- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
How do experts find top stocks to invest in?
They investigate the business, future growth opportunities and always estimate intrinsic value.
So you’ve found a top quality business. It has a sound balance sheet, good cash flow and a consistent history of delivering value to shareholders. And its share price is trading at a discount to Skaffold’s intrinsic valuation estimate. The decision to buy is easy, right? Not quite.
A top stock today may not be so great in one, two, three or five years’ time. So what research do you need to do then to make sure you build a portfolio of businesses that will stand the test of time?
Here are some expert tips…
Investigate future growth opportunities
Investigate the company’s future growth opportunities and confirm that the future intrinsic valuations estimated by Skaffold, which are driven by consensus analyst forecasts, are likely to materialise. To find these answers, you’ll need to roll up your sleeves and do some digging.
Review the company’s website (you’ll find a link in Skaffold on the Sumary Evaluate screen). Read its recent results announcements, with particular focus on the section titled ‘Outlook’, to understand management’s view on the future of their business.
ASX rulings require companies to release earnings and profit guidance when such guidance can be seen to impact share prices. Check the ASX Announcements regularly and pay particular attention to the price sensitive ones (they’re highlighted with a red !).
Talk to the brokers and analysts that cover the stock. Sometimes you can find their contact details on the company’s website. If the information isn’t freely available, ring the company’s CFO or investors relations and ask. If you use a full service broker, ask them to share their research with you.
One of the single most important external factors you need to consider is the market in which the business operates. Is it expanding, stabilising or contracting?
Only top companies that operate in expanding industries are worthy of a place in your portfolio.
Why? It's much easier to grow a business in an environment where the market is growing rapidly, rather than fighting for market share or compromising margins just to make a buck.
The online space in 2012 was a great example of an expanding market. Businesses such as realestate.com.au (REA) and Webjet (WEB) did extremely well when other markets, such as retail and construction, suffered.
Investigate intrinsic value
Once you’re satisfied the future earnings, profits and intrinsic value of a top stock is likely to materialise, you want to buy shares when the price is trading at a discount to what the business is actually worth – its intrinsic value.
Skaffold Line charts in Skaffold stock research software illustrate a company's intrinsic value (grey/orange line) and share price (green chart), and the safety margin.
Working with future intrinsic valuations is one of the toughest parts of investing. A business may look cheap, but if fast changes in the market catch out company management, a falling share price can be almost guaranteed.
Skaffold’s A1 – C5 Scores are based on the most recent financial reports published by a company. For the majority of ASX-listed business, their Skaffold Scores update in February and again in August, when the full year reporting season kicks into full swing.
It’s important to note that Skaffold’s future valuations are derived largely from earnings, dividends, equity and profit forecasts from consensus analysts who, like many of us, can be slow to factor in some new information.
That’s why Skaffold produces a range of valuation estimates. When you notice a wide gap between Skaffold’s bullish and bearish intrinsic valuations, take a closer look. Review the Earnings and Dividends Evaluate screen to see how many consensus analysts are contributing forecasts to Skaffold, and look at the range of those forecast estimates. If only two analysts are covering a business, and their EPS estimates range from $1.00 to $3.00, you need to ask: What is the likely future outlook for this business? There is probably a fair bit of uncertainty regarding the outlook for the industry or the company or both.