To All:
Thanks everyone for the suggestions. To start off... some important housekeeping and process items:
F R A M E W O R K
1. INITIATING COVERAGE :
An analysis of a stock can take from 3 to 12 hours, and in a few cases, more. Analyzing a stock is an important first step to improving the success rate of picking winners. After a stock has been analyzed, it can then be more knowledgeably monitored henceforth. Because of the considerable time investment in initiating a new coverage, I am careful in selecting candidates at the start. Stock tips are plentiful, time is limited, how does one decide which stock to initiate?
In my case, it is simply based on my "first impression". Based on what I read when a stock is first introduced to me, and by combining the information with my experience, I form the first impression of the stock. I then make an assessment on whether to invest more time to analyze the stock.
When a stock is analyzed, I'll share the information on this thread. We will then have a sound fundamental basis for subsequent discussions. I have a computer financial model that when completed, will track the financial progress of the stock on a quarterly basis. Changes in growth, expenses, margins, dilution, p/e etc will show up on the model.
Please note that I analyze stocks with the goal of finding stocks for my own personal portfolio. It is not an obligatory service that I perform for participants of this thread. The thinking is, if I've already done the work, why not share it with all for an open discussion.
2. POSTING SUGGESTIONS:
When you post names of stocks, please try and accompany with as much information as possible. In particular, I'm looking for information in these four areas:
(i) Profile of the Company - which industry? what services? what products?
(ii) Why this is a good stock - where will the growth come from?, broker analyst recommendations? Superior technology? Articles on web etc.
(iii) Management - track record, past experience, media interviews& writes-ups, insider stock holdings, how management aligned with stock holders interest..
(iv) Stock price - why present price is reasonable. Reasons for historical dips and highs you're aware off.
The more complete your information, the better the chances for the analysis to be be initiated on this thread. Please only submit suggestions of stocks that you have done due diligence on. Just names withoout sufficient information/commentary stand a slim chance to qualify for analysis. We're looking for quality suggestions rather than quantity. If you have information based on an investment news letter that you wish to share here, please quote sparingly, or better still, summarize the key information in your own words so that we don't get tangled with copyright issues. Media and press releases can be duplicated (an assumption since other threads do so freely). BTW, I subscribe to Investor's Digest so you could refer to edition date and page.
3. ANALYSIS PROCESS
My analysis in done in various stages. After each stage, if the story remains compelling, I go further. If not, I will give a neutral rating, or a discard rating on the stock.
(i) Get first impression from the stock profile.
(ii) Review news releases.
(iii) Review financial statements.
(iv) Peform TA on stock chart
(v) Complete financial analysis on computer model
(vi) Assess the overall picture.
(vii) Request and review investor's package from the company.
(viii) Speak to company's investor relations person.
At times, should a story be compelling enough and the chart looks timely, I would buy the stock after stage (vi) and then continue with the other two stages.
4. RISK/REWARD
Small-cap stocks, by their nature, contain more risk to investors than large-cap stocks. They are less liquid, get hurt more when the overall market sentiment turns negative, and are more proned to sudden negative operational surprises. However, they have a greater potential for "multiple baggers" than large-caps.
Because of the inherent high risk nature of small-cap stocks, one should allocate only a percentage of one's total portfolio to this category. For instance, the 11 stocks that will make up my small-cap group, will represent only a percentage of my overall investment portfolio.
The percentage that you chose for your portfolio, will depend on personal circumstances i.e. risk to tolerance, investment objective, level of investing skills, and other personal preferences. An investor with more than 50% of her/his total portfolio in small-cap stocks is very likely not properly diversified, and is exposed to significant risk in substantial loss of capital. Also, research has shown that to be properly diversified against "company risk", an investor should have at least 30 equity stocks in a portfolio. I've seen many novice investors investing the whole capital in one or two speculative small-cap stock, only to see the stocks decline and reduce the original capital substantially within a few months.
If you like to set up a small-cap portfolio, buy at least 5 stocks from the total amount of capital. If the amount of capital is too small, it is wiser to invest in a mutual fund. Diversification lessen the risk of a substantial loss. Remember, there is no such thing as a "sure thing" when investing in stocks, especially in small-cap stocks.
