Securities Analysis

Hello friends,

Today, I want to share with you about my investment activities.

Lets start with my principles:

1. Wonderful business at a fair price is better than a fair business at a wonderful price.
2. You don't follow Mr. Market, Mr. Market follows you.
3. Dollar. Cost. Averaging!

These are the principles that I tell myself everyday to ensure that I have clear guidance in mind before proceeding with any investment opportunities. I derived these principles after following closely to what Warren Buffet has been preaching. I understand his approach to investing is known as value investing.

Value investing preaches a set of quantifiable indicators to measure if a certain security has a higher intrinsic value that what its price is listed. As such, here are some of the indicators that I take into consideration before determining if a security is indeed worth investing in.

1. Price to book ratio (PBR)
2. Dividend yield
3. Price to earnings ratio (PER)
4. Current ratio
5. Piotroski score
6. Graham number ratio (GNR)
7. Market capitalization
8. Payout ratio

The exact definition and mathematical expression for all of the listed indicators will not be explained here. To be honest, I don't fully understand the exact concept of it to be able to teach them to others. But I do know the key ideas that these indicators could function as.

Each of the indicators has a threshold value which I personally determined in order to define if a company is good enough. If the company's financial sheet shows a reading above the threshold value, I would reward a point. Thus, the best valued company would, at the end of the analysis, receive a score of 8/8.

Lets look at one of the stocks that I have analysed back in 2018 as an example.

Company Name: Malakoff Corporation

Share price: RM0.87

PBR: 0.66

Dividend Yield: 6.62%

PER: 15.51

Current ratio: 2.42

Piotroski score: 8/9

GNR: 0.71

Market cap: RM4.38 billion

Payout ratio: 35.78%

All the details above I got them online either from:

https://www.shareinvestor.com/my or https://www.isaham.my/

Sometimes the facts aren't the same but I would choose the worst-case scenario.

I'll try to explain the analysis behind this company.

PBR gives you the ratio between the current listed price and the book price of the company. If the ratio is less than 1, it means that the company is undervalued because the listed price is lower than the book value. The exact way how to get the book value is something I'm not certain of but I would guess that it has something to do with finding the difference between assets and liabilities and getting its prices relative to all the existing shares. 

Since 0.66 is less than 1, so I can give 1 point for meeting the threshold. Score count, 1/8.

Dividend yield is the percentage of return that investors receive. So if you invested RM1000 with a dividend yield of 6.62%, you will get RM66.2 by the end of the year. Essentially, the higher the the dividend yield the better. I set the threshold to be higher than 5% because as long as it is higher than putting in fixed deposit, it's good enough. Score count, 2/8.

PER tells you how fast it takes for a company to earn as much as its current evaluation. In this case, it takes about 15 years for Malakoff to accumulate money that is as much as to what it is evaluated now. In general, the faster the better. The threshold I set was 10 years and looking at its PER, this company didn't match the threshold. Thus, no point is awarded. Score count remains 2/8.

Current ratio tells you how much current asset the company have relative to its current liability. So in the case where the company goes under, we can know how much assets the company have to liquidate to cover back the liabilities. As long as the assets are worth twice as much as the liabilities, it's good enough for me. So score count, 3/8.

Piotroski score is my way of cheating to gather all the nitty gritty details of other financial strengths of a company. The Piotroski score itself is another set of score within my own score. You can Google the criteria of getting scores in this one. It is graded out of 9 so as long as it is higher than 5, it is good enough. Score count, 4/8.

GNR is a lot similar as PBR. The only difference is, it tells an exact fair value of a company. The calculations were introduced by Benjamin Graham. He is the father of value investing and the mentor for Warren Buffet. A GNR of less than 1 means that the current listed price is lower than its fair value. So that means it is cheap to buy. Score count, 5/8.

Market capitalization tells you the monopoly that this company has in its sector and relative to its peers. A larger market cap gives a good idea that the company can weather the storm if there's a downturn in the market. So for company in the energy sector that is worth more than a billion is good enough for me. Score count, 6/8.

Payout ratio is the ratio of dividend being payed out to investors relative to its earnings. It tells you if the dividend you're getting is sustainable in the long term or not. Here, you need to find the balance between high returns and long term returns. A payout ratio of 100% means high dividends for that year but it hinders growth for the company in the long run. A low payout ratio means great opportunity for expansion for the company but unsatisfactory returns for investors. Personally, payout ratio that is about 1/3 is a good balance for me. Thus, score count, 7/8.

So overall, the score I gave for this company is 7/8. An almost perfect score! However, I decided not to invest in this one. Why? Just because the score only gives a good guideline on which company is great to consider. The scoring system I made is also not a perfect system because my personal bias holds more weight on certain criteria over the others. So here's the bottom line, there is no perfect analysis for all out there. There's only analysis that's perfect for you. This is just one of many approaches available out there and you just have to find one that is personal and works for yourself.

Disclaimer: There's probably a lot of mistakes in terms of definition or understanding to what I described in this post. If there's anything I've understood wrongly, please turn me to the right direction and I will be eternally grateful. 

How does your analysis looks like?

Thanks for reading, friends!