How do you select your stocks?

19th Feb by RA151010

15 comments 823 reads

As a complete newbie, I find Stockopedia invaluable at helping identify stocks that are worth my attention and consideration of investing in.

I'm struggling thereafter, to know what to look at next once I have my shortlist. (say stocks with a StockRank >95 from a variety of sectors). I've read about 'delving into a stocks financials' but what exactly do you look at? And why?

If it matters, I'm willing to take big risks in order to improve my chance of a bigger gain.

Anyone willing to share their strategies/methods with me?

Thanks

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15 comments

GloucesterBob

19th Feb

Before I joined Stockopedia, years ago I was in a share club that subscribed to CD REFS which was produced by Jim Slater after reading the ZULU Principle.

Once the share club disbanded, I couldnt afford the cost of CD REFS and spent ages trying to replicate that information online, unsuccesfully.

When I found out that Stockopedia had a Jim Slater screen, for less than a third of the price of CD REFS (now defunct) I signed up and within seconds, I had a selection of stocks that Jim Slater theory may have produced.

In the early days and not really understanding what Stokopedia is about, I bought everything that appeared with mixed results. Over the lat couple of years I have refined my selection criteria as follows and created my own screen as follows:

1. Jim Slater stock screen
2. Changed the market cap to > 50M (no upper limit unlike Jim Slater who stop looking 1000M. Some Elephants do gallop.
3. Added in StockRank above 80
4. Stock Rank style must be one of High Flyer, Super Stock, Turnaround or Contrarian.

This then gives me stocks to further research, and I am looking at reasons not to buy. I probably only get 4 stocks a years that I may purchase, but hopefully my tight criteria saves me from losses.

I used to stop loss everything at 10% but found this too tight, and missed out on some big wins, Wizz Air I sold at 10% loss, but if held would be looking at 100%+ profit.

I now stop loss at 20% for stocks that meet my criteria and 10% when they no longer do

Jim Slater screen currently has 5 stocks on offer, and I have bought 3 of them in the last year.

SLP + 49%
Belvoir + 45%
Liontrust +58%

Of the other two, i discarded them due to

Manolete Partners - spread too wide
MD Medical Partners - price quoted in dollars

Now it may be we are in a bull market and I could have chosen anything, but my winners have certainly gained over the last couple of years

I would recommend the following easy to read books The Naked Trader and the excellent Art of Execution. Become and Hunter/Assassin and you certainly do not want to be a rabbit.

The small cap value report is also a good place to pick up on research and ideas from the excellent Paul and Graham. They highlighted KETL, which doesn't meet my above criteria but gave me something to research and currently showing 5% profit in less than two weeks

Happy Hunting, you do not need to take big risks IMHO but DYOR.

Andrew niven

19th Feb

great advise bob

RA151010

19th Feb

Thank you for taking the time to give such detailed advice. Really appreciated and much to go on. Thanks again

herbie47

19th Feb

I would not limit your selection to > 95 SR, if you look at the big winners over the last year or so I think you will find quite a few are lower than 95 SR, such as Games Workshop (LON:GAW), Judges Scientific (LON:JDG), SDI (LON:SDI), JD Sports Fashion (LON:JD.) and Future (LON:FUTR). I do look at the CAN-SLIM screen and avoid companies with high debt. You can do your own screens also.

jonesj

20th Feb

I would park most of your money in a mix of Investment Trusts, cash and a gold etf. Within tax efficient wrappers of course.

Then go and read about 30 books on investing. Include "The Intelligent Investor", "How to Make a Million -slowly", "The Zulu Principle". Plus others by Fisher, Greenblatt, Dalio etc.

Whilst doing this, perhaps invest a small percentage of your money in stocks for the experience.

wilkonz

20th Feb

My basic filter is:

Price >200 MA

Net profit >Net debt

Stock Rank >70

After that I prefer bid-ask spread <2%, no directors' sales, profit margin >10%, PE<30, FCF close to PE, Net Gearing <50%, steadily rising share price over 5 years, low volatility - SD<20%, beta <1, capitalisation >enterprise value, and a product that's likely to be in demand in 10 years time.

After that, I start doing some research to ensure, as far as is possible, that there's no bad news in the pipeline.

