Stock-Picking

Vade mecum – Stock Picking FUNDAMENTAL ANALYSIS Study company carefully to arrive at intrinsic value Valution Techniques DCF Dividend Discount Model Net Income, FCF, EBITDA etc Check if undervalued (buy) or overvalued (sell) Long-term strategy TECHNICAL ANALYSIS Follow trends in market Use charts Short-term strategy QUALITATIVE ANALYSIS Management Who? Where? – do they come from? What? – is the company philosophy. How feasible is it philosophy in the industry When? – did they take charge Why? – and how did they become managers Epili Sagar © Vade mecum – Stock Picking Know the Business Model Understand how the company makes money Is this model feasible and sustainable? Industry/Competition Growth potential Barriers to Entry Market Share Brand Name Established brand names have high intangible value Coca Cola etc are more reliable BUT, brand established relying on a single individual can be very volatile VALUE INVESTING Basic idea Find companies that are trading below their inherent worth Look for companies that seem like a good bargain given their quality Market Volatility or day to day fluctuations are NOT taken into account EMH says prices show all relevant information – but value investing goes against this theory High beta -> high risk = but does not faze Value Investors who still consider it a bargain as long as it is below intrinsic value Guidelines Share Price not more than 2/3rd of Intrinsic Value Epili Sagar © Vade mecum – Stock Picking P/E Ratios – lowest 10% of all securities PEG<1 D/E ratio< 1 – no less debt than equity Current Assets = 2 times Current Liabilities Earnings growth – at least 7% compounded over the last 10 yrs Net-net Method – if company trading at 2/3 rd its current assets Margin of Safety – arrive at intrinsic value and make adjustments for inaccuracies Boring, depends on strong screening but has worked well over long term GROWTH INVESTING Buy stocks expecting them to grow even though they may be trading above their intrinsic worth; expect the intrinsic worth to increase Profits expected through capital gains and NOT through dividends NAIC Guidelines Historical growth – expecting them to grow similarly Projected growth rate of atleast 10-12%, but 15% preferred Costs control by management? Focus on Pre-tax EARNINGS Coz sometimes sales may be good but earnings may not be Epili Sagar © Vade mecum – Stock Picking Efficiency? ROE and ROA compared with previous years Can it DOUBLE in 5 years? GARP INVESTING Growth At a Reasonable Price investing Pick stocks – undervalued + strong growth potential Like Value Not a very high P/E ratio Lower P/B ratio Growth Growth rate, but not very high ROE figures looked at PEG Ratio - < 1 preferred and it shows both growth and value of a company INCOME INVESTING Invest to earn a fairly predictable income Choose company that gives out fairly good amount of dividends Dividend Yield should be atleast 5-6% Look for companies – pay dividend + appreciate (eg. J&J) Remember TAXES on dividends CANSLIM INVESTING Strategy for screening, purchasing and selling stocks – William O’Neil Epili Sagar © Vade mecum – Stock Picking CANSLIM C Explanation compare Current EPS of recent quarter with same time period for past years A Check 4 growth in Annual Earnings in past 5 years N Something New; some change in management, product, industry S Supply and Demand Large Cap Cos’ need much more Demand than Small Cap to see same gains L Check if Leader or Laggard Relative price strength should be above 70 (8090 is even better) Cheaper stocks are so for a reason I Look for Institutional Sponsors for a stock M Check for Market Direction Atleast 3-10 insitutional owners Bullish or Bearish Comments Growth - 18-20% Quality of earnings Growth in industry Should be in 25-50% range Pick those touching high levels Epili Sagar © Vade mecum – Stock Picking DOGS OF THE DOW Basic Idea Pick the 10 out 30 companies in DJIA with the highest dividend yield Hold them for one calendar year Replace them with the new top 10 Variations TECHNICAL ANALYSIS Assumptions Prices contain all relevant information; markets are Efficient Prices always move in trends History repeats itself Don’t Care about intrinsic value of company Only about trends and SHORT TERM Some popular shart patterns Cup and Handle pattern – Head and Shoulder pattern Bullish Bearish Epili Sagar ©