How Do I Choose A Stock To Buy?

A reader asked me how do I filter the stocks to buy. It's not easy to answer.

To make it short, I don't have a systematic way when it comes to selecting a company for investment. 

I'm not sure whether there is any established or better way to select or filter from a list of close to one thousand listed companies.

Basically, I have done it in many ways and I'll briefly discuss about them here.

First, I'll start with how I come to know a stock.

Screen through every single companies painstakingly

This was the method I used when I first joined the stock market back in year 2005. At that time, internet information was scarce. 

There was a thick book like a "Yellow Pages", which contained the information of all the listed companies in KLSE such as the business nature, historical revenue/profit, financial ratios such as EPS, ROE, PE ratio, debt/equity, as well as historical price chart.

I can't remember the name of this white & green colour book now as I have lost it many years ago.

Before I bought my first shares, I read a few investment books and I decided to follow their suggestion by looking at the fundamentals of the companies. So I made a stock selection criteria of ROE >15%, EPS growth >15% for at least 3 years & PE <10.

With these criteria, I screened through every companies in that thick book one by one. At last I came out with a few companies that matched the criteria. I still remember that the first 2 stocks I bought were Mahsing & WCT, and I made a profit from them.

Anyway, that kind of book is not published anymore due to the abundance of information which can be easily obtained on the internet.

Use KLSE Screener

Many years ago I came across this tool. I'm sure that most readers know what is it all about. You just need to key in your selection criteria (PE, ROE, DY, EPS etc) and the software will filter for you.

This is very easy and fast, and you can do it on your computer or smartphones. However, I seldom use it and don't really use it to select stocks since I started this blog.

From articles and news

Basically I do not actively look for a stock to buy, as investing in stock market is not a big part in my life, yet. I am quite passive.

I don't read business news and watch the stock market everyday. I do it sporadically when the interest comes and when I have the time.

You know, there are many articles that promote a stock in investment forum such as i3investor, some are very good and some are not. 

When a company secures a contract, reports good profit, ventures into new business or encounters headwinds, the news will certainly appear on online news portal such as The Star, The Edge and for Chinese, Sin Chew & Nan Yang. 

If the headlines of an article or news catch my attention, I will read them and sometimes it will lead me to study the company and then invest in it.

Analyst reports

I have trading accounts with Public Investment Bank & Hong Leong Investment Bank. However, I do not login to view all the reports because I only login when I plan to trade.

I read those analyst reports from i3investor, thanks to all the people that share them there. 

Analyst reports are a very important and useful tool for me. There are many information that retail investors like us have no access into. So, we need to depend on professional analysts who attend the company's AGM, investor briefing session or interview the management.

Regarding the target price derived by analysts, just take it as a reference and come out with your own target price. 

Of course different people have different opinion, and no one can predict the future with 100% accuracy. For Bumi Armada as example, someone gives it a target price of 10sen, while some value it at 56sen. That's a huge difference.

Now that Armada is at 26sen, who do you want to follow?

Quarterly Financial Reports

A listed company must release financial report every 3 months, we can get a lot of information from it.

Besides the revenue & profit, we can have a glimpse at its latest balance sheet & cash flow. The management will also explain the performance of the quarterly results and give a prospect of its business.

When a company has a good financial quarter, sometimes it catches my attention to further study it, IF I happen to bump into it as I only read 10-20 of those quarterly reports every 3 months.

I think this is a very common way for me to identify a stock to buy.

Before 2013, I only looked at the revenue and profit, EPS, ROE & PE ratio while making a decision.

After that, I include the balance sheet and cash flow, although not in a very detail fashion. I don't have accounting background, and have no one to ask except Mr Google when I have doubts.

I don't read annual reports unless from my invested companies or companies I plan to study. 

There is another way that can help me to find a good stock which I haven't use yet, which is subscribing to fundamental-based "Sifus" or other experienced investors.

I know that it might be a very good way to earn quick bucks from doing this. Many newbies and speculators pay the fee, and will surely buy when a stock is recommended as "buy call". This might push up the share price and quick profit can be made just like that.

Subscribing to such service can increase my chance of catching a stock with good potential, as I mention earlier that I'm quite passive in stock market and can't screen through all those listed companies and read all the announcement by myself.

At the moment, I still haven't join such groups. I'm still all alone.

How do I filter those stocks to decide whether to invest in them or not?

