Newsletter June 24, 2002
Updates:
Updates since last newsletter are provided for Transat AT and Cognos.
Stock Picking.
I recently studied an excellent book called, What Works on Wall Street. Click to read my review and summary. This book reveals exactly which strategies work and which don’t.
As part of my own learning from this book, I have decided to lay out a defined criteria for rating stocks as “Strong Buy”, “Speculative Strong Buy”, “Buy” and “Speculative Buy”. Previously I have weighed a variety of value, growth and quality factors to decide which stock is a strong buy. The book mentioned above caused me to realize that it would be better to have a firm minimum standard of value for Strong Buy and Buy rated stocks. Stocks which I like but which don’t meet all the strict minimum value and growth criteria will be labeled speculative picks for future reports.
MORE CONTENT:
Soon you will see more content on this Site. I have contracted with two individuals to help me evaluate more companies.
PORTFOLIO REVIEW:
In today’s tough markets, now is a very good time for investors to review their equity portfolios.
My belief is that most investors should insure that at least 80% of their money is in stocks with P/E ratios below 20. Investors can easily check this by entering their portfolio on Yahoo or globeinvestor and reviewing the P/E. For stocks with no earnings or P/E above 20, now is a good time to consider how likely it is that those stocks will recover.
Maybe it is okay to keep some of these high P/E stocks but it seems risky to have these represent more than 10 or 20% of a portfolio.
A P/E under 20 does not in any way guarantee that a stock is not over-valued. But is does eliminate most of the hugely over-valued situations.
OPPORTUNITIES:
Declining markets do provide opportunities to pick up stocks at bargain prices. The best opportunities probably lie in stocks with real earnings and low P/E ratios. Good companies that spit out real earnings (or better yet dividends) have real value. If the market starts to price some of these at low prices then that spells opportunity.
Some of my most recent picks in that area are available only to members and trial members of Baystreet.ca. Those picks will be made available to members of this site by August 31. Meanwhile they can be accessed at Baystreet.ca by joining the free trial membership there.
Canadian Western Bank displays consistent earnings growth and a P/E of about 11. It is falling along with other Banks but does not face the same issues with international loan losses. I feel confident that this will be a good investment if held for a minimum of 12 months.
Sino-Forest also seems to fit that bill. The location in China makes it riskier but the P/E of less than 4 compensates for the risk (in my opinion).
Investors with cash should not rush to invest it all, but averaging into this market over the next 6 to 12 months should be a wise strategy.
INCOME TAX COMPLIANCE SURVEY:
Last time I asked members to “vote” on whether they thought at least 25% of investors were likely not self reporting all their capital gains. The result was close about 47% thought that at least 25% were not reporting. So just over half of you think that at least 75% of investors are honest enough to self report their capital gains.