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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Financial Legacy!

Legacy

The topic that we are going to discuss about this week is on Legacy. Legacy is defined as the transmission or receive from and ancestor or predecessor.

Parents are undeniably the breadwinners in a family. However, should an unfortunate event happen, parents should prepare a contingency plan so that their children (if they are not of age) would not have any financial problems. A reduction in quality of living is inevitable but the degree of reduction should be modest in such a way that it still enables the child to fulfill their basic needs. Problems would still arise even if children are all grown. One of the most common disputes among siblings is the dispute of the distribution of assets.

Through a thorough research by BYIC’s research team, it has been estimated that the monthly cost of leaving a non-working spouse and a child studying in UNMC is RM6000. If one is only depending on the interest fixed deposit (which provides a 4% interest) to cover their living costs, the deposit would have to amount to RM1.8 million! Another low risk investment tool with a higher return rate would be the insurance plan.

Planning for the distribution of inheritance

Planning how ones inheritance would be distributed is crucial as not all children take care of their parents well and the law may distribute ones inheritance in such a way that the siblings might seize the assets.

(child A --> father --> child B)

	Parents	Spouse	children
Situation 1	¼	¼	½
Situation 2	X	1/3	2/3
Situation 3	1/3	X	2/3
Situation 4	½	½	X

One of the most common ways for us to plan out the distribution of assets is through will. Will is a legal document with details about the distribution of inheritance. The advantages of writing a will is that it is cheap with only a cost of under RM300 and the procedures to write one are easy and simple. However, writing a will means disclosing private information publicly in court. A will is usually written when there is a change in family members who are eligible for inheritance such as the coming of age of a child. Next, a significant change in the amount of assets own would also result in the change of will.

The other alternative for distributing assets would be preparing a living trust. Living trust is the legal arrangement for the trustee to manage the assets on behalf of the trustor. This way, private information will be kept secret and assets will be managed by professionals. However trustors would have to pay a higher legal fees.

credits to:

Kim Kim
Kim Pham
Lara Tan
Terence Then

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Different Types of Investment Vehicles

Definition:

Investment:
putting money into asset with the expectation of capital appreciation, dividends or interest earnings

Vehicle:      
 a thing used to express, embody, or fulfill something; instrument.

(I) Stocks:  

Parts of ownership of public listed companies; also known as shares. This is the favorite of high net worth individuals.

Advantages:

-can be started with small capital

-transparency and accessibility of relevant information

-chance to participate in accomplished businesses/ economies of scale

-almost unbeatable long term gains

Disadvantages:

-requires a certain level of expertise

-subject to market volatility

-poorly managed companies may go bust

Availability: 

Buy from stock exchange through investment banks or stock broking firms.

(II) Mutual funds:  

Individuals with MUTUAL investment objectives pool together their FUNDS to be managed by managers from banks or insurance companies.

Advantages:
-can be started with small capital

-managed by experienced investors

-diversifying risk by owning a variety of assets

-being able to hold assets available to only institutional investors, eg. bonds

Disadvantages:

-incurs higher costs for buying and selling, relative to stocks

-little space for customization, more susceptible to market volatility

-diversifying gains (not just the risks!)

Availability: 

Banks, insurance companies.

(III) Real estate:    

Land and/ or buildings built on it.

Advantages:

-consistent capital gains

-properties have strong demand and don’t get less popular over time

Disadvantages:
-high barriers of entry

-requires active management

-high financial commitment

Availability: 

Real estate agency, or sales gallery of properties developers.

Alternative investments:

-Equity derivatives                   eg. options

-Commodities                 eg. Crude Palm Oil

-Commodity derivatives eg. futures

-Precious metals             eg. gold, silver

-Foreign exchange          eg. USD/MYR, MYR/EUR

Research done by :
Dhivyamaaran Anparasan @ Maaran

Chong Zhi Ying @ Jeanne
Pham Phan Hoang Kim @ Kim
Tan Shen Tze
Terence Then

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Too Good to be True - Identify Investments Scams Out There

Well, I think I can say for the most of us students, our budget/allowances has to be one of the most constraining things of our university life. This leaves some of us tempted to anything that can help us gain a quick buck – easy targets for fraudsters with ‘Get Rich Quick’ schemes which are in fact, scams.

Scam: a fraud.

Fraud: The intentional act of deception involving transactions for purpose of personal gain.

Get Rich Quick Schemes

                Get Rich Quick Schemes offers high or unrealistic rates of return for a small amount of investment while at the same time promising that the investment is ‘easy and risk-free’. It is a type of fraud. This might sound familiar to most of us who get bombarded by hyped up emails about how we can earn over 20k in a month just by staying home etc. There are 2 types of Get Rich Quick Schemes that everybody should be cautious about: Ponzi and Pyramid Schemes.

Ponzi Schemes

                Originally created by Charles Ponzi (known as the King of Get Rich Quick), this scheme is an investment fraud that involves the payment of purported returns to existing investing investors from funds collected from new investors. Ponzi schemes still exist today in many forms and it is highly advisable to avoid them.

E.g. Investor A invests in Scheme 123 that tells him that there is a guaranteed return of 50%. Investor B invests in Scheme 123. With the money collected from Investor B, it is used to pay Investor A as the ‘returns’.