There are no strict rules now like I used to have in the past. Last time I set criteria for EPS growth, PE ratio, ROE, D/E ratio, DY etc. I usually don't go deeper into ROIC, FCF, PEG ratio & EV as I'm not a true value investor.

Let me show a few real examples of how I bought a stock in the past, if I still remember them correctly.

Latitude Tree

I first noticed Latitude after it released a very good quarterly results in Nov 2013. Then I studied its previous quarterly reports, annual reports and company website. I checked its previous announcement from Bursa Malaysia website. There was no analyst cover and not many news on this company. I found out from Bursa announcement that it was in the process of acquiring the remaining shares of its very profitable Vietnam operation. I projected the future earning and it's a no-brainer. 

Inari

If my memory serves me right, I first knew about Inari from a news article in Jun 2013. At that time, Inari was still a small little-known company and had proposed to acquire much bigger Amertron of the Philippines. It certainly caught my attention and the same process started. I checked its previous quarterly & annual reports, previous Bursa announcement, searched for online news and visited the company website. 

I remember that before I bought Inari shares at around 70sen (22sen now after adjustment), its share price has just rallied from 30-40sen to 70sen in a short period of time. Most investors commented that since it had already gone up 100%, it was very risky to buy at that time. I bought it anyway. Sometimes we have to ignore the noise of forummers and believe in our own judgement. Inari proves to be a big success for me. 

KESM

I came across an article or news shared by someone in i3investor about KESM in Jan 2016. It looked good to me and I decided to study it further. I saw that there was significant jump in its latest 2 quarters and by simple forward PE estimation, it was deemed undervalued for me. At that time its share price was falling from RM6 and I got it at RM4.80 and then around RM3.90 when it dropped further, with average price of RM4.42. 

It's lucky for me that its financial performance were good and share price kept increasing to over RM22. I sold some at RM20 and the rest at only RM8+. 

Geshen

I can't remember exactly how I came to know this company, which was a very cold and unknown company. From my record, I bought its shares on Mac 2015. I think may be from its previous quarterly result announcement in Feb 2015 which showed a significant jump in its net profit. It's not a very exciting result but I found out that it has just disposed its two loss-making subsidiaries and planned to acquire a growing profit-making peer. I felt that it would start a new page of growth and bought its shares. It was a great investment for me.

YOCB

This was just a coincidence. I was studying a company with a name of Yokohama in Aug 2013. When I searched for it in Bursa website, I saw another company alongside it with a strange name of "YOCB" which attracted my attention. That's how I started to study this company out of curiosity. I bought it because of its low PE ratio and good dividend. It was not a bad investment for me though I might have sold it too early.

Tambun

This is easy. I bought my first property from Tambun Indah and I certainly knew it well. As I was more focused in property investment at that time between 2008 and 2013, I knew a lot of other property companies and their projects.

At that time Tambun bought a vast landbank cheaply at Bandar Tasek Mutiara, which is located at Seberang Perai Selatan of Penang. We know that the nearby Batu Kawan is the next big thing. New projects were launched aggressively and each of them was rapidly sold out. So, it's also a no-brainer during such a property boom. 

Huayang 

Not every property stocks I bought at that time made money. Of all my completed buy-sell transaction up to today, the largest loss was Huayang, followed by Tropicana, both are property stocks. Huayang needs no introduction to investors at that time. Its revenue & profit was growing steadily, gave away mouth-watering dividends and multiple bonus issues. 

I felt like I missed the boat and always dreamed of owning its shares. Finally I became its shareholder in Sep 2014 at RM2.32, the price level which later proved to be at the peak. Even though subsequent quarterly results were good even with EPS of 11sen for 5 consecutive quarters, its share price just didn't go up but continued to drop instead. If we give a PE of 10x the share price should be at least RM4. Finally I cut loss at RM1.83 after 1 year and 4 months. Property was in the negative trend and we could not beat the trend.

PPHB

I found out this stock after it released its FY19Q1 results in May19. The result was nothing spectacular, just that the market gave it a low PE of around 5x. After studying it like usual, there seemed to be slow growth in this company and I believed that its products have more demand nowadays. I bought in May19 and only in the end of 2019, the stocks price started to jump.

I would say that most of the time I find a company to invest through its quarterly financial report, while PE ratio and growth prospect are the main things I look at to decide whether to invest in it, although the debt ratio & simple cash flow still play a part.

