In general, stock screening is associated with fundamental and ratio analysis. Literally, you filter stocks with predefined key fields that suit your trading styles; growth, valued, conservative or aggressive. Personally, I always use fundamental data such as dividend yield, Beta, operating margin, Return on Capital Employed (ROCE), ratios derived from Balance Sheet and Profit/Loss Account as the first stage of my stock research.
With that information, you can set up screening strategies using specific fundamental criteria to extract suitable stocks to trade. Many practitioners have developed predefined and back tested screening strategies. Some of them may be complex to general public and some of them are as simple as ABC.
I think you may hear about screening the big market cap stocks, hold and sell them after a year. Perhaps, I could put extra details on this method. You may want to apply to all stock exchanges though. However, I believe this method is useful for medium-term investors who do not want to spend too much time on research.
Big Cap list
Get a list of big market cap of Dow Jones which is usually known as Dow Jones 30. Or get a similar list from S&P, FTSE, CAC40, DAX, Nikkei, Hong Kong or even Johannesburg Stock Exchange. Big market cap stocks usually are prominent blue chip stocks with strong fundamental business and financial models.
Dividend Yield
A simple calculation of dividend yield would mark an ability of a company to pay out dividend each year. It may pay on quarterly or annually basis. However, the bottom line is it represents the return on investment for owning a stock. So hence, you should be interested to look for stocks that have high dividend yield.
Roughly, it could be in the range from 2% to 7%. If it’s more than 7%, re-compute the yield; dividing dividend per share by the current share price. The yield may be distorted by the current share price. Otherwise, you may get yourself will-be a jackpot. Insofar, you need to select ten big market cap stocks with the highest dividend yield.
Lowest Stock Price
The golden rule in trading is buy low and sell high. So, apply that rule and select five stocks with the lowest price. Please don’t make any preferences on the stock selection. You must eliminate any emotional attachment. You should not be saying’ ‘I feel these stocks would go further up’ although you know the prices are among the highest.
Finally, you would have five big market cap stocks with a good dividend payout record at a bargain price. If you are thinking of diversifying your portfolio, apply this screening method on other markets as well.
At the beginning of the year, buy equal amount of each of these five stocks. Hold them for a year. Then, sell them before Christmas or perhaps before the correction periods of stock exchanges (usually during last quarter of the year). Simple, isn’t it? How long does it take you to come out with five bargain big market cap stocks? Is your portfolio in the positive territory?
In conclusion, the timeframe for this method should be about a year. In essence, it tries to capture a year cycle of stock market. Having said that, the pre-requisite for this discipline does not implied that investors should hold for a full year. It is just a guideline not a rule.
Wednesday, 28 November 2012
Initial Public Offering : IPO
In the current economic uncertainties, initial public offering or IPO is not going to be
famous. Essentially, IPO is the first sale of stock of a private company, new or old, to the public. So often, smaller or private companies use IPO as the main platform to seek capital injection for growth or expansion programs and to become publicly traded companies. Statistically speaking, according to Bursa Malaysia, the highest number of new listings was 92 in 1996. The number was massively declined during a period from 1998 to 2001, when Malaysia was hit with the financial crisis. In 2002, the number was starting to grow especially new listings on MESDAQ market.
In the process of getting listed on Main or Second Board, an underwriting firm assists the issuer in shaping the criteria of the IPO including type of security, the best offering price and the best time to offer to the market. For average investors or beginners, you might need to be concerned on the offering price. However, I need to warn you on the risk of investing in IPO.
For private investors, it is fairly difficult to forecast how the stock would react on the first day of listing especially if you could only refer to the lengthy prospectus of the issuers and some good words from your brokers. You probably would not have any historical data to analyse. You may need to put your entire belief on the management team and the projected performance that they ought to achieve in the next 5 years or so. Thus, many risk adverse or conservative investors concur that the uncertainties looming around their future values would deter them from putting their cash on IPOs. Having said that, after taking into account the potential reward, I am confident you would include IPO in your investment list.
To buy or not to buy
The timeframe to trade IPO should be very short. Take a day or two. And I, personally, would not go beyond 5 trading days. On these initial days, most investors rush to buy a new stock in frenzy, but then, like everything else, interest wanes when as the true picture of the company emerges and the market will determine the fair value of the new stock. You would not want to be caught at this moment.
What is more, many IPOs issued last year had never been able to recover to their initial opening prices. Usually on the day two of listing, you should be able to assess the responsive of the market and to figure whether the market would just go sideways. I favour to monitor the volume. It would tell the whole story especially the momentum of the investor ’crowd’.
The capital market in 2008 were so bearish even Perwaja (5146) and TM International
(also known as Axiata) had lost more than halves of their expected value. Everybody
seemed to preserve their capital and played a wait-and-see game.
