possible potential.... So I stick to basic with minows and small caps... though I prefer the liquid ones for my large holdings... Liquid only for entry not for exit... exit is normally based on news flow and then there is heaps of volume at times 50m plus for days which is more than sufficient to exit...

From here onwards I check the following:
1. Number of shares on issue... Love it when they have less than 300m with liquidity...
2. Market cap and that is fully diluted... means options, debts, con notes cash all included... the smaller the market cap the better it is...
3. Cash burn rate on admin... this helps me to spot the life style companies... If the cash burn rate is low, it means less dilution over time...
4. Cash position... If the sector is not hot the stock must have heaps of cash... if the sector is hot, they will able to raise cash with minimum dilution... even if there is dilution share price will have less impact... most of the times cap raise in the right sector pumps the stock higher within days to weeks so all good...
5. Directors / management (does not apply to shells... In shells this is the first thing I check)... Have they done good previously... previously means recently like 6 months to 2 years... anything before, it does not bother me much...
6. Managements own position... how much shares they hold... and that is based on their capital not free shares etc... I realised over the years if the management has their own skin in the game they try harder... Not always, but most of the times...
7. Top 20... good to know but I normally think the only safe shares are the ones held by sub holders as they cant sell them without disclosing.... the rest of the t20, they can buy or sell any time like all of us...
there are other things, but if the above do exist I take a position...

Position size.... can be 1 to 5k... these are when I am not 100% sure... and I want to see the trend on daily basis... So I take a small position for two reasons:
1. If the stock make gains my research I not completely wasted and I still got something out of it.
2. I watch it on daily basis... it helps keeping an eye on announcements, volume and trading pattern.

When it comes to large holding, I normally hold 2-5 stocks at a time... Now many would say, you should not buy more than 5% of your portfolio in one stock... I would say that's their strategy... I personally take a large position and need one of them to be a goer... Also realised if I follow the above criteria and avoid stocks with heaps of shares and debt / con notes, my bad trades make 20-30% capital loss while my winners do somewhere between 30-500% gains... So at the end of the day, I do fine IMO...

Shells: totally different strategy...
I take large punts at times... mostly with MW shells though and now Otsana is becoming a personal favourite... the way they have done their listings for OOK and CR8... I am impressed...

as said countless times, I buy shells for people behind them... I mean if you take the people out, shell has nothing really...
secondly, I have my own brand value for groups... for now, MW has 5-10m value close to deal IMO and Otsana has 3-5m close to deal...

I can add heaps re shells but I remember we discussed heaps on shells in the past so perhaps STT library can be handy in this regard...

All the best guys and remember I am a simple punter who still has to learn heaps... So take this post as my simple rules and nothing more...

Cheers