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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Stock-Picking Strategies

Stock-Picking Strategies

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SHARK aka TAH


Expert
Expert
Stock-Picking Strategies - Page 2 81hu8v10
When it comes to personal finance and the accumulation of wealth, few subjects are more talked about than stocks. It's easy to understand why: playing the stock market is thrilling. But on this financial roller-coaster ride, we all want to experience the ups without the downs.

In this tutorial, we examine some of the most popular strategies for finding good stocks (or at least avoiding bad ones). In other words, we'll explore the art of stock-picking - selecting stocks based on a certain set of criteria, with the aim of achieving a rate of return that is greater than the market's overall average.
Before exploring the vast world of stock-picking methodologies, we should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks! If you are reading this tutorial in search of a magic key to unlock instant wealth, we're sorry, but we know of no such key.
This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock-picking as an art rather than a science. There are a few reasons for this:

1. So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.


2. A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.

3. Because of the human (often irrational) element inherent in the forces that move the stock market, stocks do not always do what you anticipate they'll do. Emotions can change quickly and unpredictably. And unfortunately, when confidence turns into fear, the stock market can be a dangerous place.


The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory - a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits your personal outlook, time frame, risk tolerance and the amount of time you want to devote to investing and picking stocks.

At this point, you may be asking yourself why stock-picking is so important. Why worry so much about it? Why spend hours doing it? The answer is simple: wealth. If you become a good stock-picker, you can increase your personal wealth exponentially. Take Microsoft, for example. Had you invested in Bill Gates' brainchild at its IPO back in 1986 and simply held that investment, your return would have been somewhere in the neighborhood of 35,000% by spring of 2004. In other words, over an 18-year period, a $10,000 investment would have turned itself into a cool $3.5 million! (In fact, had you had this foresight in the bull market of the late '90s, your return could have been even greater.) With returns like this, it's no wonder that investors continue to hunt for "the next Microsoft".

Without further ado, let's start by delving into one of the most basic and crucial aspects of stock-picking: fundamental analysis, whose theory underlies all of the strategies we explore in this tutorial (with the exception of the last section on technical analysis). Although there are many differences between each strategy, they all come down to finding the worth of a company. Keep this in mind as we move forward.

http://www.investopedia.com/university/stockpicking/

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Post Sat Jul 26, 2014 4:01 pm by Sstar

SHARK wrote:You know what EPS is. It’s earnings per share. EPS-GR stands for Earnings per share growth rate. This estimated growth rate is an important figure for valuing a company. When you compare the EPS history with the stock price history, it helps you determine the most likely future direction of the stock price.
Take note: In calculating a company’s earnings growth rate, you need to decide whether growth should continue at that same rate. Studying the firm, its products, and its competitive environment will help guide your decision to adjust the growth rate up or down.
Why is EPS-GR important?

Let me clarify with an example.
Let’s compare two stocks – stock of AB Ltd with an EPS of 5 and stock CD ltd with an EPS of 7.
At once glance, you may think that stock CD Ltd is better since it has an EPS of 7
A year later, AB Ltd has EPS of 5.50 per share while CD Ltd has an EPS of 7.50 per share.
This means, AB Ltd has grown 10% whereas, CD ltd has grown only 7.14%
Naturally, the price of AB Ltd will increase higher than stock CD. The stock price has direct relationship with the EPS and hence you will be getting more profit from a stock that has higher EPS-Growth rate.
Stock with the highest EPSGR rises fastest in that year as compared to its competitors in the same industry. If a company maintains a 10% or more EPS growth rate, that company may be a good target. However, such growth rates in EPS are more reliable in the case of ‘matured companies’ which has experienced a complete economic cycle of expansion and contraction, through a bear market phase and a bull run. New and fast growing companies may not have such a financial history to rely upon and may exhibit greater volatility in earnings history. Earnings history of such new and fast growing companies is less reliable in projecting growth rates than large matured companies with a consistent earnings history of 10 years or more.  So, the chances of accuracy in predicting EPS growth increases for companies with greater financial history.
Calculation.
To calculate the growth rate in earnings of a company, let’s take an example. Let’s assume that the earnings per share (EPS) of a company is as follows:
Year    EPS
2011:  4.50
2010:  4.20
2009:  3.90
2008:  3.45
2007:  2.80
2006:  2.10
In the five years from 2006 to 2011 the earnings per share increased from 2.10 to 4.50 and the growth has been consistent. In such cases, the first step is to calculate the growth multiple.
Growth multiple =   4.50/2.10 = 2.14
Next we raise the growth multiple of 2.14 to the 1/5th power:
(2.14)1/5 = 1.164
1/5th power has been used because we are calculating for 5 years. If the time period was three years, we use the 1/3rd power.
Next we take the 1.164 figure and subtract 1:
1.164 – 1 = 0.164
As a final step, we multiply .164 by 100 to get the average annual growth rate.
0.164 x 100 = 16.40% is the average annual growth rate.
From the historical and qualitative analysis, you have to take a decision as to what would be the rate of growth for the company in future. It’s your call. You can assume it as 16.40% or you can play safe by assuming a lower growth rate of 12% or 10%. It’s your decision.

http://www.sharemarketschool.com/estimating-eps-growth-rate/


Thanks SHARK!