So, how should you filter or select a company to invest in? The answer is read more, and do your own homework.

Latitud: Best Ever Quarterly Result As Expected

Latitude Tree FY16Q1 Financial Result

LATITUD (RM mil)	FY16Q1	FY15Q4	FY15Q3	FY15Q2	FY15Q1
Revenue	218.0	179.6	165.6	189.1	175.7
Gross Profit	35.6	29.4	27.5	34.4	26.2
Gross%	16.3	16.4	16.6	18.2	14.9
PBT	31.3	21.2	21.3	29.5	18.5
PBT%	14.4	11.8	12.9	15.6	10.5
PATAMI	28.1	16.2	19.5	27.4	16.6
MAS Rev	34.0	26.4	31.2	32.1	27.7
MAS PBT	10.7	1.5	5.4	5.4	2.3
VIET Rev	176.4	145.9	125.8	149.4	141.0
VIET PBT	18.9	18.4	14.4	22.6	14.8
THAI Rev	5.5	4.9	9.0	5.6	5.8
THAI PBT	0.8	0.2	1.1	0.7	1.0
Total Equity	479.4	410.7	390.1	366.6	327.2
Total Assets	729.9	594.3	575.6	548.6	502.8
Trade Receivables	79.8	49.3	63.3	63.4	59.9
Inventories	128.9	118.7	109.7	103.9	97.4
Cash	214.5	165.8	142.1	151.3	124.0
Total Liabilities	249.1	182.4	184.3	181.0	173.1
Trade Payables	110.5	88.1	75.0	89.9	91.7
ST Borrowings	105.3	76.9	90.4	82.6	74.8
LT Borrowings	26.2	12.4	17.1	6.1	6.4
Net Cash Flow	33.9	19.0	-1.0	15.9	-1.6
Operation	7.9	65.4	22.8	22.2	6.1
Depreciation	3.8	18.6	14.0	9.0	4.4
Investment	-11.1	-37.8	-34.8	-7.5	-2.7
PPE purchase	4.0	31.6	28.7	2.5	1.1
Financing	24.1	-14.5	3.6	-2.2	-6.1
FCF	3.9	33.8	-5.9	19.7	5.0
Dividend paid	0.0	8.3	8.3	0.0	0.0
EPS	28.95	16.66	20.07	28.19	17.13
NAS	4.93	4.22	4.01	3.77	3.37
Net D/E Ratio	NC	NC	NC	NC	NC

Latitude just posted its record-breaking quarterly result in term of revenue, PBT and EPS.

Compared to immediate preceding quarter of FY15Q4, revenue in FY16Q1 increased by 21.3% to RM218mil thanks to stronger USD against MYR by 17%. The rest of the improvement was contributed by higher orders and higher production output.

PBT increased by 47.6% or RM10.1mil QoQ and there was a forex gain of RM7.8mil in this quarter.

Geographical breakdown showed a significant jump in Malaysia's revenue and PBT margin.

Balance sheet and cash flow remain good as usual.

Earlier, Latitude has proposed a 12sen dividend for its FY15.

Though it is 40% higher compared to FY14's dividend of 8.5sen, it just represents 15% of dividend payout for FY15.

Does the management wish to keep more cash for imminent expansion, or just reluctant to share its profit with shareholders?

I can't say that its directors are stingy when they are getting salaries like this:

       ARFY15

Normally one executive director in a small listed company can easily get paid RM1mil a year, but those 2 executive plus 4 non-executive directors of Latitude only get RM415,000 a year in total, not even enough to buy a double storey terrace house...

Regarding future expansion, Latitude plans to expand its upstream operation especially Kiln Dry and Saw Mill facilities to meet its raw materials requirement.

       Saw Mill

The newly acquired panel board lamination factory will provide new varieties of raw materials and allows Latitude to diversify into new industry & new products.

This new factory located in Klang was acquired in Jan15 for RM22mil and started commercial operation in May15.

Besides, Latitude has allocated RM35mil to upgrade or automate its existing production lines to improve production efficiency.

Latitude exports 99% of its furniture and 92% goes to US. It plans to explore other markets with high growth potential such as Australia, China, Russia, India and Indonesia.

However, it just dissolved its subsidiary in Indonesia in Oct14.

Today Latitude's share price closed at RM7.43, which is at an actual PE of 9.1x base on FY15 EPS of 82sen.

Will it produce a better financial result and give higher dividend in FY16?

