How do you pick the right Shares?

Monday, 29th March 2010 13:28 - by Riddler

What a month it has been for the markets- the FTSE hit a 21-week high, while the DOW is still eking out gains. I feared a pull back and had a key date of 15th March in mind as a potential turning point to correct the tasty gains since the 2010 lows in January, but so far the FTSE has crept up a little more. However, I still believe that the FTSE will have to ‘take a breather’ at some point soon to ‘correct’ the over-bought signals from the technicals. In my last Blog, I mentioned that I believed Investors Chronicle to be an excellent publication, but that Investors should be wary of the ‘Buy’ and ‘Sell’ tips for the reasons I outlined last time. As if by magic, they have revised and adapted their last 3 publications and address the concerns I raised last time. They now give a timescale to their tips, whilst also categorising their tips in terms of risk. I don’t for one second believe they read my ‘two-penny trash’ Blogs, but it was a strange coincidence all the same. The title of this latest Blog seems a little strange, in that we all try to pick the ‘right’ stocks, but we can hopefully make better calls if we adopt a careful ‘screening’ of the stocks we are looking to invest in. There is an excellent article in Friday’s Investors Chronicle, where it offers some tips on how to ‘screen’ mining stocks. I sat down and tried to compile a list of criteria and questions that we could ask ourselves before taking the plunge: 1. P/E RATIO…Try to pick stocks with a p/e lower than the sector average, and somewhere in the region of 8-12. 2. DEBT…It is ideal if there is little or no net debt. 3. CASH…A healthy cash pile for acquisitions and to maintain a strong balance sheet, and significantly reduces the risk of a ‘Placing’ or ‘Rights Issue’ (RI). 4. EPS…look at the 5-year history and look for a steady increase in EPS (Earnings per share), not just an increase in revenues. 5. PLACING…If there has been a Placing, what price was it at and was it sufficient to fund future plans? If you can buy in or around the recent placing you should be ok. 6. REVENUES…Where are they coming from? Is it via acquisitions, government legislation, consumer spending, etc.? 7. SECTOR…Is the sector one which is growing? If so, is the growth expected to continue? 8. MANAGEMENT…Probably one of the most important factors to take note of. Have they got a good track record? Look for the ability to set realistic expectations of the company and ‘manage’ any difficult periods with skill and acumen. 9. SHAREHOLDERS…Look for well-known fund managers and institutions that have a stake, and ideally they will have increased their stake over the last 2 years or so. 10. MINING…Ideally stick with small-cap miners who have proven reserves, are producing rather than pre-production, have a good cash-flow and are in a politically stable area (See Jim Slater’s excellent I.C. article from Friday 26th). There are plenty of other factors, but it goes to show that research and time spent looking at the company’s records is time well spent. It worries me when people ‘jump’ on to the flavour-of-the-day or month stock and freely admit to ‘not knowing much about the company’. This, to me, is just gambling…and gambling does nothing for the blood pressure!!