PER= Market Price/EPS
PEG Ratio= PER/Growth
Value Companies = PEG <1.3
I have found few in the current market! Thanks again for the article.

Post Mon Jul 28, 2014 2:55 pm by SHARK aka TAH

We need to remember the key elements when picking Growth Stocks ......
I am bringing this thread up from time to time so we remember ..... and for Reading purposes

SHARK

Post Mon Jul 28, 2014 3:43 pm by stevenapple

SHARK wrote:You know what EPS is. It’s earnings per share. EPS-GR stands for Earnings per share growth rate. This estimated growth rate is an important figure for valuing a company. When you compare the EPS history with the stock price history, it helps you determine the most likely future direction of the stock price.
Take note: In calculating a company’s earnings growth rate, you need to decide whether growth should continue at that same rate. Studying the firm, its products, and its competitive environment will help guide your decision to adjust the growth rate up or down.
Why is EPS-GR important?

Let me clarify with an example.
Let’s compare two stocks – stock of AB Ltd with an EPS of 5 and stock CD ltd with an EPS of 7.
At once glance, you may think that stock CD Ltd is better since it has an EPS of 7
A year later, AB Ltd has EPS of 5.50 per share while CD Ltd has an EPS of 7.50 per share.
This means, AB Ltd has grown 10% whereas, CD ltd has grown only 7.14%
Naturally, the price of AB Ltd will increase higher than stock CD. The stock price has direct relationship with the EPS and hence you will be getting more profit from a stock that has higher EPS-Growth rate.
Stock with the highest EPSGR rises fastest in that year as compared to its competitors in the same industry. If a company maintains a 10% or more EPS growth rate, that company may be a good target. However, such growth rates in EPS are more reliable in the case of ‘matured companies’ which has experienced a complete economic cycle of expansion and contraction, through a bear market phase and a bull run. New and fast growing companies may not have such a financial history to rely upon and may exhibit greater volatility in earnings history. Earnings history of such new and fast growing companies is less reliable in projecting growth rates than large matured companies with a consistent earnings history of 10 years or more.  So, the chances of accuracy in predicting EPS growth increases for companies with greater financial history.
Calculation.
To calculate the growth rate in earnings of a company, let’s take an example. Let’s assume that the earnings per share (EPS) of a company is as follows:
Year    EPS
2011:  4.50
2010:  4.20
2009:  3.90
2008:  3.45
2007:  2.80
2006:  2.10
In the five years from 2006 to 2011 the earnings per share increased from 2.10 to 4.50 and the growth has been consistent. In such cases, the first step is to calculate the growth multiple.
Growth multiple =   4.50/2.10 = 2.14
Next we raise the growth multiple of 2.14 to the 1/5th power:
(2.14)1/5 = 1.164
1/5th power has been used because we are calculating for 5 years. If the time period was three years, we use the 1/3rd power.
Next we take the 1.164 figure and subtract 1:
1.164 – 1 = 0.164
As a final step, we multiply .164 by 100 to get the average annual growth rate.
0.164 x 100 = 16.40% is the average annual growth rate.
From the historical and qualitative analysis, you have to take a decision as to what would be the rate of growth for the company in future. It’s your call. You can assume it as 16.40% or you can play safe by assuming a lower growth rate of 12% or 10%. It’s your decision.

http://www.sharemarketschool.com/estimating-eps-growth-rate/

Thanks Shark Valuble reading.

Post Mon Jul 28, 2014 3:44 pm by stevenapple

SHARK wrote:Stock investing strategy – Growth investing
by J Victor on September 23rd, 2011


