FORMULA for successful stock picking

Picking the right stock to invest can increase your odd of winning. Knowing what to buy is very important step toward profitable trade. Even if you buy at the wrong timing and the stock started to drop after you bought, a good company will always provide a positive return in longer term. Like horse racing game, you need to select the best, the fittest horse to bet, getting the best return on your investment.

However, there are so many companies listed in the market, 700+ stocks in SG market, 900+ in Malaysia and 7,000+ in US market. The odd of successful picking apple among the lemons may look similar to buying 4D numbers. That is why you need to have a right formula for stock screening that give you the highest probability of success. Everyone has their own ways of selecting stocks. To evaluate your stock picking acumen, the effectiveness of your formula will be determine by the rate of return (ROI).

Today, I would like to reveal my secret formula for successful stock picking. I can’t say that my methods is perfect nor it suit everyone style of investment, but you can use this as reference to enhance your own methods. Are you ready? Here are my best ingredients for successful stock pickings!

Big Cap or Small Cap stock

Size does matters. Small Cap companies are more easily manipulated by market punters. For short term investment, price gains in small Cap can easily outpace mega Cap stock. But small Cap also post much higher risks for longer term horizon due to lack of financial stability. I have witnessed many small Cap companies went underwater during economy crisis due to cash flow issue. Small Cap companies also lack ability to compete with big corporations. One of the best examples is smart wearable battle between Apple and Fitbits. Fitbits and Pebbles used to monopolize wearable smart watch before Apple launched its iconic watch. But look at what happen to Fitbits and Pebbles now? Beside strong financial muscle, strong branding is also another plus for Mega Cap. Base on my past experience, my biggest losers are mostly small cap counters. My view can be biased, but I will always choose Big Cap over small Cap now as my selection criteria.

Verdict: I Preferred Mega Cap stocks       

Intrinsic valuation: PE or PEG ratio

The PE ratio (Price/Earning) is widely used by almost everyone who want to determine the intrinsic value of a stock. Have you ever received advice from market analysts not to buy stock that have P/E ratio more than 10? Sometimes I have coffee talk with my friends, they would told me they won’t buy certain stock because its PE ratio was high >10 as seem excessively over-valued. For me, I don’t really use PE ratio as a gauge for stock valuation. I will still buy stock with high PE >30 if it has huge growth potential. I prefer to use PEG ratio (Price/Earning vs. Growth) when selecting companies. PE ratio only useful for matured company with matured market and can only use to compare within the industry sector. Some business sectors will have higher PE valuation than others. We can’t use PE>10 rules and apply to all industries. It is too complicated, and I won’t write too details in this blog.

Verdict: I Preferred using PEG ratio 

Megatrend

The type of business that the company involves is very important to ensure continuation of growth prospects. Companies that has products that drive a new megatrend among the consumer is the best business to own. A megatrend is a shift in attitude and consumption’s behaviors that has great impact on global environment. A company that can innovate will continue to stay relevant to the megatrend shift. Example, online movie streaming had become global megatrend as the new generations spend more time on the internet as compare to older generations on TV box. The most popular streaming company Netflix had explosive increase in subscribers, reflected very well on its stock price which increase d 500% over 5 years. So, megatrend is the most important ingredients in my winning formula.

Brand Equity value

Branding is very important it can create high followers that drive demands for its products, both current and future products launch. This will ensure the growth will continue in foreseeable futures. Each brand has its value. You can refer to the world’s most valuable brands report from Forbes each year to determine its value. In 2019, Apple brand was ranked 1^st with $205 billions price tag. Can brand turn into tangible asset? Yes, you can. In 2006 Ford motor turning the iconic blue Ford oval, one of the world’s most famous trademarks, into collateral to secured $23bil loans. So, strong brands always part of my consideration when come to stock picking.    

My winning formula

Here is the summary of my winning formula for stock picking.

Formula = Mega Cap + PEG + Megatrend + Branding


Adios!

-WILLIAM CHENG

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