Stock Picking for Noobs

June 11, 2007 20076 12:06 pm | In Finanducation | Comments Off

Who best to learn but from the gurus themselves? Here's a brief list of gurus and their strategies:

1. Benjamin Graham - Value Investing Guru

Strategy: Buy shares at price well below company's intrinsic value!

Indicators:

• P/E < 15 for average earnings over last 3 fiscal years (or current P/E whichever is higher)
• No financial/technology stocks
• Annual Revenue > $340 million
• Liquidity: Current Assets/Current Liabilites > 2
• Industrial companies: Long-term debt < Net current assets
• EPS increases > 30% over 10-year period, must not be negative within last 5 years.
• (Price-to-book ratio)*(P/E) < 22

Source: NASDAQ, Kiplinger, Forbes

2. Peter Lynch - P/E Growth Guru

Strategy: Divide attractive stocks into different categories.

Indicators:

a. Fast Growers:

• Little debt, Debt to Equity Ratio < =1
• Annual EPS Growth Rate = 20 to 30
• Current P/E < = 1.75*Annual EPS Growth

b. Slow Growers:

• High dividend payouts
• Sales > $1 billion
• Low yield-adjusted PEG ratio
• Reasonable debt-to-equity ratio

c. Stalwarts:

• Moderate earnings growth
• Potential for 30-50% stock price gains over 2 year period if bought at attractive prices
• Positive earnings
• Debt-to-Equity ratio < 0.33
• Sales rates increasing inline with, or ahead of inventories
• Low yield-adjusted PEG ratio

Source: NASDAQ, MSN Money, AAII Journal

3. Martin Zweig - Conservative Growth Investor

Strategy: To be fully invested in the market when the indications are positive and to sell stocks when indications become negative.

Indicators:

• Quarterly earnings positive and growing faster than:

• –1 year ago
• –last 3 quarters
• –last 3 years

• Sales growing as fast or faster than earnings
• P/E > 5; BUT P/E < 3*Market P/E or 43, whichever is lower
• No high level of debt, below-average for industry

Source: NASDAQ,MartinZweig.org

4. Brothers David and Tom Gardner of Motley Fool - Small-Cap Growth Investor

Strategy: Search for stocks of small, fast-growing companies with solid fundamentals.

Indicators:

• Health profit margins
• Little debt
• Ample cash flow
• Respectable R&D budgets
• Tight inventory congtrols

Source: NASDAQ

5. Kenneth Fisher - Price-to-Sales Investor

Strategy: The lower a company's stock price is relative to its sales, the more attractive its stock is.

Indicators:

• Strong balance sheet with little debt
• Low Price-to-sales ratios

Source: NASDAQ

6. David Dreman - Contrarian

Strategy: Search for deep-discount value stocks.

Indicators:

• Good earnings growth
• Low P/E
• Low P/B Ratio
• Low Price-to-Cashflow Ratio

Source: NASDAQ, Investopedia

7. James P. O'Shaughnessy - Growth/Value Investor

Strategy: 2 investment strategies: "Cornerstone Growth" and "Cornerstone Value"

Indicators:

a. Cornerstone Growth

• Market value > $150 million
• Price-to-sales ratio < 1.5
• Persistent earnings growth, among market's best performers over prior 12 months

b. Cornerstone Value

• Market cap > $1 billion
• Revenue > 50% greater than mean of market's 12 month sales
• Cashflow per share > average publicly-traded company
• Yield Factor: Company which has highest dividend yield from 50 shortlisted using above criteria.

Source: NASDAQ, Forbes

Power of Margins

August 29, 2005 20058 2:46 am | In Finanducation | 1 Comment

A good post about the power of margins from Fool.com. Margins represent the efficiency by which companies capture portions of sales dollars but David Meier attempts to summarise/categorise different ways to look at margins:

• The traditional lens - basics/definitions about margins i.e. gross, operating, net margins.
• The fuel lens - are companies powered by gross margins?
• The power lens - is power (dollars) better than efficiency(percentages)?
• The psychology lens - capping gross margins brings in the customers?

Read more…

Ten Useful Lessons from John Llewellyn

August 29, 2005 20058 1:27 am | In Finanducation | Comments Off

Amazing article by John Llewellyn, chief economist of Lehman in the Guardian a while back. Thought I should at least keep a copy in my blog before it disappears!

1) Economic events - what economists call 'shocks' - seldom produce just one consequence. Usually the effects ripple on for years. A tax cut or an increase in government spending usually does indeed have the sought-after effect of increasing total spending, output, and employment. But later it may result also in higher inflation, balance of payments problems, currency depreciation, higher interest rates and misallocated resources. Maybe, in the end, all the expansionary policy achieves is the bringing forward of some demand and output - followed by an unavoidable 'payback' period of below-trend output and above-trend inflation. Maybe, maybe not. That debate rumbles on. But the point that policy proposals should be evaluated over their full lifetime, and not just an electoral lifetime, is well made.

2) Good economic policies do not guarantee good economic performance; but bad economic policies inevitably result in bad performance. No economist finds it easy to say what policies would guarantee a better performance in France or Germany. But virtually no economist doubts that Zimbabwe's disastrous performance is mainly the result of its economic policies.