In a nut shell….
Growth investors, invest in companies that exhibit signs of above-average growth. They don’t mind if the share price is expensive in comparison to its actual value. ‘Signs of above-average Growth’ is what growth investors try to spot. These signs gets revealed when you study the fundamentals. This is the exact opposite of ‘value investing’ approach. In a nutshell, the difference between ‘value’ investing and ‘growth’ investing lies in the methodology adopted by the investors. While the value investor looks for undervalued shares, the growth investor looks for shares with higher growth potential.
What exactly is ‘growth’?
Benjamin Graham defined a growth share as a share in a company “that has done better than average in the past, and is expected to do so in the future.” Any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy, can be categorized under ‘growth’. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business. Software companies are examples of growth oriented companies.
What’s the concept all about?
Investors who follow this strategy look for companies that exhibit huge growth in terms of revenues and profits. Typically, this set of investors looks for those in sunrise sectors (those in the early stages of growth) hoping to find the next Microsoft. A growth investor may look into the past year’s data to recognize the past growth rates and based on his studies about the industry’s potential and company’s prospects; try to estimate the future growth of the company. Investors look to spot a company that grows at minimum 15% annually. If a stock cannot realistically double in five years, it’s probably not a growth stock. That’s the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock’s price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.
What does a Growth Investor look for in a stock?
Low dividend yields, high price-to-earnings ratio or high sales-to-market capitalisation ratio or a mix of all. For identifying stocks with high potential, growth investors look at key variables such as rate of growth in per share earnings over the last five-10 years, expected growth in earnings over the next five years or so, operating and net profit margins and business efficiency. A growth investor would target a company that’s growing at 15%-40% year on.
On a macro level, factors such as the stage in business cycle in which the industry operates, its relative attractiveness, and the positioning of the company in the competition matrix form part of the investment analysis. They then look at the current price and determine if it reflects the growth potential of the company’s business.
Growth – the risky strategy.
As growth investing often involves taking exposure to companies that trade at high valuation levels, the downside risk is relatively high. Sometimes, owing to their unproven business models, these companies could be sensitive to changes in market movements and business cycles.
Is a sky rocketing share a growth share?
Not necessasarily. Share prices can move up due to various reasons including fraudulent practices. High price is never a criteria for spoting a growth share. What matters is the rate of growth in the past years and the future prospects of the industry in which the company is in.
What are the sources to find Growth shares?
The best method is to do your own research. Most growth stocks can be spotted in the small cap and mid cap indexes. It is the growth rate that finally makes them large caps. Try to spot new companies that come up with   innovative ideas – for example in medical Pharma industry.  Watch companies that have grown from small cap to mid caps. Watch companies that breach all time high levels. Investigate why the prices sky rocketed.   You may also validate shares of Industries that are currently facing market overreaction to a piece of news affecting the industry in the short term and try to spot one.
Is this approach popular?
Yes. If warren buffet is popular for his value investing strategies, Peter lynch is one of the greatest growth investors. Both he strategies are being used by investors according to market conditions worldwide.
What are the Pros and cons of  Growth investing?
Pros:The biggest advantage of this approach is Potential for incredible returns in a short period of time
Cons:On the negative side, these shares carry the potential for huge losses.
Market downturns hit growth stocks far harder than value stocks.
Failure to relate the stock price to the company value leads to purchasing overvalued stocks
Hot stock tips, rumors, hype, and market hysteria are not reliable sources of information to act upon
Which is better? Value or growth?
Both has its pros and cons as mentioned in our lessons. In value investing, the investor has to ensure correct stock valuation as well as the right time of entry – both being equally vital as he would not like to get too early into a stock.
In growth investing, it is essential for the investor to identify businesses that face little threat of erosion so that earnings growth of those companies is not impacted. Growth investors are generally in for short time frame compared to value investors. In general, value stocks tend to hold up better during stock market downturns.
An investor having a high-risk appetite is more likely to choose a growth strategy. While a defensive investor would choose to take the value investing route.

http://www.sharemarketschool.com/stock-investing-strategy-%E2%80%93-growth-investing/

Further Reading for the weekend

SHARK

Thanks shark. Very Clear.

FLOWER2

Post Sun Aug 03, 2014 1:07 pm by FLOWER2

good one. Cheers!

avatar

Post Mon Aug 04, 2014 1:46 am by newguy

These stratrgy guides are extremely interesting! Thanks for sharing!

SHARK aka TAH

Post Mon Aug 04, 2014 10:31 am by SHARK aka TAH

Welcome .....NG

There are other Strategies as well.

Technical
Qualitative
Growth etc... Please refer to the Expert Chamber

judecroos likes this post

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Post Wed Aug 27, 2014 12:57 pm by MARKETWATCH2

thank you all. good stuff.

SHARK aka TAH

Post Sat Dec 20, 2014 2:28 pm by SHARK aka TAH

I am revisiting the thread Very Happy

SHARK aka TAH

Post Sat Dec 20, 2014 2:31 pm by SHARK aka TAH

Please read during the week-end

avatar

Post Sun Dec 21, 2014 3:47 am by hlsindrajith

Thanks shark for insights

avatar

Post Tue Apr 14, 2015 9:37 am by mr.castro

thanks... very important stuff.

avatar

Post Thu Nov 19, 2020 7:07 am by Quibit

ddd

Rare

Post Wed Nov 25, 2020 1:35 pm by Rare

https://www.bdfwealth.com/Growth-Stocks-vs--Value-Stocks.c1022.htm

Growth Stocks vs. Value Stocks
Growth and value are styles of investing in stocks. Neither approach is guaranteed to provide appreciation in stock market value; both carry investment risk. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking to achieve higher rates of return also involve a greater degree of risk.

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