Vade Mecum - 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

Epili Sagar ©

Vade mecum – Stock Picking  When? – did they take charge  Why? – and how did they become managers  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

Epili Sagar ©

Vade mecum – Stock Picking  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  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

Epili Sagar ©

Vade mecum – Stock Picking

 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

 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

Epili Sagar ©

Vade mecum – Stock Picking  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

CANSLIM C

Explanation compare Current EPS of

Comments  Growth - 18-20%

recent quarter with same

 Quality of earnings

time period for past years A

Check 4 growth in Annual

 Growth in industry  Should be in 25-50%

N

Earnings in past 5 years Something New; some

range  Pick those touching high

change in management, S

product, industry Supply and Demand

levels  Large Cap Cos’ need much more Demand than Small Cap to see

L

Check if Leader or Laggard

same gains  Relative price strength should be above 70 (8090 is even better)  Cheaper stocks are so

Epili Sagar ©

Vade mecum – Stock Picking

I

Look for Institutional

for a reason  Atleast 3-10 insitutional

M

Sponsors for a stock Check for Market Direction

owners  Bullish or Bearish

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

Epili Sagar ©

Vade mecum – Stock Picking  Some popular shart patterns  Cup and Handle pattern –

Bullish

 Head and Shoulder pattern -

Bearish

Epili Sagar ©