3) It is structural, not demand-side, policies that most influence economic performance over the long term. The experience of reforming economies as diverse as Australia, New Zealand, the Netherlands, and Poland is testimony to that. But structural policies take ages to produce effects. The initial consequence is usually a reduction in expenditure, which slows economic activity. It typically takes five years or more for positive effects to start to outweigh the negative. No surprise that politicians so seldom undertake reform. They know that the negative consequences will occur on their watch, while the benefits will accrue to their successors. Look at how Labour has benefited from the policies of Mrs Thatcher.

4) People respond powerfully to economic incentives. They may not analyse the situations they face in the framework, or use the terminology of the professional economist. But discussion in the cafe or pub, plus trial and error, results in a solid practical understanding of what it is optimal to do, given the rules of the game. Look at the way unemployed people in Britain, in contrast to those in Belgium and France, now go in search of a job - the rational consequence of the incentives in the UK's new unemployment benefit regulations.

5) Economic and social policies have to be considered as a whole. It is no good, as the Dutch found, setting unemployment benefit at a level that gives incentives to unemployed people to seek work if, meanwhile, the social benefit system encourages them to register as disabled. In the Netherlands in the 1990s, disability benefit was equivalent to at least 70 per cent of the recipient's wage, and often matched it. No wonder that 13 per cent of the Dutch workforce was on disability pension.

6) Competition is one of the most powerful of forces that motivate the perpetual quest for more efficient ways of doing things. It also makes companies' lives more demanding, one of the reasons that they so often seek to curb competition, not least that which comes from abroad via international trade. However, when such competition causes major layoffs and plant closures, such that workers who lose their jobs cannot find another for which they are qualified, the costs - economic and social - can outweigh the benefits. It is therefore sensible, fair, and efficient that society finds ways for the winners to compensate the losers: but without reverting to protectionism. The way in which Scandinavian countries retrain workers whose skills have become obsolete is the classic example of such thinking.

7) History seldom, if ever, repeats itself precisely. Economies have the habit of producing new mixtures of circumstances that require new approaches. The Korean War commodity price shock of the 1950s produced scarcely a ripple in overall inflation: but the similar-sized oil shock of 1973-74, which happened in an environment of strong unionisation and widespread wage-price indexation, zoomed inflation in many countries up to 20 per cent or more. And who would have thought that, a little over 20 years after tackling 20 per cent-plus inflation, Japan would be grappling with the problems of deflation.

Complicated economic policies whose rationale is hard to explain usually fail. J K Galbraith gives a great example. During the Second World War he was in charge of price control in the United States. A crusty, 71-year-old adviser, Bernard Baruch,said: 'just put a ceiling over the whole price structure'. Galbraith, young, enthusiastic, and a trained economist, knew better. He devised a system that allowed price increases where warranted, disallowed them where not. It failed. He improved - complicated - the system further. Again, failure. In the end his agency effectively froze all prices for the duration of the war. And it worked.

9) Some of the biggest, and most important, economic issues remain unresolved. One current example: A major experiment in macroeconomic management is under way, with the US on the one hand and the continent of Europe on the other, following quite different philosophies. In the US the biggest fiscal and monetary boost to spending in the past 50 years has produced a strong economic recovery, but also two asset price booms/bubbles - first the stock market; now housing. Steadier polices in the euro area, by contrast, have largely avoided this. But economic growth has been slow, and risks becoming self-perpetuating. Whether activist US policy, or the steady-as-she goes European approach will produce the better outcome over the economic cycle as a whole is not yet clear: this is a two-act play, and so far we have seen only the first.

10) Last lesson, and perhaps the most important. Just because professional economists don't always have a confident answer, it does not follow that all proffered solutions have equal validity. Folksy, common sense-sounding, policies can often be demonstrated by the economist as simplistic at best, dangerous at worst. Hence, often the biggest contribution that the professional economist can make is to demonstrate why the current fad or nostrum is wrong and will fail. Examples of policies that policy makers thought would work, but whose economic illogic was demonstrable from the outset, are legion. Go no further than Zimbabwe's seeking to reduce inflation by printing smaller-denomination bank notes, or France's seeking to reduce unemployment by making it illegal to work for more than 35 hours a week.

Source

The 14 Fallacies

July 21, 2005 20057 11:11 pm | In Finanducation | Comments Off

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We're often tricked by the news/fundamentals when trading FX. Thus, I have tried to note down the 14 major fallacies that we meet everyday. This is from Jack Schwager's "A Complete Guide to the Futures Markets".

1. Viewing Fundamentals in a Vacuum
2. Viewing Old Information as New
3. One Year Comparisons
4. Using Fundamentals for Timing
5. Lack of Perspective
6. Ignoring Relevant Time Considerations
7. Assuming that Price Cannot Decline Significantly Below the Cost of Production
8. Improper Inferences
9. Comparing Nominal Price Levels
10. Ignoring Expectations
11. Ignoring Seasonal Considerations
12. Expecting Prices to Conform to Target Levels in World Trade Agreements
13. Drawing Conclusions on the Basis of Insufficient Data
14. Confusing the Concepts of Demand & Consumption