Saturday, 10 October 2015

Stock Selection process for your long-term portfolio

I would like to share how I usually take to select stocks for my portfolio. I assume you already have some emergency funds (covering 6 months of expenses) stashed away for a rainy day.

Planning Stage
Have a long-term financial plan written down on paper. Visualise your major financial goals & commitments in phases of 3-5 years. You should tell yourself, "Ok, I want to have xyz amount of assets by the time I hit 30/35/40 years old". If you are looking to start a family (mid-30s), you probably prefer more stable defensive stocks like the blue chips. Or you might even want to reduce the allocation of cash on stocks. On the other hand, if you are still young and single (early 20s), you might want to take more risk and go for a mixture of dividend plus growth stocks and ignore bonds until you are older.

Screening & Selection Stage
Once you are clear what you want to achieve financially, it is time to screen the market for stocks which fits your criteria, or at least come close to your criteria. These are the main figures that I focus on when read the balance sheets of companies which I am interested in.
  • Type of industry (sunrise - healthcare & logistics or sunset - newspapers & snail mail)
  • Debt
  • Revenue
  • Earnings
  • Free Cash Flow
  • Dividend payout ratio
  • Yield
  • Dividend growth
  • P/E ratio within the same sector
  • Management execution track records (mergers/ acquisitions/ joint-ventures/ AEIs/ rights issue/ private placements etc.)

As for REITs, I look at these figures;
  • Gearing
  • Weighted Average Lease Expiry (WALE)
  • Debt expiry profile
  • Land lease expiry profile
  • Rental reversions track record
  • Quality of assets (location, age  and design of the properties)
  • Type of assets (retail, commercial, industrial, healthcare, hospitality etc.) 
  • Management execution track records (lease renewal/ acquisitions/ AEIs/ rights issue/ private placements/ capital-recycling)
I would suggest starting from the STI. Treat it like your shopping list. Even the companies on the reserve list are solid choices too. Some people prefer to simply buying the STI ETF at regular intervals. I am more selective, so I am only vested in certain companies from the STI such as Singtel, Starhub, CMT, SATS and ST Engineering.

A list of the latest STI component stocks.


STI Reserve list:
  • CapitaLand Commercial Trust,
  • Singapore Post
  • Suntec REIT
  • Keppel REIT
  • M1
I guess this is what the experts would call 'due diligence'. Fortunately, I thoroughly enjoy this screening process. However, I do understand some people are too busy or lack the interest in analysing balance sheets. They prefer to automate their investments. For these people, I would recommend either the POSB or OCBC regular investment saving programmes.


DK

1 comment:

  1. Great starting points you had there DK! Just to add on, for me ROE, ROA & PEG are some of my selection criteria....as for REIT, I'll also look at NAV, price:book value. Great sharing!

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