PS The Financial Wisdom channel (by Gareth Packer) on Youtube does animated book reviews on investment books so it might be useful when deciding which books to read.

cafcash49

20th Feb

I have read the good advice you have already been given and agree with it. SCVR by Paul and Graham is very good and I read it daily. It also gives you insight into how they judge a share which is a good way to learn more. I have one caution and that is not to become too small cap focused and remember the issue of liquidity. Some are very small cap and you can buy quite easily but not always get out so easily. There has to be a buyer for you to sell and if they are not performing, which is why you want to sell, no one else wants them either. Don't buy 'jam tomorrow' make sure they are making money now. On the financials on stockopedia to get you started, on the Balance Sheet look for Total Equity rising. On the Income Statement look for Net Income rising and on the cash Flow statement look for cash from operating activities to be adding to the cash. On the Stock Rank Styles go for Super Stocks, Turnarounds, High Flyers, and Contrarians. Avoid Momentum Traps, Value Traps, Falling Stars and Sucker Stocks. Enjoy your investing, ditch your losers and run your winners for longer and buy more as they rise. Charles.

herbie47

20th Feb

I agree with most of that, cafcash49. However some Momentum traps can do very well, Ed did produce some figures, which I can't find now which showed that the top 25 Momentum Traps were among the best performing styles. I would say my High Flyers have been the best performing style.

herbie47

20th Feb

Here is the performance of the styles, these are the top 25 shares in each style, over 5 years Momentum traps were 3rd: https://app.stockopedia.com/screen-groups/stock-rank-styles-8234?edition=gb&returnType=five_year

Gromley

20th Feb

Interesting that Herbie, I wasn't really aware of that view given that I am using the main site rather than the Beta (oooh I'm so naughty).

The presentation is somewhat dumbed-down in that it doesn't actually tell you what has been measured, but I presume that it is a three monthly rebalanced view (as that seems to be the most popular Stocko presentation of data.

If that is the case, then there is probably a "style bias" in the measurements in that momentum investor will 'flip' often whereas followers of other styles will probably have a significantly longer holding time. Some of the apparent extra gains for momentum would be eaten up by frictional costs of regular trading.

Even accepting that though, the fact that a "losing" StockRankStyle - comprising stocks with momentum but whose share price is not supported by fundamentals or Quality - beats most of the "winning styles" , is very interesting.

My observation here would be that the anomaly may be explained by the fact that the StockRanks and the SRStyles were developed on the basis of looking at data over several market cycles (IIUC) Wheras the Stocko performance measures are based on a (debateably) extremely long bull market, since the StockRanks inception in 2013.

Personally I worry that the time at which momentum is "proven" to be the very most powerful indicator might also be the time when the balance reverses.

I know the future no better than anyone else, but I just sound a note of caution here.

herbie47

21st Feb

A few Momentum Traps that have done well recently are GAN (LON:GAN), Velocys (LON:VLS), ITM Power (LON:ITM) and AFC Energy (LON:AFC), all are up about 4x within the last year. Cerillion (LON:CER) is another one, that has doubled in the last 2 months. Some MTs turn into other styles such as high flyers. They are risky so a stop loss maybe worth using. The problem with Stockopedia is it is backward looking, so if there have been changes in the company it will take time for these to show up in Stockopedia rankings. I also think that ones that are rated around 99 and 100 have probably peaked already, I would be interested to see some figures. Many of my better performing shares in the last year are rated in the 70-80s, only Sylvania Platinum (LON:SLP) is rated over 95.

cmpeckham

25th Feb

I endorse the comment of jonesj above. That's the best advice based on what you've said so far.

To add to that, I would emphasise to you that most individual investors and almost all professional investors and fund managers have underperformed their benchmarks (basic indices) over history. Are you aware of that? Do you understand why that is the case?

So why do you want to invest in individual stocks? What do you have in terms of knowledge and skills that makes you different from all the amateurs and professionals that have failed before? Even if you have a rational basis for believing that you can outperform the market, have you thought through the time and commitment involved to do it successfully?

If you can answer those questions (not to me, but honestly, to yourself) then you will know what to do and wont need to ask the question you did originally. I'm only saying this to help you, not to offend you.

gpacker

25th Feb

Thanks William!

Terry the Trader

25th Feb

My stop loss is between 10% and 20%. I look at the 18-month chart ( I use sharescope) and run a stop loss from the lowest point, then adjust it till I get the best fit. When I buy the stock I have already got the stop loss worked out, I then enter all this into my spreadsheet so I can run up the stop loss with the price. Once the price has gained 20% I immediately reduce the SL to 5%.

Most of the book tells you to CUT YOUR LOSSES and RUN YOUR PROFITS. It is good advice.

Good luck with your investment, and enjoy them too.

Caper4

25th Feb

To be honest I take a very long term view. I tend to invest in quality companies that have regularly paid a dividend in excess of 4% . I am not all that bothered about market corrections ( as presently) other than seeing it as a possible buying opportunity. Mind you, I am in a financial position whereby I have no need to sell the shares for the foreseeable future. So I prefer a 4% plus dividend to the pathetic fixed termed deposit rates available . At least if I ever was desperate for early cash I could sell one or two of my holdings,even if at a loss.

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How do you select your stocks?

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RA151010

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