The longer the investment time horizon, the less the risk investing in stocks. That's why financial planners always remind investors to have a long term view.
By carefully selecting a stock at the beginning, there is a good chance that the company will grow and prosper. Monitoring the stock along the way is also important. The stock price usually go higher as the company grows. There will be bumps along the way, the stock price will go up and down, however in the end, a good stock should usually produce a higher return than bank GIC over a 5 year period.
The goal I've set for my small-cap portfolio is to hold a stock for a maximum term of two years only. This is aggressive. Many financial planners counsel investors to have at least a 5 year time horizon in any investment. To reach my goal, I plan to go through a very rigorous initial selection process at the beginning.
5. STOCK VALUATION
Valuation of a stock price is always a complicated and controversial thing. Some people think the stock is cheap, and others think the stock is expensive - this is what makes a market. A personal buy sell/decision are driven by such factors as personal risk tolerance level, investment ohjective, investment horizon, cash requirements, investment strategy etc.
I like to call an investor's investment strategy as "the play". There are many different types of possible plays in the stock market - intraday trading, position trading, momentum trading, shorting a stock, buy and hold, options, exploration stocks, speculative stocks, etc.etc. Depending on what an investor is playing, the stock can be viewed as either fully valued, or undervalued.
An experienced investor can be fluent in many plays. Most times I buy and hold. However, I also enjoy trading and shorting some stocks occasionally. I have seen investors making money in any time of market simply because they are so conversant with all different plays. Each play has rules to determine whether the stock is a buy, hold, or sell. For example, an intra-day trader does not care whether a stock is fundmentally over-valued or under-valued. The intra-day trader is only interested in the price movements of the stock during the day. When you invest, ask yourself, what is the play?
The play for my portfolio is to find high growth small-cap stocks, and to buy and hold for a maximum of 2 years. Hold the stock as long as things are unfolding as they should, and discard if there are signs of material problems. At a minimum, I should get a return of 5 basis points above the 30 year bond rate.
Exploration and speculative stocks are very difficult to analyze and to give a valuation. Is there gold in them hills? Hard to tell. Even the directors of Bre-X apparently didn't know that there was no gold (or so we are told). Will Belfast Petroleum find enough gas to justify investors hopes reflected in its share price? Hard to tell. We'll have to consider each speculative stock on a case by case basis, depending on the quality of the information and evidence that we can collectively bring to the table.
I like stocks that already have sales, whose products and services have competitive advantages, a management with track record of growing the company, and in a business that I understand.
6. LINKS WITH OTHER SI THREADS
Having participated on threads, I can see what's good and what's bad on most SI threads.
Good - collaborative efforts of collecting information, facts, and links about the stock.
Bad - herd mentality and intolerant of opposing view points.
Bad - speculating on others motives (long, short)
Bad - assuming that discussions on the thread will move the stock price. This causes defensive postures.
Bad - dominant participants imposing arbitrary standards of postings of others.
Herd mentality in a thread will only cloud our ability to assess a stock situation objectively. Cheer leading creates an illusion, which makes us feel good while we are losing money. If a stock is fundamentally sour, no amount of cheer leading will prevent an unfortunate outcome.
There is no need to be defensive if someone post opposing views to our stock positions. I don't think people post to mislead. People may not up to speed on the stock story, or have poor information but are keen to contribute. Even if there are some people that post to mislead, it would have little impact on the stock price. There is a tendency for participants at SI to think that what's said at SI will have a dramatic influence on the stock price. IMO, there is a bigger world out there consisting of analysts, investment advisors, and institutional investors and they are the ones who have the major influence on the price of a stock.
What is important within a thread community is that we have a means to measure sentiment for the stock. To do this, we must create an open atmosphere where people can feel safe to express their views. Ater all, what moves the stock price up and down in the real market are dominant sentiments at different points in time.
As long as participants on this thread abide by the terms of memberships with SI, and not flame others, they are welcome to post their sentiments and views of the stock.
On this thread, let's take the good, and leave out the bad.
7. FRAMEWORK
I've written this so as to create a framework for the thread that hopefully works well for participants of the thread. The framework will be refined further after seeing how it's working initially. Meantime, I welcome your comments.
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