Stock selection approach

After learning so many investments tools, I got interested in investment process. Simple question to answer would be: What should I buy? Why should I buy it? When should I sell it?

These can be solved by creating an investment method.

I would like to learn as much as I can from investments and, one day, create my own methods of investing. It’s like art. You learn drawing techniques and one day you decide which fits you the best and create your own art.

The CANSLIM method is a good start.

Outline:

  • (1) Create an universe of stocks:
    • (1.1) Top-down approach or Bottom up approach
      • (1.2) Market expectations
  • (2) Analyze the company you want to invest in:
    • Fundamental analysis
    • Technical Analysis

Value and growth investing.

*Choose a company*

(2) Fundamental Analysis:

1. PEST analysis (understand the industry)

2. Barringer/Ireland business model (minimum understanding of the company business model)

3. Read Annual report

4. Financial statement: Balance sheet, Income statement and Cash flow statement

  • Trend analysis (A2-A1)/ A1
  • %Sales analysis (How much % of sales is in this category)
    • e.g.: S&A takes 50% of sales (high cost)
  • Financing from debt or equity? (If private company, only have debt/internal financing)
  • What do they use their cash for ? (reinvest in plants for future growth? or High salary for CEO?

5. Financial ratios:

  •  Low P/E
  • EBITDA Multiple = Enterprise Value / EBITDA
  • Dividend yield
  • Profit margin

(3) Technical Analysis:

  • Relative strength of the sector to the Market
  • Relative strength of the stock to the sector
  • Find target price to enter.
  • Find target price to exit (take profit) and stop loss
  • Determine the trend : Upward, downward, sideways

Confirmation before action:

  • Charts:
    • Trends
    • Moving average
    • Bollinger Bands
  • Volume indicator: *look at divergence
    • OBV: On balance volume index
    • Volume oscillator/ histogram
    • Chakin Money Flow (CMF)
  • Momentum indicator:
    • MACD: buy/sell signal, divergence, overbought/sold
    • RSI: overbought/oversold, divergence
    • ROC: buy/sell signal, divergence
    • Stochastic Oscillator: Good in trading range, overbought/sold, divergence, failure swing.

SimpleMoneyInvesting.