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Transcript of My Stock Portfolio Selection
INVESTMENTDIARY007
MY STOCK PORTFOLIO
SELECTION
8 CRITERIA OF STOCK PORTFOLIO SELECTION
James Bong
My Stock Portfolio Selection
2
CONTENTS
_________________________________________________________________________________
I. Introduction 3
II. SingPost - My Portfolio Choice 5
III. Eight Criteria of Stock Portfolio Selection 6
IV. My Analysis on SingPost 9
V. Conclusion 13
VI. Appendix 14
VII. Foot Notes/Acknowledgement/Bibliographies/ 21
DISCLAIMER
The strategies outlined in this PDF document may not be suitable for every individual, and are not guaranteed or
warranted, whether expressed or implied, to produce any particular results. The author is not a license investment advisor
and thus information contained on this PDF document should not be taken as investment advice. The thoughts and
opinions and ideas expressed in this PDF document do not constitute investment advice and specific professional advice
may be necessary. No warranty (whether expressed or implied) is made with respect to the accuracy, adequacy, reliability,
suitability, applicability or completeness of the information contained herein, and both the author and publisher
specifically disclaim any responsibility or liability for any damages, lost profits, losses or risks, whether personal or
otherwise, which is incurred as a consequence, whether directly or indirectly, of the use and application of any contents of
this PDF document.
My Stock Portfolio Selection
3
INTRODUCTION
As deliberated in my article “How I Fail Disastrously in Stock Market”¹, 25,000 shares of company “X”
were given to me free (but I needed to pay the income tax) as a token of appreciation in 2007. The
cost depicted in the EA form was $S0.90 per share and I had to pay approximately $0.19 per share
for the income tax. As I was holding share for the first time in my life, I didn’t do anything with it.
However, the price for company “X” kept plummeting that I had to do something about it. To cut the
story short, I managed to dispose 15,000 shares at $0.25, and the balance 10,000 shares at $S0.105.
I managed to recover the money paid for the income tax.
What is the moral of the story? Is there any intrinsic value for company “X”? If yes, how do I
determine the intrinsic value? Through own research, I have concluded eight criteria for stock
portfolio selection and I will deliberate these eight criteria in this article.
Before I go into details of describing the eight criteria of stock portfolio selection, I will look into the
potential portfolio on three areas namely: share price pattern, earning and dividend. The three
performance yardsticks can be seen in the chart snap shot of company A and company B as shown
below. The company A and company B are not the real company, they meant for illustrative
purposes. If the three performance yardsticks do not meet my expectation, I will just drop it without
further deliberating on it.
Both companies are trading at the price range of 0 to 1.4, and earning also at 0.01 to 0.14. Company
A will be the company of choice in my stock portfolio selection as it has consistent growth and
consistent history of dividend payment. Share price for company A is predictable as it fluctuates with
earning and general market trend.
As for company B, it will not be in the list of my stock portfolio selection as I cannot see the potential.
The earning is unpredictable and due to poor earning record, company B will not be able to pay
dividend and it shows that in the stretch of 3 to 4 years, company was not paying any dividend.
My Stock Portfolio Selection
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In my initial screening, company A will immediately enter into my list of research to identify the 8
criteria in value investing. Why I choose company A:
1. Price trend is measurable and predictable.
2. Company is paying attractive dividend and my bench mark of dividend yield is 5%. When
company is paying dividend, it reveals that the free cash flow of the company is healthy.
When there is no cash flow, company will not be able to pay dividend.
3. Earning is consistent least the share price will go on “yo-yo” pattern when earning is
declared on every quarter.
You may ask me where to view the snap shot of charts that will tell you the share price pattern,
earning and dividend history. You can view the snap shot of public listed company at
Corporateinformation.com. The following will be the link:
http://www.corporateinformation.com/Company-Advanced-Search.aspx
My Stock Portfolio Selection
5
SINGPOST – MY PORTFOLIO CHOICE
As a retiree, my investment strategy is basically to protect my saving so as to beat the inflation;
therefore, I have to invest on stocks with low risk exposure. As for those who desire higher return,
my investment strategy may not be suitable for you. As a conservative investor, I will ensure that the
risk-reward-ratio is favorable. Otherwise, I will let my money kept in the bank instead of putting it in
“securities” that does not provide me the “security”. However, SingPost is my choice of investment
as I traded several entries in these few years, and I am very familiar with it. When you enter SingPost
at the right time, you are sure to earn good return. What is the right time? It is when there is some
major correction taken place.
From 2009 to 2012, I went in and out of SingPost for three times and the following were the gain
and loss against three entries and exits:
Notes:
1. As the above table is meant for illustrative purposes, the percentage return in investment
does not include commission paid.
