FRAMEWORK OF THIS THREAD (rev04/08/98):
1. INITIATING COVERAGE :
An analysis of a stock can take from 3 to 12 hours, and in a few complicated cases, it can take even longer. Analyzing a stock is an important first step to improve the success rate of picking winners. After a stock has been analyzed, it can be knowledgeably monitored henceforth. Because of the significant amount of time it takes to initiate a new stock coverage, I am careful in selecting candidates at the start. Stock tips are plentiful, time is limited, how does one decide which stock to analyze?
I use a "first impression" approach. Based on the information provided when the stock is introduced to me, and based on experience, I quickly form a first impression of the stock. If it is an exciting prospect, I will invest more time to look further into the stock.
After a stock is analyzed, I'll post my findings (positive and not-so positive) on this thread, addressed to the person who introduced the stock to me. This "report" can serve as a basis for discussions by thread participants. If you happen to like the stock, it is an opportunity to buy a stock that has been researched and discussed. Should I buy the stock for my small-cap portfolio, I use a computer financial model to keep track of the financial progress of the stock on a quarterly basis. Any significant changes in growth, expenses, margins, dilution, p/e etc. 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 is this 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 is your information, the better the chances for an analysis to be initiated on the stock. Please only submit suggestions of stocks that you have done due diligence on. Stock names posted with little information or commentary stands a slim chance for analysis. I'm 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 introductory 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 case.
(vii) Request and review investor's package from the company.
(viii) Speak to company's investor relations person.
Sometimes, when a stock story is compelling enough and its chart looks favourable, 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, they get hurt more when the overall market sentiment is negative, and they are more proned to sudden unpleasant 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 of small-caps category that you chose for your own portfolio, will depend on personal factors, such as: risk tolerance, investment objective, investing skills, and other personal preferences. An investor with more than 50% of her/his total portfolio in small-cap stocks would not be prudently diversified, and would be exposed to the risk for a substantial loss of capital.
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 novice investors investing their whole capital in one or two speculative small-cap stocks, and faced a substantial loss of the original capital within a few months of investing.
If you like to set up a small-cap portfolio for yourself, do buy at least 5 stocks with the original 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. I'm saying all this just as a caution - in case we have novice investors on this thread.
The longer the investment time horizon, the less the risk of investing in stocks. That's why financial planners always remind investors to have a long term view. For small-caps you should be prepared to hold on for a few years.
By carefully selecting a stock at the beginning, there is a good chance that the company will grow and prosper. When the business grows, the stock appreciates. Monitoring the company along the way is important. There will be bumps along the way, and the stock price will go up and down. A good stock would usually produce a higher return than a 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 affair. Some people think the stock is cheap, while others think the stock is expensive - this is what makes a market. A personal perception of a stock leads to a buy, sell, or hold decision. The personal perception is formed from one's risk tolerance level, investment objective, investment horizon, cash requirements, investment strategy, investing skills, 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. A stock at any one point in time can be regarded as under valued, or fully valued, depending on what the play is. Thus, a trader sees the stock as one to avoid, while the long term investor sees the stock as opportunity. They have different plays.
An experienced investor can be fluent in many plays. Most times I buy and hold. However, I also enjoy trading and shorting stocks occasionally. Those investors fluent in many types of plays, can see opportunities in markets and stocks, irrespective of price directions. Each play has its 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 my play? Sometimes in thread discussions, the opposing views are due to different plays.
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 the stock if there are signs of significant. 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 a proven track record of growing the company, and in a business that I understand.
6. LINKS WITH OTHER SI THREADS
Having participated on SI 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 - assuming others motives (long, short)
Bad - being defensive, believing that the discussions will move the stock price against one's position.
Bad - dominant participants imposing arbitrary standards of postings on thers.
Herd mentality in a thread will only cloud our ability to assess a stock situation objectively. Cheer-eading creates an illusion, which makes us feel good even though 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. They may not be up to speed on the stock story, or have poor information but are keen to contribute. Even if there are people that post to mislead, it will 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. In fact, there is a bigger world out there consisting of analysts, investment advisors, and institutional investors who are the ones controlling the big money and have the influence on stock price movement..
It is beneficial that within the thread community, we have a means to measure sentiment for a stock. To do this, we need to create an open atmosphere where people can feel safe to express their views. Ater all, it is overall sentiment that moves the stock price up and down in the real market.
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 on any 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 so that it will work well for everyone to benefit. This framework will be refined further as we see how it works. In the meantime, I welcome your comments.
|