Pyramid Schemes

                In a pyramid scheme, participants only make money by recruiting more members. There are two basic types of pyramid schemes: Naked and Product-based.

Naked Pyramid Scheme: No product is sold

Product-based Pyramid Scheme: same concept disguised as a legitimate direct sales opportunity

E.g. Person H recruits 10 people to participate in a ‘’no fail investment”. Each of them has to pay RM500 to the recruiter. The new recruits are told to recruit 10 other people each and to do the same. Each recruit will make a profit RM4500 from the initial RM500 investment.

The fundamental issue

                The main issue in both schemes is that eventually it will be impossible to recruit anymore members or investors. Even if it was possible to recruit every single person in the world, eventually both schemes will still fail.

Based on Figure 1, we can easily see how a pyramid scheme will fall very quickly if each recruiter recruits just 6 members each and the new members do the same. Nobody will be left to recruit.  This is also known as saturation of the market where there is too many sellers and no buyers.

Similar to a pyramid scheme, a Ponzi scheme will fail when the pool of new investors run out.

When Ponzi schemes turn bad

As Figure 2 illustrates, when the pool of new investors eventually run out, the scheme will begin to collapse and the investors will lose the most.  

When Pyramid Schemes turn bad

As Figure 3 illustrates, when the market becomes too saturated (too many seller no more buyers) or when there are nobody left to recruit, the scheme will start to fail. When this happens, there are two possibilities that might happen.

Either:

 1) The Company will disappear

2) The Pyramid will simply topple

With either situation, the people at the bottom will lose all their money that they have spent on this company.

 BUSTED – Get Rich Quick Schemes Uncovered

                Here are some of the famous Get Rich Quick Schemes and scammers that have been uncovered in the past:

-          Charles Ponzi – the King of Get Rich Quick

o   His scheme caused an estimated loss of $20 million and the closing of six banks.

-          Bernard Madoff

o   Used his credentials as a stockbroker, investment advisor, and former chairman of NASDAQ to gain clients’ trust.

o   When he was arrested recently by the FBI he admitted that “There is no innocent explanation”

o   Estimated Losses: $65 billion

-          Genneva Malaysia Sdn Bhd

o   Sued by 1,065 gold traders for breach of contract

o   Other illegal activities include:

§  Illegal deposit taking

§  Money laundering

§  Tax evasion and avoidance false description (misrepresentations)

§  Appointment of agents without license

o   Involves an estimate of: RM146 million in gold products and monies

Risks of participating in Get Rich Quick Schemes

                Now some of you might be asking yourselves with your new found knowledge: “I can go in then make a profit then I’ll exit the scheme, right?” Well, yes, you can. But here are some numbers to make that thought less appealing. 99.88 percent of participants of naked pyramid schemes never make any money. It's also a mathematical fact that 88 percent of participants in any pyramid scheme will be on the bottom level (Roos, 2008).

 Not only that, victims of these schemes will become a burden to themselves and family members. These people may also incur additional costs as they may have to employ lawyers to bring a civil suit against the fraudsters. 

Suspicious Get Rich Quick Schemes

Disclaimer: These are recent suspicious cases and not confirmed cases. They just fit descriptions of the schemes discussed.

QNET – direct-sales company.

◦          Have to pay a fee in order to join as a member.

◦          Pyramid Scheme that looks like an MLM company after packaging.

◦          People have to recruit more in order to get return from their investment.

◦          Members at the bottom line will eventually lose money.

HERBALIFE - direct-sales Company

◦          3.7 million “members” in ~ 90 countries

◦          MLM style compensation (earnings from sales and recruitment)

◦          The more Herbalife protein shakes that members you’ve signed up buy, the more money you make.

◦          You and your recruits need to buy several thousand dollars’ worth of shakes and supplements before these bonuses kick in.

◦          When company’s president was questioned on how much of it’s sales were made outside the company’s network, to non-members, he responded saying “We don’t track this number and do not believe it is relevant”

The Rules of the Game

                With all that said, there are a few rules to remember so that we do not fall for such schemes.

• 1.       The Golden Rule – If it’s too good to be true, it probably is.
• 2.       Be sceptical. Be VERY sceptical.
• 3.       Don't be pressured or rushed to invest
• 4.       Deal only with licensed financial institutions and authorised dealers
• 5.       Check with the relevant authorities before investing/ depositing
• 6.       Be extra careful with investments over the internet
• 7.       In case an investment has been made, keep copies of all the investment and communications

The Bottom Line

It is easy to see how these schemes work, but participating in one involves deception and fraud because people will lose money that is promised in return. As with all investment plans you consider investing in, it is vital to ask the correct questions. Questions such as: What will this money be invested in? What is the rate of return? Who will be doing the investing? It is crucial to talk to professionals and to do your due diligence before investing your money in anything.

With this new found information and knowledge, BYIC sincerely hopes that you – yes, you – will do your part to share this information with as many people as you can to increase awareness and to hopefully reduce the number of victims of Get Rich Quick Scams.

Peace.

BYIC Research & Education Team

Prepared by:

Tan Liang Yen

Kim Kim Chia

Prashanth A/L K Palanival

Nelson Liew Cheng Yu

Fabian Au Waijune

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