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

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 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

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 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

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 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 Growth
Not a very high P/E ratio Growth rate, but not very high
Lower P/B ratio 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

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 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 Explanation Comments

C compare Current EPS of  Growth - 18-20%

recent quarter with same  Quality of earnings

time period for past years
 Growth in industry
A Check 4 growth in Annual  Should be in 25-50%

Earnings in past 5 years range

N Something New; some  Pick those touching high

change in management, levels

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  Relative price strength

Laggard should be above 70 (80-

90 is even better)

 Cheaper stocks are so

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 Vade mecum – Stock Picking

for a reason
I Look for Institutional  Atleast 3-10 insitutional

Sponsors for a stock owners

M Check for Market Direction  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

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 Vade mecum – Stock Picking

 Some popular shart patterns

 Cup and Handle pattern – Bullish

 Head and Shoulder pattern - Bearish

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