Picking Stocks: Profitability & Growth

Stocks, or shares, are fractions of ownership of public listed companies

Contrary to public perception, picking stocks successfully is not as difficult as Wall Street or Hollywood would like you to know. Sometimes, it takes just a little more than common sense to do it. We can assure you, it will feel like cheating, literally.

First of all, if you're into stocks investing for the money, you'll really have to pick the companies that have solid track record of profit. A good example would be a company having made profit for every one of the last five years, which includes times of recession.


Numerically, we are interested in the earnings per share (EPS) and return on investment (ROI), which is the earnings per share divided by the share price. However, the reciprocal of ROI, known as price to earnings ratio (P/E) is more commonly in use.


EPS = Net profit / number of shares
ROI = EPS / share price
P/E = Share price / EPS = 1/ ROI


To look for undervalued stocks, pay attention to stocks with P/E ratio less than 10.

However, one should bear in mind that the rate of growth of a company makes a huge difference in the long term.


The growth of a company can be attributed to prudent management, products being well received by the market (usually highly differentiated or have competitive advantage), and public infrastructure among many other factors.


The rate of growth of a company without taking on additional financial leverage, assuming there's no dividend paid can be represented by return on equity (ROE) which is usually used to represent the efficiency of a company.


ROE = Net profit/ equity

Whereas equity is the net worth of the company, shown by the accounting equation:

Assets = Equities + Liabilities
Equities = Assets - Liabilities


Fundamental investors usually look for at least 15% of ROE in the past three to five years, on top of having healthy level of borrowing. Shares of companies with rapid rate of growth usually come at a much higher price tag.


A rule of thumb to ensure that a growth stock isn't overvalued is to look at the ratio between its price to earnings ratio and the growth of its earnings per share, otherwise known as PEG ratio.


PEG ratio = (P/E ratio) / (Growth rate)

As a rule of thumb, PEG ratio of equal or less than 1 is a value buy.


Takeaway
Stock investing isn’t as tough as it seems/ as risky as people portray it to be. All you need is emotional intelligence, some math, patience, the ability to learn from failure and most importantly, education!

From us in the BYIC R&E team, we wish you all the best in your current/future endeavours in the stock market!



Terence
Research & Education Team
Bursa Young Investor Club

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Introduction to Capital Market

“People with money but don’t know how to start or run a business; people who know how to run a business but don’t have the money.”

Capital market

Definition of Capital Market

Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals.

The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets.

Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities.

Stock

The stock (also capital stock) of a corporation constitutes the equity stake of its owners. It represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders' equity cannot be withdrawn from the company in a way that is intended to be detrimental to the company's creditors.

Shares

The stock of a corporation is partitioned into shares, the total of which are stated at the time of business formation. Additional shares may subsequently be authorized by the existing shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared par value, which is a nominal accounting value used to represent the equity on the balance sheet of the corporation. In other jurisdictions, however, shares of stock may be issued without associated par value.

Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.

Bursa Malaysia

Is an exchange holding company and offers a variety of products and services for the Malaysian market, such as securities, derivatives, Islamic market, bonds, indices and the Labuan International Financial Exchange (LFX) which offers listing of financial instruments in US Dollars.



Before the Internet, we had to either rely on the advice of a broker who was paid only when we bought or sold or we had to dig through mounds of annual reports and an assortment of documents that were months old by the time we got them.

Today, any investor can access powerful research tools that before the Internet were not available and many of them are free. Of course, there are some very sophisticated tools that come with hefty price tags; however, for most investors all the research they will need is free or available for a modest subscription.

Stock Screener

The most basic research tool is the stock screener. This handy program does in nanoseconds what would take you hours and hours of research by hand to do and best of all, there are many of them on the Internet free for you to use. Some of the better ones come as part of subscription packages to the better research sites, but you can get a feel for how they work for free.

The concept is simple. You want to identify stocks that meet certain criteria. (Incidentally, this is how you go about building a portfolio, rather than haphazardly investing in whatever stock looks good at the moment.)
Stock screening programs allow you to enter qualifiers such as industry type, market cap, sales, dividends, and so forth. The more sophisticated the screen, the larger number of qualifiers.

After you put in all the qualifiers, the screener looks at all the companies listed on the major exchanges and pulls out those that meet your qualifications. You get a list of the companies. If the list is too large, you can run the screen again with tighter qualifications to reduce the number of hits.

The more sophisticated screeners allow you to run further screens on the set you just generated, while the free screeners tend to leave you with just the list. Either way, you have just saved yourself hours and hours of work by narrowing down the possible candidates.


The better stock screens offer a significant database, presets, relative as well as absolute numbers and flexibility in entering parameters. Here are a few Bursa stock screeners to help you:
Bursa Marketplace Stock Screener 
FT Markets Screener
TradeSignum Screener
KLSE Screener V2



Knowing the basics of investing
If you are going to put your money at risk in a stock investment, you should understand a stock is a type of security reflecting ownership in a publicly traded company. But this alone is not enough to begin the journey of informed investing.

Knowledge on how the stock market functions, how stocks compare to bonds and the potential risks and rewards of each, how stocks trade in the primary and secondary markets, and what rights stock ownership provides is crucial . It’s also helpful to know how stocks trade on Bursa Malaysia and realize how market forces and quarterly earnings reports can impact stock prices. This can help us make more informed choices and become great investors!

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Investment Forum with CFA and MBA Professionals.

Bursa Young Investor Club UNMC proudly present to you the upcoming event- "DO YOU EVEN INVEST" (Investment forum with CFA and MBA professionals).

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Date: 15 APRIL 2015 (WEDNESDAY)

Time: 6-10 PM

Venue: F1A02

*If you're worried about getting hungry halfway through, DINNER IS PROVIDED!

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REASONS TO ATTEND THIS EVENT?

•        The speakers are well-experienced in the finance field

•        The speakers are true financial educators, not motivators!

•        A good head start for those who want to learn about investment.

•        Professional feedbacks for all your inquiries.

•        Widen your knowledge about finance and investment.

•        Have a clearer picture between CFA and MBA.

Our speakers:

Dr. Yee Wee Chun(MBA)

•        CEO of Noesis

•        DBA (Northumbria), MBA (Duke), BA (Econs, Virginia)

•        Started his career as a Financial Analyst at General Electric under the prestigious Financial Management Program in the US.

•        Joined the Boston Consulting Group in Kuala Lumpur with assignments in major corporations in Malaysia and Indonesia.

•        Chief Executive and Executive Director of MIM-INTI Management Institute and INTI Management Services for 7 years

•        His doctoral research is in strategic management.

•        Awarded the Dean’s Recognition award at Duke University

•        Graduated with High Distinction at the University of Virginia

Chua Kim Kian (CFA)

•          Managing an investment portfolio for wealthy individual.
•          Portfolio return of more than 35% for the last 3 years, last year’s return was 68%.
•          Financial professional program organized by CFA Institute, USA.
•          CFA charter holder since 2004.
•          A part-time lecturer, Noesis Exed Sdn Bhd.( for CIMA and CFA Program)
•          FPAM’S Approved Facilitator for Certified Financial Planner
•          Center for Continuing & Professional Education
•          Has managed Bank’s investment portfolio amounting more than RM250 million

The first 100 participants who signed up and paid for the event will get an exclusive CFA Society Malaysia T-shirt for FREE!! 

Only while stocks lasts. Hurry and register yourself a seat!

Payment can be made at the SA CIRCLE/ BUS STOP where our booth is located. Register yourself now for early booking of seat. Seats are LIMITED, so do hurry up and REGISTER! Link is shown below.

                                                                 Do SIGN UP HERE!

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