There might be a chance. We can only wait and see.

Latitude: Still A Remarkable FY2015

Latitude Tree FY15Q4 Financial Result

LATITUD	FY15Q4	FY15Q3	FY15Q2	FY15Q1	FY14Q4
Revenue	179.6	165.6	189.1	175.7	142.8
Gross Profit	29.4	27.5	34.4	26.2	20.3
Gross%	16.4	16.6	18.2	14.9	14.2
PBT	21.2	21.3	29.5	18.5	10.3
PBT%	11.8	12.9	15.6	10.5	7.2
PATAMI	16.2	19.5	27.4	16.6	8.7
MAS Rev	26.4	31.2	32.1	27.7	23.4
MAS PBT	1.5	5.4	5.4	2.3	-0.7
VIET Rev	145.9	125.8	149.4	141.0	114.4
VIET PBT	18.4	14.4	22.6	14.8	13.0
THAI Rev	4.9	9.0	5.6	5.8	5.0
THAI PBT	0.2	1.1	0.7	1.0	-0.4
Total Equity	410.7	390.1	366.6	327.2	308.2
Total Assets	594.3	575.6	548.6	502.8	475.3
Trade Receivables	49.3	63.3	63.4	59.9	37.0
Inventories	118.7	109.7	103.9	97.4	93.5
Cash	165.8	142.1	151.3	124.0	123.1
Total Liabilities	182.4	184.3	181.0	173.1	167.9
Trade Payables	88.1	75.0	89.9	91.7	79.1
ST Borrowings	76.9	90.4	82.6	74.8	78.8
LT Borrowings	12.4	17.1	6.1	6.4	7.9
Net Cash Flow	19.0	-1.0	15.9	-1.6	26.5
Operation	65.4	22.8	22.2	6.1	81.2
Depreciation	18.6	14.0	9.0	4.4	17.6
Investment	-37.8	-34.8	-7.5	-2.7	-37.6
PPE purchase	31.6	28.7	2.5	1.1	10.0
Financing	-14.5	3.6	-2.2	-6.1	-18.5
FCF	33.8	-5.9	19.7	5.0	71.2
EPS	16.66	20.07	28.19	17.13	8.93
NAS	4.22	4.01	3.77	3.37	3.17
Net D/E Ratio	NC	NC	NC	NC	NC

Latitude's latest FY15Q4 result is not as good as I would have expected but it's still a good result.

Its revenue improves 8.5% QoQ to RM179.6mil but PATAMI drops 16.9% to RM16.2mil in the same period. However, PBT for both periods are almost the same.

This lower net profit is mainly due to higher tax in current period, in which there is an RM2.375mil deferred tax expense.

Better sales in current quarter is due to higher orders, higher production output & strengthening of USD vs MYR, while marginally lower PBT QoQ is due to lower unrealized forex gain compared to previous quarter.

Latitude (RM mil)	FY15	FY14	FY13	FY12	FY11
Revenue	710.0	651.0	493.7	517.9	500.6
Revenue growth %	9.1	31.9	-4.7	3.5	-1.2
Gross Profit	117.5	109.8	71.2	53.5	57.6
Gross%	16.5	16.9	14.4	10.3	11.5
PBT	90.4	71.9	35.7	16.6	21.7
PBT%	12.7	11.0	7.2	3.2	4.3
PATAMI	79.8	55.0	24.4	9.8	12.5
PATAMI growth %	45.1	125.4	149	-21.6	-54.9
EPS	82.04	56.59	25.07	10.1	12.8
NAS	4.22	3.17	2.39	2.16	2.02
ROE	19.4	17.8	10.5	4.7	6.7

For the whole FY15, revenue increases 9.1% YoY while PATAMI grows much more at 45.1% mainly due to full year contribution from acquisition of remaining LTIG shares.

RM31.6mil has been spent in FY15 for the purchase of PPE, including RM22mil for the laminating wood factory.

It has a net cash of RM76.5mil which should be its highest ever in its history.

Latitude does not pay attractive dividend. If it decides to pay 25% of its net profit for FY15, then it will be 20sen dividend, or 2.8% yield at share price of RM7.38.

Will Latitude continue to grow its top & bottom lines in FY16?

This may depend on US house sales & consumer spending, as well as its own production capacity.

Or will it make another acquisition with plenty of cash on hand?

At current share price of RM7.38, Latitude is currently trading at actual PE ratio of 9x.

