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- 1. VALUE INVESTING For KLSE Market L. C. Chong http://lcchong.wordpress.com 29 January 2014
- 2. Stock Picking Franchise Quality Analysis Due-Diligence Shareholder Wealth Creation Due-Diligence Profitability Cash Flow Financial Risks Asset Quality Reporting Quality Potential Growth Buy and Hold Returns Market Timing Intrinsic Value EY% Oscillator DY% Oscillator Absolute P/E Technical Analysis Changes in Shareholding Quarterly EPS Performance Entry/Exit 2
- 4. SECTORS THAT I WILL APPLY VALUE INVESTING Consumer Products Trading Services • Tobacco • Breweries • Food and beverage • Poultry farming • • • • Telecoms Gaming Electricity Diversified business • Rice and grains • Media and publishing Financials • Banks • Stockbroking Industrial Products Plantations • Oil palm • Oil and gas 4
- 5. FILTER CRITERIA • Filter criteria applied in www.equitiestracker.com to search investment grade, large capital growth and emerging investment grade companies. • Criteria: • Franchise Quality Analysis • Min: 70% • Max: 100% • Due-Diligence Basic • Min: 70% • Max: 100% • Shareholder Wealth Creation • 5 Years and 10 years • Min: 8% • Usually, the above criteria will return 120++ companies. 5
- 6. FURTHER SCREENING • The next criteria will be Shareholding Analysis. • I will only shortlist the companies where institutional funds have substantial shareholding. • This criteria can eliminate 20-30 companies from the list. • The last criteria is to determine quality of the management team. • I will ask around my friends and relatives, as well as search though Internet for track record of the management team in three aspects: • Transparency, Integrity • Shareholder Friendliness • Incentives, Ownership, and Stewardship • With this criteria, sometimes, we can eliminate 5 – 10 companies with poor management stewardship. 6
- 7. FURTHER SCREENING • High level financial/business performance • Check each company in EquitiesTracker for consistent growth of: • Cash Flow • Profitability • 5-Y Average of ROE ≥ 10% • At this stage, this criteria is meant to be slightly loose because I do not want to eliminate turnaround companies. • I will eliminate those companies with inconsistent growth. • At this stage, I should have around 20 – 30 stocks in my shortlist. The next step is to check financial health and potential growth of these companies in details. 7
- 9. MEASURES • Please refer “Stock Analysis Measures.pdf” where you can download in my blog. 9
- 11. STOCK COMPARISONS • In KLSE, there are roughly 25 – 35 companies that meet most of the criteria that I defined in Stock Filtering. • It is impossible for us to invest in all of these companies. • Not all of them are giving good returns even if their fundamental are sound. • Therefore, we have to compare the companies, and eliminate weaker companies until we found the best of the best. This is a tedious work, but it is worth to do. • At one time, I will only maintain 10 – 12 stocks in my watch list. 11
- 12. IMPORTANT KEY METRICS FOR COMPARISON • Return On Invested Capital (ROIC) • Cash Return On Invested Capital (CROIC) • Growth Rate • Earnings per Share (EPS) • Trend of Net Cash from Operations • Strong brand, monopoly or barriers to entry • Historical capital and dividend payout (dividend yield) • Valuation and earning yield 12
- 13. MARKET TIMING 13
- 14. ENTRY RULES Method Description EPS The current quarter's EPS is up more than 15% from the All companies same quarter the year before. DCF Intrinsic Value Price is below Intrinsic Value Applicable To Companies with consistent growth of cash flow Companies with inconsistent growth of cash flow, but consistent growth of earning. Absolute P/E Price is close to Buy Price DY% Oscillator Price is below or around the price derived from DY% High Stock price breaks out of consolidation/dip on an uptrend. Company owner, EPF, Khazanah, PNB and major fund institutions heavily buying Companies with consistent growth of dividend payout All companies Price is below or around the price derived from EY% High Companies with inconsistent growth of cash flow, but consistent growth of earning. Market Direction Institutional sponsorship EY % Oscillator All companies 14
- 15. ALERT/EXIT RULES Method EPS DCF Intrinsic Value Absolute P/E DY% Oscillator Market Direction Institutional sponsorship EY % Oscillator Fundamental Analysis Description Quarterly EPS drop for 5 consecutive months. Has the stock risen too far from its intrinsic value? Price is close to Sell Price Price is above or around the price derived from DY% Low Long term trend changed from bullish to bearish Company owner, EPF, Khazanah and PNB heavily selling. Price is above or around the price derived from EY% Low Fundamental of business turns unattractive or bad - Declining cash flow - Serial charges - Serial acquirers - The CFO or Auditors leave the company - The bills aren’t being paid - Changes in credit terms and account receivable - Found a better opportunity to replace this stock 15
- 16. DISCLAIMER 16
- 17. • This document is • Mainly for myself • Educational only • Does not contain investment advice • I am not originator or inventor of any rules and methodology that used in this document. I am just standing on the Shoulders of GIANTS. I stated the source of ideas and material in bibliography. • The methodology and rules that I am using definitely not 100% fit you because I have personalized the methodology and rules to my risk tolerance, capital, personality and lifestyle. 17