Stock Selection Criteria

A good company exhibits many desirable characteristics. When doing stock selection in stock market, it is good to have a set of rule by your side to aid the selection. Following pure analyst recommendation, usually doesn't get you anywhere.

This list would serve as a guideline when selecting stock

1. Good, committed and honest management.

• This should be a very important factor to consider. A good and foresighted management would be able to take the company to great height. They should communicate all the latest corporate development and strategy to share holder in a timely fashion. Possible evidences are periodic result briefing, immediate release of important development and take time to clear shareholder's doubt in AGM.
• They should also chart out a clear defined growth strategy which capitalise the current industry trend or show how they are going to adapt to industry change.
  

2. Company is profitable, efficient and have a great future.

• High ROE, possibly exceed 20%. This measures the company is able to deploy the fund efficiently to earn good return.
• High profit margin. It is good to have, although not necessary a must. Some company's business model is low margin but high volume. In this case, there are sufficient money to be made to compesate for the low margin.
• Good dividend yield. A high dividend yield is again nice to have, but not a must. If the company is able to deploy the fund efficiently, there is no need to pay high dividend. But periodic and predictable dividend does give share holder a level of confidence in the company.
• Low gearing. The company's debt should not be exccesive. Ideally, the current year cash flow should be able to cover all the debt.
• Positive free cash flow. Look at the operating cash flow, the company with negative cash flow is running the risk that they would have problem in meeting all the short term obligation.

3. Reasonable valuation.

• It might be a great company, but if the valuation is too high, investor would risk potential capital lost if the market valuation is coming down.
• Don't over pay for something.
• Look at the PE and PEG ratio to decide whether it is still worthwhile to invest in the company.
• Alternatively, we can use the discounted cash flow to value the company. However, the problem with this approach is a slight error in the assumption would result in vastly different result.

They are 101 ways to value stocks, either by this or that ratio, or other aspect of the business. But that is too complicated for retail investor. Nowadays, I won't insist on all aspect of the company to be good(in fact, that's almost impossible), I look at few simple aspect of the stock and with the help of analyst report to make the decision.