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YoungInvestors. Stock Picking Strategies. Introduction. Stocks are common topic for wealth growth Stock-picking is an art, not a science No infallible strategy to be successful Numerous factors affect company’s health More than just numbers Emotions play on stock market rises/falls

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Younginvestors

YoungInvestors

Stock Picking Strategies


Introduction

Introduction

  • Stocks are common topic for wealth growth

  • Stock-picking is an art, not a science

  • No infallible strategy to be successful

  • Numerous factors affect company’s health

  • More than just numbers

  • Emotions play on stock market rises/falls

  • Stock-Picking: Best Guess


Fundamental analysis

Fundamental Analysis

  • Intrinsic Value: Your view of the value of a stock as opposed to its actual price

  • Company worth all its future profits added together, accounting for Time Value of Money

  • Greater Fool Theory: Ability to buy stock and sell it at higher price to “fool”

  • Technical Investing (often short-term): Buy based on trends in market (stock charts)


Finding intrinsic value

Finding Intrinsic Value


Qualitative analysis

Qualitative Analysis

  • Important to analyze qualitative attributes of company to find good stocks to pick

  • Who runs company (i.e. CEO, COO, CFO)

  • Backgrounds of Managers/why they are there

  • How they manage and if it works

  • How long have they been in charge?

  • Frequent changes indicate poor performance/ improvements


Contd

Contd.

  • It can be as simple as predicting a product will do great in the future

  • Understand business models of companies and their future (industry potential)

  • View if they have potential to grow against competition

  • Companies with diverse brand portfolio (i.e. Proctor and Gamble are safer)


Value investing

Value Investing


Who is a value investor

Who is a Value Investor?

  • Looks for stock fundamentals (dividends, earnings, book value) in a stock selling at a bargain price

  • Looks for stocks that are undervalued (potential to increase when market corrects valuation)


Value not junk

Value not Junk

  • Is not a stock that is cheap in price

  • Need to do homework to find stock that is cheap given the quality

  • Compares share value to what the perception of the “true value” is, not historical share prices


Example

Example

  • Warren Buffet used value strategy for his holding company Berkshire Hathaway

  • Invested in many quality companies

  • Stock was at $12/share in 1967 to $111,300 currently


Value investing1

Value Investing

  • Make profits by investing in quality companies, not by trading

  • Do not consider market volatility and day-to-day price fluctuations

  • Long term investment


Value stocks

Value Stocks

  • Most often located in industries that have recently fallen

  • Share price should be no more than two-thirds of intrinsic worth.

  • Look at companies with P/E ratios at the lowest 10% of all equity securities.

  • PEG should be less than one.

  • Stock price should be no more than tangible book value.

  • Current assets should be two times current liabilities.


Margin of safety

Margin of Safety

  • Example:

    • Believe that the intrinsic value is 25

      • Stock trading at $10/share has high margin of safety

      • Stock trading at $22/share has low margin of safety

  • Margin of safety ensures you do not pay too much for a stock


Growth investing

Growth Investing

  • Opposite of value investing

  • Less emphasis on present price

  • Belief that intrinsic value will exceed current valuations


Growth stocks

Growth Stocks

  • Companies which grow much faster than others

  • Usually young companies

  • Look at emerging markets (new technology, new medicine)

  • Theory that increased revenue will directly result in an increased stock price

  • Based in individual interpretation, look at history of stock and industry


What to look for

What To Look For

  • 1) Strong Historical Earnings Growth

  • Is revenue growing? (over 5 years)

    • > 4B = minimum growth of 5%

    • 400M – 4B = minimum growth of 7%

    • < 400M = minimum growth of 12%


What to look for1

What To Look For

  • 2) Strong Forward Earnings Growth

    • 5 year projected growth rate of 10-12%

      • 15% is more ideal

  • 3) Is Management Controlling Cost and Revenues?

    • Company may have substantial increase in revenue, however the EPS might not have increased that much. Shows decrease in profit margin


What to look for2

What To Look For

  • 4) Can management operate business efficiently?

  • Use the return on equity as a tool (ROE)

  • Should be steady or increasing

  • Best compared to 5 year average of industry or company


What to look for3

What To Look For

  • 5) Can the stock price double in 5 years?

  • If stock can not realistically double in 5 years, it is probably not a growth stock

  • At a growth rate of 15% a stock should double in 5 years


Garp investing

GARP Investing

  • Growth at a reasonable price

  • Combination of both value and growth investing

  • Looks for companies that are somewhat undervalued and have solid sustainable growth potential


Misconceptions and users

Misconceptions and Users

  • Wishy-washy, fence-sitting method that fails to establish meaningful standards for distinguishing good stock picks

  • A portfolio with equal amounts of both value and growth stocks

  • Biggest supporter is Peter Lynch


The hybrid characteristics

The Hybrid Characteristics

  • Growth Investing

    • Positive earnings numbers for past few years alongside positive earning projections

      • A reasonable growth rate is 10-20%

    • High and increasing ROE relative to industry average is indication of a superior company

  • Difference: have different ideas about ideal levels exhibited by metrics


The hybrid characteristics1

The Hybrid Characteristics

  • Value Investing

    • Look for higher P/E ratios than value investors

    • Attraction to Price-to-book ratio (below industry average)