2. In real setting, commission paid must be included in calculating the percentage return in
investment.
My Stock Portfolio Selection
6
COUNTER Singapore Post Limited (SingPost S08.si)
OUTSTANDING SHARES 2,696,700
Insert Chart From: http://www.corporateinformation.com/Company-
Snapshot.aspx?cusip=C702MG300
Quarter
Financial Year
2006 2007 2008
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st
Qt
2nd Qt
3rd
Qt
4th Qt
Total 0.10 0.0625 0.0625
Quarter
Financial Year
2009 2010 2011
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st
Qt
2nd Qt
3rd
Qt
4th
Qt
Total 0.0625 0.0625 0.0625
Quarter
Financial Year
2012 2013
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st
Qt 30.6.12 17.8.12 0.0125 30.6.13
2nd
Qt 30.9.12 12.11.12 0.0125 30.9.13
3rd
Qt 31.12.12 7.2.13 0.0125 31.12.13
4th
Qt 31.3.12 2.7.13 0.0125 31.3.13
Total 0.0625
CRITERIA 1 : HISTORY OF CONSISTENT EARNING AND GROWTH
YEAR REVENUE NETT
INCOME
EPS DIVIDEND
31-3-06 412.8 123.3 0.065 0.10*
31-3-07 436.0 139.8 0.073 0.0625
31-3-08 470.9 149.3 0.076 0.0625
31-3-09 479.2 148.8 0.078 0.0625
31-3-10 523.5 165.0 0.085 0.0625
31-3-11 563.9 161.0 0.083 0.0625
31-3-12 578.5 142.0 0.074 0.0625
CRITERIA 2: HISTORY OF CONSISTENT DIVIDEND PAYMENT
My Stock Portfolio Selection
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LONG TERM DEBTS/EQUITY RATIO DOES NOT EXCEED 0.5-1.0
D/E RATIO = LONG TERM DEBT/EQUITY
ROE MUST EXCEED 12%-15%, BELOW 12% IS LOUSY
ROE = (NETT INCOME/EQUITY) X 100
ROA MUST EXCEED 6-7%
ROA = (NETT INCOME/TOTAL ASSETS) X 100
HIGH FREE CASH = CASH FLOW FROM OPERATION – CAPITAL EXPENDITURE
FCF/REVENUE = (FREE CASH FLOW/REVENUE) X 100 (MUST EXCEED 5%)
YEAR BETA YEAR BETA YEAE BETA
2013 0.48²
CRITERIA 3: CONSERVATIVE DEBT FINANCING
YEAR 31-3-09 31-3-10 31-3-11 31-3-12
L/T DEBT 303.0 503.0 503.0 505.7
EQUITY 251.40 292.9 326.10 659.8
RATIO 1.20 1.71 1.54 0.76
CRITERIA 4: HIGH RETURN ON EQUITY (ROE)
YEAR 31-3-09 31-3-10 31-3-11 31-3-12
N/INCOME 148.80 165.00 161.00 142.00
EQUITY 251.40 292.9 326.10 659.8
RATIO 59.19% 56.33% 49.37% 21.52%
CRITERIA 5: HIGH RETURN ON ASSETS (ROA)
YEAR 31-3-09 31-3-10 31-3-11 31-3-12
N/INCOME 148.80 165.00 161.00 142.00
T/ASSETS 770.20 1074.9 1092.9 1430.20
RATIO 19.32% 15.35% 14.73% 9.93%
CRITERIA 6: HIGH FREE CASH FLOW
YEAR 31-3-09 31-3-10 31-3-11 31-3-12
FREE CF 155.80 196.10 174.60 150.50
REVENUE 479.20 523.50 563.90 578.50
RATIO 32.51% 37.46% 30.96% 26.02%
CRITERIA 7: LOW BETA (1 or below 1)
My Stock Portfolio Selection
8
Name of the Stock Singapore Post Limited
Date of Valuation July 2012
PERPETUITY DIVIDEND DISCOUNT MODEL OF VALUATION (BY MARK LIM)
The Perpetuity Dividend discount Model calculates the reference price of a stock by taking the
sustainable dividend dollar per share divided by the difference between the cost of equity and the
perpetual growth rate in dividends.
FORMULA: P = D / ( k – g )
P = Reference price
• It serves as a possible entry point for long term conservative dividend investors.
D = Future Dollar Dividend one year from now.
