Checklist for share selection

8 July 2017

Dear Fellow Investor,

Over the years I have read over 50 books on investments. Most say the same things. There are however; a few books I can recommend.These are the ones that stick like chewing gum on your shoe.  

One such book is The Five Rules for Successful Stock Investing by Pat Dorsey.  He was head of equity research for Morningstar from 2000 to 2011 and now runs his own equity fund.  

He is a value investor and follows the Warren Buffet method.

In his book he provides a checklist for share selection. He lists 9 criteria and to invest successfully we need a majority of them to line up before investing

Dorsey’s criteria

1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has a market capitalisation that isn’t too small.

2. It has consistently earned an operating profit.

3. It has generated consistent operating cashflow.

4. The firm earns a good return on equity.

5. It has been able to grow its earnings consistently.

6. It possess a clean balance sheet.

7. The firm can generate lots of free cash flow.

8. There are infrequent appearances of one-time charges.

9. There has not been major dilution of shareholders’ stakes in the firm.

An example of how to use the checklist  We have been buying Uchi Tech Sdn Bhd for ourselves and clients.  Uchi has met all 9 criteria but that is unusual so if the majority of criteria line up I would consider to purchase. 

DESCRIPTION OF BUSINESS

Original Design Manufacturing (ODM), specializing in the design of electronic control systems primarily for consumer and industrial electrical and electronic appliances industries (such as precision weighing scales and high end household appliances)

Uchi has been listed since 2000. It has consistently grown profits in the last 16 years. Its ROE has exceeded 17 % for the last 8 years and last reported ROE was 23.28 %

Its net margin in the last quarter was 45.9 % and the margin has been in an uptrend since listing in 2000. Its free cash flow was 51.1 million and also in a gradual uptrend. Gearing is zero and they grow the business organically rather than borrowings.

PE of 13.7 is  reasonable compared to peers.

I could find no evidence of share holder dilution via rights issues or options.

Weekly chart of Uchi Tech Sdn Bhd

In the last year they have earned a 15.2 % capital gain +  5.3 % dividend   This is not too bad considering that most Malaysian/ Singapore shares have underperformed and the KLSE index was  up 8.2 % + average dividend yield of 3.2 %.

For our loyal clients, we are constantly on the look out for shares that meet these criteria. We are like the eagle who flies alone and swoops on his prey to earn a tasty meal of say a fat sheep.

Do not forget our upcoming Phillip Investor Conference on 22 July in the Berjaya Times Square Hotel from 9 to 6 PM. Prominent speakers will review the markets and present opportunities.

If you are a client there is no charge and if you email me I will have our administrator register you.

Invest well and grow your wealth
Bill

A Canadian lynx who seems to be a lone hunter like the eagle