But in 2009, you might want to re-consider IPOs. For the last three new listings, the
market seems to be more optimistic and bullish. For example, Samchem Holdings
(5147) was opened at RM 0.69 and at the highest RM 0.95 on the second day of listing.
About 38% gain in two days. Not bad aye? Handal Resource (7253) was opened on 30 July 2009 at RM 0.90 though the original price was 72 cents. Handal Resource continued to gain heavy interest in the market when it recorded the highest price on the second day at RM 1.47. Amazingly almost 100% return.
Although the figures look overwhelmingly appealing, you may also want to assess the principal activities and the industry of the IPOs. Given at certain stage of economy, some sectors might be bearish and normally the market would not respond as you expected. Is it too late to join the crowd? I believe not.
Some IPOs are still at the early stage. In fact, the Securities Commission of Malaysia (SC) had approved seven IPOs, so far. Five IPOs were for the Main Board and the balance for the Second Board. The performance of the previous three aforementioned IPOs indicates that the capital market is responding well.
Conclusion
Investing in IPOs is a risky business but it may come with startling rewards. Even so, some factors should be taken into considerations such as offering price, timing, the principal activities in the industry and overall market sentiment (bullish or bearish). There is no perfect blueprint on what is working and what is not. The best thing to do is assess available information and then make your judgement call. If it didn’t work, cut your losses. Re-visit when things calms down.
famous. Essentially, IPO is the first sale of stock of a private company, new or old, to the public. So often, smaller or private companies use IPO as the main platform to seek capital injection for growth or expansion programs and to become publicly traded companies. Statistically speaking, according to Bursa Malaysia, the highest number of new listings was 92 in 1996. The number was massively declined during a period from 1998 to 2001, when Malaysia was hit with the financial crisis. In 2002, the number was starting to grow especially new listings on MESDAQ market.
In the process of getting listed on Main or Second Board, an underwriting firm assists the issuer in shaping the criteria of the IPO including type of security, the best offering price and the best time to offer to the market. For average investors or beginners, you might need to be concerned on the offering price. However, I need to warn you on the risk of investing in IPO.
For private investors, it is fairly difficult to forecast how the stock would react on the first day of listing especially if you could only refer to the lengthy prospectus of the issuers and some good words from your brokers. You probably would not have any historical data to analyse. You may need to put your entire belief on the management team and the projected performance that they ought to achieve in the next 5 years or so. Thus, many risk adverse or conservative investors concur that the uncertainties looming around their future values would deter them from putting their cash on IPOs. Having said that, after taking into account the potential reward, I am confident you would include IPO in your investment list.
To buy or not to buy
The timeframe to trade IPO should be very short. Take a day or two. And I, personally, would not go beyond 5 trading days. On these initial days, most investors rush to buy a new stock in frenzy, but then, like everything else, interest wanes when as the true picture of the company emerges and the market will determine the fair value of the new stock. You would not want to be caught at this moment.
What is more, many IPOs issued last year had never been able to recover to their initial opening prices. Usually on the day two of listing, you should be able to assess the responsive of the market and to figure whether the market would just go sideways. I favour to monitor the volume. It would tell the whole story especially the momentum of the investor ’crowd’.
The capital market in 2008 were so bearish even Perwaja (5146) and TM International
(also known as Axiata) had lost more than halves of their expected value. Everybody
seemed to preserve their capital and played a wait-and-see game.
But in 2009, you might want to re-consider IPOs. For the last three new listings, the
market seems to be more optimistic and bullish. For example, Samchem Holdings
(5147) was opened at RM 0.69 and at the highest RM 0.95 on the second day of listing.
About 38% gain in two days. Not bad aye? Handal Resource (7253) was opened on 30 July 2009 at RM 0.90 though the original price was 72 cents. Handal Resource continued to gain heavy interest in the market when it recorded the highest price on the second day at RM 1.47. Amazingly almost 100% return.
Although the figures look overwhelmingly appealing, you may also want to assess the principal activities and the industry of the IPOs. Given at certain stage of economy, some sectors might be bearish and normally the market would not respond as you expected. Is it too late to join the crowd? I believe not.
Some IPOs are still at the early stage. In fact, the Securities Commission of Malaysia (SC) had approved seven IPOs, so far. Five IPOs were for the Main Board and the balance for the Second Board. The performance of the previous three aforementioned IPOs indicates that the capital market is responding well.
Conclusion
Investing in IPOs is a risky business but it may come with startling rewards. Even so, some factors should be taken into considerations such as offering price, timing, the principal activities in the industry and overall market sentiment (bullish or bearish). There is no perfect blueprint on what is working and what is not. The best thing to do is assess available information and then make your judgement call. If it didn’t work, cut your losses. Re-visit when things calms down.