• Use the historical dividend payment track record as a gauge
K = Cost of Equity {risk free rate + ( beta x equity risk premium)}
• Risk free rate equals to 10 year government bond yield average 3% (Singapore)
• Beta use 1, actual beta can be obtained at www.reuters.com
• Equity risk premium for Singapore is about 6%.
g = Perpetual Growth Rate In Dividend
• Use long term economic growth rate of a develop economy (GDP growth rate), usually
3%(For STI stock)
Calculation of Denominator:
K – g = {risk free rate + (beta x equity risk premium}} – g
ACKNOWLEGEMENT;
The above format is adopted from “Secrets of Dividend Investors” by Mark Lin (Page 40 to page 43).
STEP A: DETERMINING K
K (Cost of Equity) =
Risk Free Rate + (Beta x Equity Risk Premium)
3% + (1 x 6%)
9%
STEP B: DETERMINING K - G
K – G = 9% - 3%
6%
STEP C: DETERMINING INTRINSIC VALUE
INTRINSIC VALUE =
Current Year Dividend/(K – G)
0.0625 / 0.06 (6%)
S$ 1.04
CRITERIA 8 : STOCK PRICE IS NOT OVER VALUED AGAINST THE INTRINSIC VALUE
My Stock Portfolio Selection
9
MY ANALYSIS ON SINGPOST
Criteria 1:
1. SingPost is showing consistent growth from 2006 to 2011.
2. 2012 faces domestic decline in mailing income, but management has remedied the situation by
accelerating its transformation into digital services, e-commerce businesses, and growth in
regional logistics and e-fulfillment.
3. The current decline in EPS should be temporal.
4. Though EPS is reducing, dividend payment is still consistent at S$0.0625 per share annually. It is
still providing an attractive income.
Criteria No. 2:
Except for the year ended 31-3-2012 when special dividend was declared, SingPost had been paying
consistent dividend of $0.0625 for year 2007 to year 2012, and details are as follow:
Dividend chart adopted from SingPost web page
My Stock Portfolio Selection
10
Criteria 3 to 7:
1. Criteria 2 to Criteria 6 are healthy.
2. As SingPost is the only postal service provider in Singapore, the service will never go obsolete
though it is facing decline in domestic mail. However, official documents will still need the
postal service to deliver.
3. Current standing is monopoly in postal service.
4. The company is accelerating its transformation into digital services, e-commerce business, and
growth in regional logistics and e-fulfillment.
5. As for long term debts, there is no concern as the long term debt is reduced to 206.1 million
according to 30-9-2012 balance sheet report.
6. Operating cash flow was healthy and positive and enabled the company to pay good dividend to
the investors.
7. The Beta for SingPost is 0.44, considered as low Beta, thus SingPost is not too volatile. When
^STI is bullish, it will be underperformed. But if ^STI is bearish, it will over perform the ^STI.
Criteria 8 :
A. Type of Valuation:
Determining intrinsic value is one of the most difficult hurdles as there is no one-fix-all valuation
method. In my selection of stock portfolio, I use three methods of valuation named:
• Discounted cash flow valuation method (by Adam Khoo)
• Value.Able valuation method (by Roger Montgomery)
• Perpetuity DDM valuation method (by Mark Lin)
B. How Do I Choose Which Valuation Methods?
1. When the company is paying 80% to 100% of their earning as dividend, I will use Mark Lin’s
Perpetuity DDM valuation method.
2. If the company cash flow from operation is consistent with steady growth every year, I will
use Adam Khoo’s discounted cash flow valuation method.
3. The rest of the shares are not fitting to nos. 1 and 2, I will use Roger Montgomery’s
value.able valuation.
C. What Is The Purpose Of Defining The Intrinsic Value?
1. Just as what I have written in “How I Fail Disastrously in Stock Market”, share prices will
eventually reflect the true value of the underlying business quoted by Benjamin Graham “In
the short run, the market is a voting machine. In the long run, however, it is a weighing
machine”³. Thus, knowing the intrinsic value will prevent us from paying extra for the
investment.
2. When share price has exceeded the intrinsic value, our investment will have to base on the
technical aspect, i.e. to surf along with cycles of waves in stock market (swing trading).
3. However, our knowledge of intrinsic value will help us in bearish market, when the market is
filled with fear and uncertainty, we will have the courage and “greed” to buy in stocks and
hold so long as there is substantial discount to the intrinsic value.
My Stock Portfolio Selection
11
Technical Analysis
A. Swing Trading Strategy:
1. As I am very familiar with the trend direction of SingPost, I will enter into position via swing
trading strategy (this will be another subject to touch on later on) when there is a test on the
trendline support as circled in the chart.
2. When the trendline is tested and rebound, that will be the optimum entry point.
3. SingPost is like any other stocks, the performance will be subjected to general market
conditions:
• When there is major correction in the STI index, SingPost will be affected.
