Fundamental Analysis - The process of stock picking

[Boggo]

When my trades start going wrong, I know it can only mean one thing, namely, my dartboard is long overdue for servicing!

There may be a technical issue there cynic, is the centre of the bull precisely the regulation 5' 8" off the floor

 

[McLovin]

Turn the chop mate, a few people on this very forum put an avoid on DSH in the same time period and I can tell you now they weren't all techies.

You forget who you're dealing with. This is the guy who used TLS at $8 as an example of yield investors getting burnt.

And remember the TGA saga?

 

[cynic]

There may be a technical issue there cynic, is the centre of the bull precisely the regulation 5' 8" off the floor

Some might argue that it's positioning is fundamentally floored! But that's just a technicality that I'll be discussing with my analyst!

 

[Boggo]

You forget who you're dealing with. This is the guy who used TLS at $8 as an example of yield investors getting burnt.

And remember the TGA saga?

and how are both of those going for fundamental investors

Anyway, enough of this nonsense. There are two ways of doing this beating the market bizzo, one headed in the same direction as galumay's SGH investment in the links in my earlier post #18 and the other one (TA) is working for me.
I'll leave it that, each to what works for them, FA solely on its own didn't for me.

Nighty night.

(click to expand)

 

[McLovin]

and how are both of those going for fundamental investors

TGA doubled from when you were shrieking like banshee a few years ago about it. Funny how you never acknowledged that in your "beating the market bizzo" spiels (your chart starting in 2014, when you made the comments in 2012 is, I guess, understandable). TLS as a yield stock at $8? Hilarious.

FA solely on its own didn't for me.

No ****.

 

[InsvestoBoy]

Enlighten me please, in your opinion what might these brokers have been using as basis for their research ?

Good question!

FWIW, the IPO price of DSH was ~$2.20 from memory. I wasn't on this forum at the time but if you go back to the thread like I just did, before the IPO had ever generated a chart, there was people saying stuff like "IMO you would have to have a death wish to invest in this"

There was an DSH Annual Report released 28th June 2014 (price was ~$2) and the next on 29th June 2015 (still around $2). Even for someone like me who knows really essentially nothing about reading an annual report, there were obvious huge red flags:
- Low net and operating profit margins
- Negative and declining free cash flow (-35M) for 2015 ann report
- Low and declining current ratio (1.23) for 2015 ann report
- Huge increase in debt/equity ratio for 2015 ann report
- and most damningly, the operating cash flow went negative, while the net income somehow magically shot up by nearly 100%.

Even if you were a holder on 1 July 2015 you could have sold for ~$2 per share without ever looking at a chart from those red flags, well before price collapse started.

 

[So_Cynical]

Exactly why I use approx 460 of StockDoctor safer stocks and I apply TA to those.
(At the moment I am actually running the All Ords constituents of about 490 stocks in parallel).

At the first sign of a weekly chart technical heads up I find that I actually am ahead of the inevitable FA caution or warning.

For galumay - https://www.aussiestockforums.com/forums/showthread.php?t=6931&page=5&p=867465&viewfull=1#post867465

and - https://www.aussiestockforums.com/forums/showthread.php?t=6931&page=5&p=873098&viewfull=1#post873098

On the subject of Slater and Gordon - I called it on the 1st of April.

(1st-April-2015) I'm inclined to think that the Quindell purchase is a bad deal, unlike all the other acquisitions this one is big enough to really hurt SGH, well hurt the shareholders because they are the ones putting up the bulk of the money, its a risky move simply due to the size.

Its been quite a while since a major Aussie company made a massive blunder buying something foreign so i reckon we are overdue, its like the roll up expansion is more important than the safety of shareholder funds. feels like SGH is taking us to a crap table hoping to win big with our money.

No TA or FA needed, just wish i had followed my own thinking, wanted to wait until the new tax year...

 

[galumay]

I am with craft, i am out of here. You cant have a discussion with people that make so many logical fallacies and seemingly are incapable of rational discussion.

Using one of my errors of judgement to try to justify his personal ignorance of FA is about as silly an argument as I have ever seen!

Its a pity that another thread has been torn off topic by the religious and evangelical attachement to strategies for investment and trading. Its one of the most positional arguments going and its entirely pointless.

 

[craft]

You may suggest it but that does not mean you are correct either. If some one has the time to learn FA then fair enough if that is what they like to do and can then make it work for their investment timeframe.

I also fall into the category of subscribing for my FA and I do not understand the ins and outs but understand the methodology that is being used to select the most financially healthy companies and since I spent my years understanding technical's and how combining the two FA/TA I can profit from the market that is all I require.

I also see it not just as a safety overlay but also to advance my performance with market or stock timing ..... entering or exiting at a more opportune time for whichever timeframe I may be using.....

Ok deep breath.

I have said that if you use a third party FA supplier and you do not fully understand and agree how they come to their conclusions you should overlay TA for safety, lest you ride somebody else's 'potentially' poor judgement into the ground on misplaced trust in their judgement and ability. So I am confused what you are actually disagreeing about. Do you think a TA overlay shouldn't be used? Do you think you should just fill your portfolio with a dozen or so of their recommendations and wait for there next advice. No I don't think that is what your action's suggest, so what is our point of disagreement in which you are saying I'm not correct?

