Stock Selection

"A stock that moves is a good stock"

I have always been told that, and over here I would like to cover what I look for when I invest in a company, not in any particular order.

1. What are the prospects of the industry for the next 5 to 10 years.

Over here, what I look into is the products developed by the industry and how likely is the product's usage in the next 5 to 10 years. If chances are the product is going to be around in the next 5 to 10 years, then it's a good investment in that sector. For that reason, I value commodities highly. Another sector that is worth looking into is the food and beverage industry. After all, we all have to eat.

On the same note, I look towards employee placement companies in USA as a play on the job recovery. 2 companies come into mind: Barrett Business Services (Stock Quote: BBSI) and Spherion Corp (Stock Quote: SFN)

2. How large is the company, and what is the likelihood it grows?

For me, I look to invest in small growing companies. I believe that it is one of the most, if not the most, important factor when choosing a company to invest in. If you look at the companies I am investing in, they are not the market leaders in their industry. To me, there's only 1 correct time to buy a market leader in an industry, and that is during a recession when prices are depressed.

There is one exception to the rule, and that happens when I look at companies that would be classified as turnarounds. Turnarounds are companies that used to be market leaders, but now are so depressed due to mismanagement that it would probably be on the verge of bankruptcy.
Three companies come into mind: JC Penney (Stock Quote: JCP), Office Depot (Stock Quote: ODP) and YRC Worldwide (Stock Quote: YRCW).

3. Financials

I base my financial analysis on multiples - P/E and P/B ratios are the most common. Other important things I look at is Cash per Share, NAV per share and the leverage and current ratios. I personally think that Cash Flows, while important, should not be given too much emphasis - on this topic we should look at the Burn Rate of cash, which is an indicator for companies who may face troubles during a recession.

Negative equity is one thing that is a huge red flag, however, I believe that sometimes it does not mean it's the be all and end all of investing. It all depends how the company would fare in the future that matters. I will put one company forward should people wish to study a negative equity B/S that has prospects worth looking into in my opinion: Comforce Corp (Stock Quote: CFS). I believe that it is a possible investment if you are looking into the employee placement industry.

4. Management Policies

On the topic of management policies, I would like to mention Soilbuild as a company that conveys its message across to its investors succinctly. If you do just a little bit of research, you will realise 1 thing - that Soilbuild is focusing on hitting the 40million mark in rental income, and its dividend is based on rental income. If I told you that we aim to pay out a minimum 7 cents a share by 2012, and continue the payment beyond 2012, people who look for a stock with a developer play and would want to collect respectable dividends would look towards the company.

This is what I mean by the management policies. A policy that tells investors what to expect and what they intend to do in the future, especially its future expansion plans, is always a good thing as it reduces the investor's margin of error.

5. Invest In What You Know

The idea is taken from Peter Lynch. When we look at something to invest, we should look around us. Things that work around us, because it will give us first hand knowledge on how good/bad the product is.

For example, if your Toyota has an accelerator problem and you are one of the first users of it, you may wish to find out more about that problem, and an early research would turn out a result that a few people are experiencing the same problem as you. This is first hand information that may tell you that you should sell your shares in Toyota before the issue becomes widespread.

Or if you have bought an OSIM massage set ( I have never used an OSIM massage set), or if you always go to Popular to buy books, or if you get your coffee from Gloria Jean instead of Starbucks because they serve better coffee, all these are indicators that you should do a little bit of digging around about the company, so that equipped with the first hand information, you will be one step ahead of all the analysts.

For this same reason, I do not foresee myself looking towards techonology and semiconductor stocks because I can tell you, that I don't understand what actually happens at all.