• From 2008 till now, there were at least two major reversals during these periods: April
2008 and September 2010.
4. I will also use the researched target prices of brokerage firms as a guide, as the target price
will be the “perceived price”⁴ accepted by the professional traders as defined by Tom
William.
5. The target price will be some form of guideline whether I am buying an expensive stock or
otherwise (available from www.i3investor.com)⁵.
30/10/12 Maybank Kim Eng – $1.10
30/10/12 OCBC – $1.20
B. Buy & Hold Strategy:
1. When there is a major correction and the price has fallen below intrinsic value with a
discount, I will buy and hold to gain maximum profit.
2. This is the only situation technical analysis will not be employed.
3. Buying will solely be determined by how many percent of discount from the intrinsic value
that I should aim for.
4. My entries at 25-8-09 and 27-4-2011 were of this nature.
My Stock Portfolio Selection
12
Chart of SingPost
Dec 10 Dec 12
Dec 10 Dec 12
My Stock Portfolio Selection
13
CONCLUSION
My stock portfolio selection based on “eight criteria of portfolio selection” is definitely served me
well. I am using this method to short list my stock portfolio and I will wait for the right moment to
enter trade. By having an objective stock selection, I will not be carried along by “tips”,
“recommendations” and “persuasion”. With stringent adherence to my rules and regulations, I have
the edge in trading. Further than having the edge, I discipline myself to protect the capital with stop
loss order when market turns against my entry. What I shared works well for me; however it may
not work for you.
My Stock Portfolio Selection
14
APPENDIX
My Stock Portfolio Selection
15
COUNTER
OUTSTANDING SHARES
Insert Chart From:
www.corporateinformation.com
Quarter
Financial Year
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st Qt
2nd
Qt
3rd Qt
4th
Qt
Total
Quarter
Financial Year
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st
Qt
2nd
Qt
3rd
Qt
4th
Qt
Total
Quarter
Financial Year
Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend Mth/Yr Ex-Date Dividend
1st
Qt
2nd Qt
3rd
Qt
4th Qt
Total
CRITERIA 1 : HISTORY OF CONSISTENT EARNING AND GROWTH
YEAR REVENUE NETT
INCOME
EPS DIVIDEND
CRITERIA 2: HISTORY OF CONSISTENT DIVIDEND PAYMENT
My Stock Portfolio Selection
16
LONG TERM DEBTS/EQUITY RATIO DOES NOT EXCEED 0.5-1.0
D/E RATIO = LONG TERM DEBT/EQUITY
ROE MUST EXCEED 12%-15%, BELOW 12% IS LOUSY
ROE = (NETT INCOME/EQUITY) X 100
ROA MUST EXCEED 6-7%
ROA = (NETT INCOME/TOTAL ASSETS) X 100
HIGH FREE CASH = CASH FLOW FROM OPERATION – CAPITAL EXPENDITURE
FCF/REVENUE = (FREE CASH FLOW/REVENUE) X 100 (MUST EXCEED 5%)
YEAR BETA YEAR BETA YEAE BETA
CRITERIA 3: CONSERVATIVE DEBT FINANCING
YEAR
L/T DEBT
EQUITY
RATIO
CRITERIA 4: HIGH RETURN ON EQUITY (ROE)
YEAR
N/INCOME
EQUITY
RATIO
CRITERIA 5: HIGH RETURN ON ASSETS (ROA)
YEAR
N/INCOME
T/ASSETS
RATIO
CRITERIA 6: HIGH FREE CASH FLOW
YEAR
FREE CF
REVENUE
RATIO
CRITERIA 7: LOW BETA (1 or below 1)
My Stock Portfolio Selection
17
CRITERIA 8: STOCK PRICE IS NOT OVER VALUED AGAINST THE INTRINSIC VALUE
My Stock Portfolio Selection
18
Name of the Stock
Date of Valuation
PERPETUITY DIVIDEND DISCOUNT MODEL OF VALUATION (BY MARK LIM)
The Perpetuity Dividend discount Model calculates the reference price of a stock by taking the
sustainable dividend dollar per share divided by the difference between the cost of equity and the
perpetual growth rate in dividends.
FORMULA: P = D / ( k – g )
P = Reference price
• It serves as a possible entry point for long term conservative dividend investors.
D = Future Dollar Dividend one year from now.