  • Difference: GARP investors are worried about present evaluations


Peg ratio

PEG Ratio

  • Most important ratio to GARP investor

    • Gauges balance between stock’ s growth potential and its value

    • Require PEG between 0.5 and 1


Returns

Returns

  • Hybrid of value and growth = combination of returns

  • GARPer will be rewarded with more consistent and predictable returns

  • GARP strategy might sound perfect but it is very hard to master


Income investing

Income Investing

  • Straight-forward stock picking strategy

  • Stocks can provide steady income through dividends

  • Must look for older more established companies

    • Instead of reinvesting retained earnings, pay dividends as a way to provide return for shareholders


Dividend yield

Dividend Yield

  • Income investing is not about simply finding a company that pays the greatest dividend

  • More important factor = dividend yield

    • Annual dividend per share/ share price

  • Must analyze dividend policy

    • Ability to pay dividend in the future

  • Companies that pay steady dividends are likely to continue the trend


Dividends are not everything

Dividends Are Not Everything

  • High dividends does not always mean a good company

  • Dividends paid from net income and problems may arise if retained earnings are too low

  • Income investing is more than finding the highest investment yield, yield must be sustainable


Disadvantages

Disadvantages

  • Risk

    • Dividends do not equal lower risk

    • Company can go bankrupt so invest in solid companies

  • Taxes

    • Dividend payments taxed at the same rate as your wages = reduces overall return


Can slim

CAN SLIM

  • CAN SLIM is a philosophy of screening, purchasing and selling common stock.

  • C = Current quarterly earnings per share - Earnings must be up at least 18-20%.

  • A = Annual earnings per share – These figures should show meaningful growth for the last five years.

  • N = New things - Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to hit new price highs. Forget cheap stocks; they are that way for a reason.

  • S = Shares outstanding - This should be a small and reasonable number. CAN SLIM investors are not looking for older companies with a large capitalization.

  • L = Leaders - Buy market leaders, avoid laggards.

  • I = Institutional sponsorship - Buy stocks with at least a few institutional sponsors who have better-than-average recent performance records.

  • M = General market - The market will determine whether you win or lose, so learn how to discern the market's overall current direction, and interpret the general market indexes (price and volume changes) and action of the individual market leaders.


Dogs of the dow

DOGS OF THE DOW

  • The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average (DJIA) with the highest dividend yield.

  • In the Dogs of the Dow strategy, the investor shuffles around his or her portfolio, adjusting it so that it is always equally allocated in each of these 10 stocks. 

  • Every year look at the top 10 stocks paying the highest dividend yield and make your portfolio as equally weighted in each of these 10 stocks as possible. Hold onto these 10 stocks for one calendar year, until the following Jan 1, and repeat the process.

  • This is a long-term strategy, requiring a long period to see results.

  • No system is full proof, results from the 20th centaury says market will repeat itself though there are no guarantees.

  • In conclusion, pick the 10 highest yielding stocks of the 30 Dow stocks, and weigh your portfolio equally among them, adjusting the portfolio annually, and you can expect about a 3% outperformance of the Dow as previous numbers show. That is, if history repeats itself. 


Technical analysis

Technical Analysis

  • Opposite of Fundamental Analysis

  • select stocks by analyzing statistics generated by past market activity, prices and volumes, AKA chartists

  • Assume the following:

    • Prices already reflect, or discount, relevant information. In other words, markets are efficient.

    • Prices move in trends.

    • History repeats itself.

  • Base selection solely on data (charts, trends, etc)  often select companies they know nothing about


Technical analysis1

Technical Analysis

  • Not long term

  • Must be very active in trades to capitalize on fluctuations and sell at peak

  • Dump stocks quickly if they are not going in the direction the investor wants  stop-loss


Support and resistance

Support and Resistance

  • Support: stock increasing after a decline

  • Resistance: stock decreasing after a rise

    • Indicate which way the stock will “bounce”


Picking stocks

Picking Stocks

  • Subjective

  • 100s of patterns and theories

  • Most popular: Cup and Handle & Head and Shoulder


Cup and handle

Cup and Handle

  • Expected to rise at the end of the handle

  • Fairly easy to spot

  • Bull-ish market


Head and shoulders

Head and Shoulders

  • The head and shoulders act as peaks

  • Bear-ish markets


Recap

RECAP

  • Use the tools and techniques of fundamental analysis to find the worth of a company. In quantitative analysis, a company is worth the sum of its discounted cash flows

    • It is worth all of its future profits added together.

  • Qualitative factors affecting the value of a company are its management, business model, industry and brand name.

  • Value Investors, concerned with the present, look for stocks selling at a price that is lower than the estimated worth of the company.

  • Growth investors are concerned with the future, buying companies that may be trading higher than their intrinsic worth but show the potential to grow


Recap1

RECAP

  • The GARP strategy is a combination of both growth and value:

    • companies that are somewhat undervalued given their growth potential.

  • Income investors, seeking a steady stream of income from their stocks, look for solid companies that pay a high but sustainable dividend yield.

  • Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Inudstrial Average (DJIA) with the highest dividend yield.

  • Technical Analysis, the polar opposite of fundamental analysis, looks at past market activity to determine future price movements.


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