Its share price has been standing tall during the bear run in August, perhaps investors are anticipating good financial result or bonus issue.

Can it still outperform the market in the rest of 2015?

Latitud: A Good Q3

Latitude Tree FY15Q3 Financial Result

LATITUD	FY15Q3	FY15Q2	FY15Q1	FY14Q4	FY14Q3
Revenue	165.6	189.1	175.7	142.8	146.8
Gross Profit	27.5	34.4	26.2	20.3	23.8
Gross%	16.6	18.2	14.9	14.2	16.2
PBT	21.3	29.5	18.5	10.3	14.8
PBT%	12.9	15.6	10.5	7.2	10.1
PATAMI	19.5	27.4	16.6	8.7	12.8
MAS Rev	47.7	32.1	27.7	23.4	32.3
MAS PBT	5.4	5.4	2.3	-0.7	3.0
VIET Rev	125.8	149.4	141.0	114.4	108.1
VIET PBT	14.4	22.6	14.8	13.0	10.9
THAI Rev	9.0	5.6	5.8	5.0	6.4
THAI PBT	1.1	0.7	1.0	-0.4	-0.1
Total Equity	390.1	366.6	327.2	308.2	296.8
Total Assets	575.6	548.6	502.8	475.3	475.5
Trade Receivables	63.3	63.4	59.9	37.0	49.1
Inventories	109.7	103.9	97.4	93.5	90.7
Cash	142.1	151.3	124.0	123.1	109.0
Total Liabilities	184.3	181.0	173.1	167.9	179.3
Trade Payables	75.0	89.9	91.7	79.1	77.7
ST Borrowings	90.4	82.6	74.8	78.8	91.4
LT Borrowings	17.1	6.1	6.4	7.9	8.9
Net Cash Flow	-1.0	15.9	-1.6	26.5	11.5
Operation	22.8	22.2	6.1	81.2	55.5
Investment	-34.8	-7.5	-2.7	-37.6	-34.0
Financing	3.6	-2.2	-6.1	-18.5	-5.8
Dividend paid	8.3	0.0	0.0	6.1	6.1
EPS	20.07	28.19	17.13	8.93	13.12
NAS	4.01	3.77	3.37	3.17	3.05
Net D/E Ratio	NC	NC	NC	NC	NC

If you look at Latitude's past earning records, Q3 (Jan-Mac) is its poorest period in the whole financial year due to lower demand in US post New Year/Christmas festive period and shorter working days.

It even made loss in Q3 of FY11 & FY12.

This year its FY15Q3 result is even better than FY15Q1 despite slightly lower revenue. This is mainly due to forex gain of RM2.9mil in current quarter.

FY15Q3's revenue can be even better if not because of lower shipments to US due to its West Post strike.

Compared YoY, revenue, PBT & PATAMI increase 13%, 44% and 52% respectively, though Vietnam operation only contributed partially to its bottom line in FY14Q3.

Overall it's a good result for me.

There is a significant increase in Malaysia's revenue by almost 50% compared to last quarter but PBT stays flat. Is it a contribution from the laminating facility acquired last year?

Despite having a net cash of more than RM60mil, Latitude still has a net drawdown of borrowings of RM14.4mil in FY15Q3 alone.

What is this borrowings for?

It has spent RM28.7mil so far in FY15 in purchasing PPE, with RM22mil used in the acquisition of laminating facility.

As the management is not keen to pay higher dividend to its shareholders, I'm keen to know what kind of expansion plan they have with such a good cash on hands.

Hopefully some investment banks will start to cover Latitude Tree and write more detail about its current and future plans.

The US West Port strike seems to have settled towards the end of Feb15. This issue actually persist for 9 months before it ends.

So I would expect normal or may be more shipment to US for Latitude in its FY15Q4.

Latitude's cumulative 9-months PATAMI of RM63.5mil has surpassed FY14 full year figure of RM55mil. I expect it to post at least RM80mil PATAMI for FY15.

Thus, guesstimated EPS for FY15 will be 82.3sen.

I hope that its management will payout 30% of its net profit as dividend in FY15. This will be about 25sen or 4% yield at share price of RM6.

About bonus issue, Latitude has past record of giving bonus issue in year 2011. I predict that it might do it again in the near future but it will be OK for me if there is none.

For me, it's better if Latitude can expand its market presence out of US, increase its production capacity, or making strategic acquisition.