I have said that a good technical ability will probably not be improved by selection of a fundamentally superior universe.
Do you know the split in performance contribution between your universe selection and your technical Overlay? Have you tested whether your technical abilities could harvest more profit in a more volatile universe which arises where fundamental uncertainty abounds? From the argument in your post I think you have misinterpreted my point.

I have not posted anything against TA.

Yes I have made a point about combining them. Some news based reaction strategies lend themselves to combining the two but generally I think the individual advantages of the two disciplines subtract rather than add value to each other. Yes that's an opinion but it's not a chump change opinion. Your argument has not refuted it. The question is does the FA universe selection aid or detract from the technical overlay. If your technical abilities are good why not drive the speed of the internal compounding by widening the universe to faster moving more volatile price action that arises from fundamental uncertainty in an 'inferior' FA universe.

I have responded to someone that always attacks FA because of his lack of understanding and implementation of it. That is not an attack on TA.

 

[Value Hunter]

By the way good to see you back Craft.

 

[Triathlete]

I have responded to someone that always attacks FA because of his lack of understanding and implementation of it. That is not an attack on TA.

I do not know how you come to that conclusion since I use FA in my own analysis.....

I certainly have had disagreements with entry points into a particular stock that have been put forward by pure FA cousins....but this is just an opinion within different investment styles and based on my own TA analysis....

 

[craft]

I have responded to someone that always attacks FA because of his lack of understanding and implementation of it. That is not an attack on TA.

I do not know how you come to that conclusion since I use FA in my own analysis.....

I certainly have had disagreements with entry points into a particular stock that have been put forward by pure FA cousins....but this is just an opinion within different investment styles and based on my own TA analysis....

That line was explaining why I responded to Boggo. The other response I added to this thread was in relation to Porper's query. I'm not sure what you were responding too - but I think you may have misinterpreted what I was saying to either of them. Just trying to put it in context for you. Any interest in addressing the rest of the post which was directed to you now that you have chimed in?

 

[Klogg]

I guess I haven't been clear when i made a post previously about the challenges and obstacles in stock investing.

Basically I like to find out if others have come across any challenges, obstacles or frustration during the process of stock picking. That is from finding & screening opportunities or ideas, research, analysis to valuation, making buy decision, portfolio allocation/composition etc. This process also include decision making in every stage of the investing from when to buy or sell, to buy or not to buy etc.

Personally, I think the challenging part for me is the research part. Trying to understand the business side and do a deep research, the ability to find information is a frustrating one and analysing those information after you got them.

Just want to see if others have any challenges in any stage of the process or the whole process is an obstacle that prevent you from starting at all, i.e. not time to learn etc. Cheers

Going back to the original question (in bold). Your post suggests that you're using some form of fundamental analysis, so I'll answer as best I can making this assumption.

I can break this down into two components (although it can be broken down further). Finding ideas to research, and then knowing what to look for once the ideas are found.

On finding ideas
I typically have a few approaches here, but the main ones are:
- Using forums like ASF to see what like-minded people are looking at
- Using filters against listed companies based on any metrics imaginable (P/E, Book Value, etc.)
- Looking at companies trading at 52week lows
- Reading yesterday's ASX announcements for anything particularly interesting (questionable value, but I'm testing it)

That usually helps me generate sufficient ideas to research


On researching ideas
There's almost an unlimited number of ways to view a company. What I do (not necessarily what's right), is to understand the industry and then know what to look for.
For example, I might be looking at a mining services company currently. All the basics of my research might check out (management, debt levels, etc.) so no obvious risks.

The next part for me is filtering the important from the unimportant. Should I be looking at the cyclicality of the industry and how they've performed previously? Or is there some sort of key client risk? Is there a change of management that has created uncertainty reflected in the share price?

This generally takes me a long time to get comfortable (2-3weeks minimum). However, I build that knowledge base once and it can holds me in good stead for a long time... Once I become familiar and comfortable with a company, and I have a rough idea on valuation/expected cash flows, then I can make an informed decision.

My biggest challenge is that I'm time bound. Full time job, organising a wedding and some additional community responsibilities on top of it all. To get around this, I wake up early (5:30am) and hit the annual reports for 1.5 to 2hours. Still, I'm now working on freeing up some more time...



As an aside - I'm currently reviewing my own portfolio allocation, so I don't really want to go into my thoughts, as writing them out in a public forum might make me bias toward one approach over another.

I hope this helps...

 

[skc]

Personally, I think the challenging part for me is the research part. Trying to understand the business side and do a deep research, the ability to find information is a frustrating one and analysing those information after you got them.

Just want to see if others have any challenges in any stage of the process or the whole process is an obstacle that prevent you from starting at all, i.e. not time to learn etc. Cheers

Don't be discouraged. It's not meant to be easy or straight forward... and there is no single right or wrong answer. For some people the most difficult part is generating the idea, for others it might be the action to buy/sell, and for some it would be the management aspect. Nothing's worse than having the right stock but only to sell because you got cold feet and tried to take a small quick profit.