Commodity Prices versus Currency Movements
Last night, I was watching the business channel, airing the correspondents throwing their verdicts on the sudden spike of commodity prices and the weakening of US dollar. The logic is commodity prices tend to have an inverse relationship with currency movements.
How
It has something to do with being an exporter or importer of these commodities. As Canada and Norway are in the top 10 list of oil exporter countries, any vulnerability on oil prices would directly impinge on the value of their currencies. In the long run, the correlation has been strong especially when the oil priced in US dollar. Thus, any appreciation of oil price (remember in USD) would depreciate the value of USD/CAD or USD/NOK.
Concurrently, for Norway, you need to appreciate the importance of Norwegian exports figure. Its economy dependents on the oil exports. Over the years, crude oil is accounted for more than 50% of the total exports. This high correlation to the oil price allows FOREX traders to use oil price as one of the indicators in their trading strategy. For some traders, they use NOK as a hedge especially against USD.
Quite the opposite, Japan is the oil importer country. If the oil prices surged, the Japanese economy would suffer so does its currency. In short, the currency pair CAD/JPY would has a strong correlation with oil prices i.e. the value of CAD/JPY would follow the direction of oil prices. Similarly, the appreciation of oil price would depreciate USD/JPY.
The performance of AUD and NZD are highly related to gold. Meaning, the appreciation of gold prices should lead to the appreciation of AUD, followed closely by NZD. The similar impact on the latter is basically due to the close economic link between Australia and New Zealand. For FOREX traders, who like AUD and NZD, you should also consider trading gold.
Conclusion
Have you ever wondered why CNBC or Bloomberg always put on view the Dollar Index (DXY as quoted in Bloomberg)? If you knew what DXY consists of, you would appreciate that it actually summaries the performance of USD against Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. So hence, you can practically use DXY as guidance without referring to every major currency.
In fact, if you want to save time and happen to have access to Bloomberg terminal, go to the Foreign Exchange Forecasts (FXFC) function.You could browse analysts’ predictions for the dollar and other currency pairs. But don’t swallow everything. Check the movement in gold and oil prices. Consider using technical indicators as well. Long oil, short USD/CAD. Long gold, long AUD or NZD.
Off you go. Place your bet now!
The correlation of commodity prices and currency movement has been one of the common rules in FOREX trading. Professional FOREX traders who I had been acquainted with will blindly subscribe to this statement. This rule apparently helps them to understand and predict market movements of certain major currencies. Top four currencies that have a strong correlation with commodities are the Australian dollar, the Canadian dollar, the New Zealand and the Norwegian Krone. Other currencies like Japanese Yen and Swiss Franc are also affected by the movement of commodity prices. However, their correlations are not as strong as the top four. The correlations are related to currencies with oil and gold.
It has something to do with being an exporter or importer of these commodities. As Canada and Norway are in the top 10 list of oil exporter countries, any vulnerability on oil prices would directly impinge on the value of their currencies. In the long run, the correlation has been strong especially when the oil priced in US dollar. Thus, any appreciation of oil price (remember in USD) would depreciate the value of USD/CAD or USD/NOK.
Concurrently, for Norway, you need to appreciate the importance of Norwegian exports figure. Its economy dependents on the oil exports. Over the years, crude oil is accounted for more than 50% of the total exports. This high correlation to the oil price allows FOREX traders to use oil price as one of the indicators in their trading strategy. For some traders, they use NOK as a hedge especially against USD.
Quite the opposite, Japan is the oil importer country. If the oil prices surged, the Japanese economy would suffer so does its currency. In short, the currency pair CAD/JPY would has a strong correlation with oil prices i.e. the value of CAD/JPY would follow the direction of oil prices. Similarly, the appreciation of oil price would depreciate USD/JPY.
The performance of AUD and NZD are highly related to gold. Meaning, the appreciation of gold prices should lead to the appreciation of AUD, followed closely by NZD. The similar impact on the latter is basically due to the close economic link between Australia and New Zealand. For FOREX traders, who like AUD and NZD, you should also consider trading gold.
Conclusion
Have you ever wondered why CNBC or Bloomberg always put on view the Dollar Index (DXY as quoted in Bloomberg)? If you knew what DXY consists of, you would appreciate that it actually summaries the performance of USD against Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. So hence, you can practically use DXY as guidance without referring to every major currency.
In fact, if you want to save time and happen to have access to Bloomberg terminal, go to the Foreign Exchange Forecasts (FXFC) function.You could browse analysts’ predictions for the dollar and other currency pairs. But don’t swallow everything. Check the movement in gold and oil prices. Consider using technical indicators as well. Long oil, short USD/CAD. Long gold, long AUD or NZD.
Off you go. Place your bet now!
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