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16 Criteria For Deep Value Stock Selection
Corporate Digest | 22 October 2015
By: giraffevalue
Articles (1) Profile

Many look for the holy grail to investing. Value investing, when done right, follows a set of rules, or checklist. Below is a list of 16 Criteria for deep value stock selection from Giraffe Value.

1. Scout for stocks with low P/E – the lowest of 20-30 percent of SGX stocks (use EV/PBIT if possible).

2. Scout for stocks with low P/B – the lowest of 20-30 percent of SGX stocks.

3. Scout for stocks with low/no debt.

4. Scout for stocks with dividend yield – good to have.

5. Scout for stocks with low/no cash burn rate – best is to have increasing cash flow year after year.

6. Scout for stocks with insider buying/regular share buyback – if not then at least no serious selling by its management.

7. Hold a basket of at least 20 stocks.

8. Perform portfolio re-balancing (Yearly).

9. Scout for stocks with strong balance sheet – Stocks with hard assets like property and land are great; stocks with high cash reserve are awesome, as for high receivables – one must be extra careful. Also, one would need to see if the company has tried reducing its total liabilities. Do pay special attention to disclosure notes, particularly on hard assets.

10. Google or visit forums like ValueBuddies – to check whether there are things that you have over looked, and discern whether is it just noise or concern.

11. Make your portfolio equally-weighted – this is to prevent making the mistake of favouritism towards any particular stock.

12. Knowledge-cost averaging – lump-sum investing fails when the stock price is going down, dollar-cost averaging (DCA) fails when the stock price is going up. Knowledge-cost averaging (KCA) wins in both ways since it’s based on the idea of monthly investing plus accumulation of knowledge. DCA investors will keep buying even though the valuation is stupidly high, whereas KCA investors would have accumulated enough knowledge to tell that valuation is high and it’s time to exit or at least not make panicky mistakes.

13. Keep a record of your holdings and transaction – it’s completely pointless to say you make 4 digits, 5 digits or even 6 digits without making reference to your “risk” capital invested. The most basic record to have is at least record the date and amount of buying/selling transaction in your Excel, and use “=XIRR” to compute your annual return.(google XIRR for more info). Or get it over here.

14. Be mentally prepared – your portfolio value may fall 20-30 percent at any unexpected event, and 50 percent or more during global financial crisis. Statistically speaking, (low price/fundamental vs high price/fundamental) it will be more resilient than blue chips stocks. Not mentioning that blue chips are more speculative in nature than low cap stocks.

Just think about it if you are a trader/speculator would you trade a low cap stock that you have never heard of or Singtel, or Apple, or Google? You will definitely choose the one that is the most watched, the most liquid stock of all so that you can get in and out easily.

You may not agree but the higher the quality of the stock is, the more speculative it actually is. And as a long term investor this is very bad for you.

Why?

Imagine for a moment that you are investing for the long term on a stock that is filled with many participants, largely made up of traders/speculators that are playing the game of who-can-be-the-first-one-to-hit-sell-equals-win, and never forget there’s also another batch of professional managers who are using sophisticated trading models that are making short-selling bets against you.

Those are not even the worst, the worst is that those traders/speculators/managers aren’t even humans! They are bots/algos like the ones we saw in movie terminator.

They are programmed to sell at lightning speed before the price quote even reaches your broker screen. Unless you were John Connor who can lead a resistance team of long term investors to fight against the bots/algo, even so your chances of surviving is still very slim.

Oh… sorry, even John Connor is a terminator.

15. Ignore Schips

16. Ignore stocks that have a history of doing regular rights issue, warrants and private placement.

GV is a ACCA graduate and the author of GiraffeValue, a systematic deep value investing blog. He's currently writing a definitive guide to Singapore stocks investing in his blog. And he often says, "that's the best guide. But my only question is, will you miss it?"

Please click here for more information about this author.


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