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TRANSCRIPT
For KLSE Market
VALUE INVESTING
L. C. Chong
http://lcchong.wordpress.com
24 May 2013
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Stock Picking
Due-Diligence
Profitability Cash Flow Financial Risks
Asset Quality Reporting Quality Potential Growth
Buy and Hold Returns
Market Timing
Intrinsic Value EY% Oscillator DY% Oscillator
Absolute P/E Technical Analysis Changes in Shareholding
Quarterly EPS
Performance
Entry/Exit
Franchise Quality Analysis Due-DiligenceShareholder Wealth
Creation
SECTORS THAT I WILL APPLY VALUE INVESTING
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Consumer Products
• Tobacco
• Breweries
• Food and beverage
• Poultry farming
Trading Services
• Telecoms
• Gaming
• Electricity
• Diversified business
• Rice and grains
• Media and publishing
Financials
• Banks
• Stockbroking
Industrial Products
• Oil and gas
Plantations
• Oil palm
FILTER CRITERIA
• Filter criteria applied in www.equitiestracker.com to search investment grade, large capital
growth and emerging investment grade companies.
• Criteria:
• Franchise Quality Analysis
• Min: 70%
• Max: 100%
• Due-Diligence Basic
• Min: 70%
• Max: 100%
• Shareholder Wealth Creation
• 5 Years and 10 years
• Min: 8%
• Usually, the above criteria will return 120++ companies. 5
FURTHER SCREENING
• The next criteria will be Shareholding Analysis.
• I will only shortlist the companies where institutional funds have substantial
shareholding.
• This criteria can eliminate 20-30 companies from the list.
• The last criteria is to determine quality of the management team.
• I will ask around my friends and relatives, as well as search though Internet for track
record of the management team in three aspects:
• Transparency, Integrity
• Shareholder Friendliness
• Incentives, Ownership, and Stewardship
• With this criteria, sometimes, we can eliminate 5 – 10 companies with poor
management stewardship.
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FURTHER SCREENING
• High level financial/business performance
• Check each company in EquitiesTracker for consistent growth of:
• Cash Flow
• Profitability
• 5-Y Average of ROE ≥ 10%
• At this stage, this criteria is meant to be slightly loose because I do not want to
eliminate turnaround companies.
• I will eliminate those companies with inconsistent growth.
• At this stage, I should have around 20 – 30 stocks in my shortlist. The next step is to
check financial health and potential growth of these companies in details.
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STOCK COMPARISONS
• In KLSE, there are roughly 25 – 35 companies that meet most of the criteria that I defined
in Stock Filtering.
• It is impossible for us to invest in all of these companies.
• Not all of them are giving good returns even if their fundamental are sound.
• Therefore, we have to compare the companies, and eliminate weaker companies until we
found the best of the best. This is a tedious work, but it is worth to do.
• At one time, I will only maintain 10 – 12 stocks in my watch list.
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IMPORTANT KEY METRICS FOR COMPARISON
• Return On Invested Capital (ROIC)
• Cash Return On Invested Capital (CROIC)
• Growth Rate
• Earnings per Share (EPS)
• Trend of Net Cash from Operations
• Strong brand, monopoly or barriers to entry
• Historical capital and dividend payout (dividend yield)
• Valuation and earning yield
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ENTRY RULES
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Method Description Applicable To
EPS The current quarter's EPS is up more than 15% from the
same quarter the year before.
All companies
DCF Intrinsic Value Price is below Intrinsic Value Companies with consistent growth of cash
flow
Absolute P/E Price is close to Buy Price Companies with inconsistent growth of cash
flow, but consistent growth of earning.
DY% Oscillator Price is below or around the price derived from DY%
High
Companies with consistent growth of
dividend payout
Market Direction Stock price breaks out of consolidation/dip on an
uptrend.
All companies
Institutional
sponsorship
Company owner, EPF, Khazanah, PNB and major fund
institutions heavily buying
All companies
EY % Oscillator Price is below or around the price derived from EY%
High
Companies with inconsistent growth of cash
flow, but consistent growth of earning.
ALERT/EXIT RULES
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Method Description
EPS Quarterly EPS drop for 5 consecutive months.
DCF Intrinsic Value Has the stock risen too far from its intrinsic value?
Absolute P/E Price is close to Sell Price
DY% Oscillator Price is above or around the price derived from DY% Low
Market Direction Long term trend changed from bullish to bearish
Institutional sponsorship Company owner, EPF, Khazanah and PNB heavily selling.
EY % Oscillator Price is above or around the price derived from EY% Low
Fundamental Analysis Fundamental of business turns unattractive or bad
- Declining cash flow
- Serial charges
- Serial acquirers
- The CFO or Auditors leave the company
- The bills aren’t being paid
- Changes in credit terms and account receivable
- Found a better opportunity to replace this stock
• This document is
• Mainly for myself
• Educational only
• Does not contain investment advice
• I am not originator or inventor of any rules and methodology that used in this
document. I am just standing on the Shoulders of GIANTS. I stated the source of
ideas and material in bibliography.
• The methodology and rules that I am using definitely not 100% fit you because I
have personalized the methodology and rules to my risk tolerance, capital,
personality and lifestyle.
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