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.


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.


4

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


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.


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


1st

Qt

2nd Qt

3rd

Qt

4th

Qt

Total 0.0625 0.0625 0.0625

Quarter

Financial Year

2012 2013


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


7

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)


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


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


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.


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.


12

Chart of SingPost

Dec 10 Dec 12

Dec 10 Dec 12


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.


14

APPENDIX


15

COUNTER

OUTSTANDING SHARES

Insert Chart From:

www.corporateinformation.com

Quarter

Financial Year


1st Qt

2nd

Qt

3rd Qt

4th

Qt

Total

Quarter

Financial Year


1st

Qt

2nd

Qt

3rd

Qt

4th

Qt

Total

Quarter

Financial Year


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


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)


17

CRITERIA 8: STOCK PRICE IS NOT OVER VALUED AGAINST THE INTRINSIC VALUE


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


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


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)


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.

my stock portfolio selection

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