• Use the historical dividend payment track record as a gauge
K = Cost of Equity {risk free rate + ( beta x equity risk premium)}
• Risk free rate equals to 10 year government bond yield average 3% (Singapore)
• Beta use 1, actual beta can be obtained at www.reuters.com
• Equity risk premium for Singapore is about 6%.
g = Perpetual Growth Rate In Dividend
• Use long term economic growth rate of a develop economy (GDP growth rate), usually
3%(For STI stock)
Calculation of Denominator:
K – g = {risk free rate + (beta x equity risk premium}} – g
ACKNOWLEGEMENT;
The above format is adopted from “Secrets of Dividend Investors” by Mark Lin ( Page 40 to page 43).
STEP A: DETERMINING K
K (Cost of Equity) =
Risk Free Rate + (Beta x Equity Risk Premium)
STEP B: DETERMINING K - G
K – G =
STEP C: DETERMINING INTRINSIC VALUE
INTRINSIC VALUE =
Current Year Dividend/(K – G)
CRITERIA 8: PERPETUITY DDM VALUATION MODEL
My Stock Portfolio Selection
19
COUNTER
DATE OF VALUAION
ACKNOWLEGEMENT:
The below-mentioned discounted cash flow valuation method is adopted from Adam Khoo’s
“PROFIT FROM THE PANIC” page 97 TO 127.
VALUATION YEAR: CF: GROWTH:
Year 1 2 3 4 5 6
Projected CF
Discount Rate 0.95 0.91 0.86 0.82 0.78 0.75
Discounted CF
Year 7 8 9 10 TOTAL:
Projected CF
Discount Rate 0.71 0.68 0.64 0.61
Discounted CF
INTRINSIC VALUE DCF
TOTAL SHARES
CRITERIA 8: DISCOUNTED CASH FLOW VALUATION MODEL
My Stock Portfolio Selection
20
Name of the Stock
DATE OF VALUATION
AKNOWLEGEMENT:
Value.Able valuation method is adopted from “VALUE.ABLE” by Roger Montgomery.
YEAR LAST KNOWN FANANCIAL RESULT FORECAST RESULT*¹
STEP A: DETERMINE THE EQUITY PER SHARE (EQPS)*²
EQUITY
TOTAL SHARE
EQUITY PER SHARE (EQPS)
STEP B : DETERMINE DIVIDEND PAYOUT RATE (POR)
DIVIDEND (DPS)
EARNING PER SHARE (EPS) DIVIDEND PAYOUT RATE(POR)
STEP C: DETERMINE RETURN ON EQUITY (ROE)
NETT INCOME
EQUITY*³
RETURN ON EQUITY
STEP D: DETERMINE THE MULTIPLIERS
DIVIDEND POR RATIO
REQUIRED RETURN
ROE
INCOME MULTIPLER*⁴
GROWTH MULTIPLER*⁴
Notes No. *1:
1. The forecast result for KLCI and STI stock can be obtained at www.i3investor.com (look for the target price).
Notes No. *2:
1. Forecast Equity Per Share = Previous year equity per share + forecast earning per share – forecast dividend per share + new
share capital per share – share buyback per share
Notes No. *3:
1. For the forecast valuation, use the prior year equity as the basis as this is the equity used to earn forecast year of return.
Notes No. *4:
1. Income and growth multipliers will follow to the nearest ROE.
2. The required return will depend on the stock invested; a stable stock may use lower required return, whereas unstable and
high volatility stock may need higher required return.
CRITERIA 8: VALUE.ABLE VALUATION
STEP E: APPLYING THE MULTIPIERS (ACTUAL VALUATION)
FORMULA CALCULATION AMT. CALCULATION AMT.
EQPS*INCOME MULTIPLER*POR (#1) EQPS*GROWTH ULTIPLER*POR(#2)
INTRINSIC VALUE (ADD #1 & #2)
My Stock Portfolio Selection
21
FOOT NOTE
1. “How I Fail Disastrously in Stock Market”.
http://www.investmentdiary007.com/2012/12/how-i-fail-disastrously-in-stock-
market.html
2. Beta for SingPost taken from www.reuters.com
3. Roger Montgomey. “Value.Able”. My 2 cents Worth Publishing: Australia, 2010. Page 19.
4. Tom Marshall. Master the Market:TradeGuider, 1993, page 13
5. Target Price of SingPost. http://sgx.i3investor.com/ptservlet.jsp?sa=pts&q=SingPost
ACKNOWLEDGEMENT
Data for SingPost is taken from Thomson Reuters (in Million Singapore Dollar)
BIBLIOGRAPHIES:
1. Mark Lin, Secrets of Dividend Investors, Singapore: Rank Book 2010.
2. Adam Khoo, Profit from the Panic, Singapore: Adam Khoo Learning 2008.
3. Roger Montgomery, Value.Able, Australia: My 2 Cents Worth Publishing 2010.