Being good at investing requires you to be both alert and relaxed at the same time. At the beginning phase, it's not easy to distinguish between a temporary dip in business performance or a major structural change.

Enlighten me please, in your opinion what might these brokers have been using as basis for their research ?

Not directly related to DSH, but it's worth noting that a research analyst doesn't work in a vaccum and it can be difficult for them to be completely impartial for a number of reasons. For example, to make a call that's very different to consensus, he/she needs to be absolutely sure of being right. If the wrong non-consensus call is made, the career may be on the line. But if the view is simply inline with others, he could always said that the whole market got it wrong. Also, the research is often but one part of a larger broker house.. and the organisation often wants to maintain good relationship with the company they are covering for future, more lucrative businesses (e.g. capital raising, acquisitions). So while there's supposed to be Chinese walls separating the different arms, the research analysts may not always be purely independent.

Here's a good article on this issue. A BoA analyst who first called sell on SGH ended up leaving her job because she experienced too much pressure from her non-consensus call.

http://www.afr.com/business/the-sellside-sold-out-on-slater--gordon-20160302-gn8hw2

I doubt that a universe of “fundamentally superior” stocks will add to a technical approach. Actually I suspect it will detract. The volatility that TA should seek to harvest occurs mostly where there is too much uncertainty for FA to be of any use - the more fundamentally superior and understood the more bounded the price discovery is in the market. If your a good trader go for the inferior stocks - that's where the movement will be.

I don't think I can conclude one way or the other whether it's a plus or minus. TA trader doesn't necessarily want volatility... a smooth trend without major gap/tail risk is probably more desirable. The question is whether an FA filter can offer that - and at a guess I'd probably say yes if the FA is good.

Also, at a guess, for most traders there are usually more trade candidates than available capital or risk tolerance. So a vast enough FA filter would probably not result in too many opportunities forgone.

Interesting discussion you have in the other thread about PAC. It's a stock I've looked at in recent times but I find that I don't have enough knowledge to buy (and hold) it with the conviction required. But it's generated enough for me to say it has potential... and in such case I use TA for a trade. The TA is protection for my weak FA, while my weak FA is a filter for trades with potential catalyst. If it sounds unscientific that's because it isn't!

 

[craft]

Interesting discussion you have in the other thread about PAC. It's a stock I've looked at in recent times but I find that I don't have enough knowledge to buy (and hold) it with the conviction required. But it's generated enough for me to say it has potential... and in such case I use TA for a trade. The TA is protection for my weak FA, while my weak FA is a filter for trades with potential catalyst. If it sounds unscientific that's because it isn't!

Very interesting and ironically or maybe even hypocritically to what I have posted I'm in exactly the same situation with PAC - I will implement TA if needed to supplement the FA as I continue to try and get a handle. I've also done the same with other stocks - CCP springs to mind because I just can't get to the comfort level I need to be a quantitative strong hand but I really wanted to own the company at times. But adding the TA ultimately has a cost compared to buy and hold if the company actually is quality and bought at the right price. That cost often means I would be better off looking elsewhere for something that I can be comfortable with - yet here I am still researching PAC.....

I think the other point to make in understanding this paradox is for me at least the trade management is never mixed - If its TA entered position I am prices bitch and will exit when she say regardless of what my fundamental inclination may be and visa versa.

 

[Triathlete]

I think you may have misinterpreted what I was saying to either of them. Just trying to put it in context for you. Any interest in addressing the rest of the post which was directed to you now that you have chimed in?

I think you might be right Craft...I will respond later ...!!

 

[craft]

Interesting discussion you have in the other thread about PAC. It's a stock I've looked at in recent times but I find that I don't have enough knowledge to buy (and hold) it with the conviction required. But it's generated enough for me to say it has potential... and in such case I use TA for a trade. The TA is protection for my weak FA, while my weak FA is a filter for trades with potential catalyst. If it sounds unscientific that's because it isn't!

ps the liquidity on PAC is crap it could get a bit crowded:

 

[skc]

ps the liquidity on PAC is crap it could get a bit crowded:

For your portfolio size...every stock has crap liquidity.

 

[craft]

For your portfolio size...every stock has crap liquidity.

That's not true - but I could do without any competition from a 'gun trader' on PAC if starts to run. I'm so sloooww. Perhaps you could agree me a gentlemanly headstart

 

[skc]

That's not true - but I could do without any competition from a 'gun trader' on PAC if starts to run. I'm so sloooww. Perhaps you could agree me a gentlemanly headstart

Lol. Pre-mature accumulate all you like. This would be one of those rare weekly trades that I take (if I do take it) which means small size and slow entry/exits as well.

PAC reminds me of HFA from 5 years ago. The HFA turnaround in price was some 2 years in the making and prices ranged from 60-90c (50% range which would throw out most traders).

Anyhow... enough about PAC here.