Beauty is in the eye of beholder. I believe that applies to evaluating stocks as well.
So, what is your definition of a good stock? Undervalued? Growth? Dividend?
More importantly, how do you identify it? What metrics do you use? Do you perform technical or fundamental analysis? Or you dig through the years of annual report to understand the business model and direction?
I guess I should share my thoughts first.
My main investment objective is to have passive income hence my definition of a good stock would mean one that pays good and growing dividends year after year.
In order to identify that, currently I mostly rely on dividend strength as it is essentially numerous fundamental metrics squeeze into one number.
to me a good stock is one with 1) good track record of earnings/dividends of at least 10 years 2) in an industry that is not too competitive 3) management has shown to deliver shareholder value and not the type that keeps asking for money 4) valuations for the stock is cheap, lower PE than STI ETF and higher yield than STI ETF
Sim Lian, was to me, the perfect undervalued stock.
It was trading at about 0.6x to a dollar in book value. Debt was very, very low. It wouldn’t have mean much until (2) and (3).
I valued Sim Lian’s worth at about 1.1 dollars. My values are very modest-- I valued Singpost to be worth only 0.9x dollars… no joke LOL! That is purely based on cash-flow…
It has an almost perfect board composition-- it has an insider in an ex-HDB senior offical, and the daughter is the wife of a promising political minister.
I used the methods described in the book “The 5 Rules to Successful Stock Investing.” I googled every single member of the board of directors… very revealing.
Quite some time back, I was screening for stocks that are high in ROE but low in debt… one of the companies was The Hour Glass… I am a simple man and know nothing about the luxury business.
The business didn’t appeal to me because I feel that the company is misusing valuable funds-- case in point-- there was unsecured loan of about 2-3 million dollars to an associate that is recorded, and the company offered the departing lady boss a country club gift of a million dollars.
This and many more companies convinced me that a company might be attractive in statistics but you still to read the annual reports very very very carefully.
Well… I am certainly guilty of always just flipping through those annual reports if I even bother to. You mean they write all these down in the annual report and no one question that during AGM?
The loan is recorded in the balance sheet; whereas the gift was stated somewhere in the front portion of the AR… can’t recall. I didn’t attend the AGM as I am not a shareholder. Neither did I ask the public.
I think it boils down to risk appetite, investment horizon and investment objectives. It is difficult to define a generic good stock
For me its something to be below book value but still making profits with good dividends track records.
Stocks like nam lee pressed metals.
Honestly I found “dividend strength” inaccurate in identifying consistency of dividend payments, whether as in dividend amount or dividend yields. If a stock’s dividend changes 40-50% (up/down) YoY, I would give it maybe 50-60% strength. When I look at the top names in https://stocks.cafe/dividendstrength-details?min=90; some of them are terribly inconsistent. Take DBS for example, quite an unreliable dividend payer with unpredictable future. https://stocks.cafe/stock/dividend/D05/dbs+group+holdings+ltd?type=xsummary&exchange=XSES
Whereas OCBC seems quite consistent in terms of dividend amount. https://stocks.cafe/stock/dividend/O39/oversea-chinese+banking+corp?type=xsummary&exchange=XSES
From 2006 to 2017, DBS dividend didn’t change at all, while OCBC has increased >50% as inline with inflation and growth. They have the same dividend strength. OCBC gives confidence for the future (by looking at the past). DBS, who knows what will happen to dividends 5 years later.
|OCBC BANK (O39)|3.74%|3.13%|92.03%|
In my opinion, we need to review the dividend strength concept and formula very carefully. In its current shape, it doesn’t give me much confidence just by looking at the OCBC - DBS example. OCBC deserves 92%, DBS hardly 60-70%.
Agree. We should maybe use more straight forward rule-based approach to compute.
I guess, it is impossible to come up with a perfect formula. I am not sure what metrics you use in yours; however I think the following criteria might have weight in the calculations
- standard deviation of dividend yield (this is somewhat indexed to the stock price stability)
- standard deviation of dividend amount (in better times or worse times, the income needs to keep coming)
- dividend amount growth min %2-4 as inline with healthy inflation+growth (consider dilution, stagnant/shrinking business)
- number of years dividend have been being paid continuously (prefer 10 years vs 2 first years after IPO)
- number of dividends paid annually (prefer regular 4 dividends vs 1)
I haven’t touched statistics last 30 years. Standard deviation might not be the best approach.