Stock Selection Points To Note

Core business

The first thing I look at when evaluating a stock to buy is the company’s business model. What it does and how it generates profit is important.

In this respect, I will consider the competition of the industry, the quality of its products, barrier of entry, availability of raw materials, as well as the demand and necessity of its products and services. 

Earnings

A growth in earnings without a growth in revenue is not good. A growth in revenue without a growth earnings is also not good. Revenue and earnings must go up in tandem.

Always compare latest quarterly earnings to the previous year’s corresponding period, not the preceding quarter. This is because of seasonality. 

Business is all about profits. The higher the profits are the better.

Calibre of Management 

Competency and Integrity counts. Competency without integrity is worse than integrity without competency. Lack of integrity of the management is the main cause of failure. The only way for you to know the management is to look at its record. A growing revenue, improved earnings and dividend payments year after year are the things to look at. 

Balance Sheet (BS)

The BS is an important statement. It tells you what the company has and what it owes others. Once studied, you will know whether the company is solvent or not. An insolvent company is somebody’s problem which you shouldn’t get involved with. 

Cash Is King

A company needs cash to expand. Money is not everything, but money makes everything different.

Current Ratios, Free Cash Flow, Borrowings, Receivables, Payables, Pay-up Capitals, Par Value must all be carefully considered.

Metrics such as EPS, Dividend Yields, Profit Margins, Current Ratio, Debt-equity-ratio, ROCE & Price-to-book Ratio are some important metrics to look at closely. (Refer to Investopedia.com, if you do not understand any of the terms mentioned.)

Income Statement

Quality of earnings must be carefully look at. Not all earnings are the same. The important thing to think about is whether earnings can be sustained  or improved going forward.

Cash Flow Statement 

How cash flows in and flows out must be analysed carefully. Looking at the bottom line alone is not enough. You must know the details.

CEO (Chief Executive Officer)

The CEO is the most important person in a company. Know who the person is. Failure or success of the company depends on this person rather than on anything else. Besides being competent, the person must have integrity as well. Look at his track record, not how well he can speak.

Dividend Policy

I like companies that have a dividend policy of paying 30% to 50% of its earnings to shareholders. I don’t like to share risk without sharing the gains. A company that pays regular dividends in tandem with its earnings is preferable to one that pays no dividend in the name of growth. Bear in mind that the only benefit a minority shareholder has is the dividend. 

Major Shareholders

The major shareholders control everything. If, for whatever reasons, you don’t like them, avoid the stock. On the other hand, strong major shareholders can do wonder for the company. Next time, when you are about to buy a stock, don’t forget to find out who the major shareholders are. 

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IQ Group has the metrics to outperform

https://online.capitalcube.com/#!/stock/my/malaysia/5107

Fortune favours the prepared mind

Speculators, traders and even investors who do not have any strategies playing the stock market are likely to have a hard time trying to make money. 

If you have been in the market for some time and find that you have not made any money, it’s time for you to think hard why you have not been lucky so far. Is it because luck has been against you or because you have failed to plan well? Many people blame luck when they failed, but when they succeed, they say there are smart and skilful. This is human ego.

There may be some truth that some people are born lucky. If you relied on your luck to succeed, you are likely to fail because luck favours the prepared mind.  

The worst thing that can happen to a novice is for him to make a lot of money immediately he enters the market because of a tip or because of luck. This is called the winner’s curse. Very often the early winnings are the prelude to disastrous losses. Easy money leads you to become greedy and careless. Very soon you will realise that easy money is not easily made. If you bet what you can afford to lose, things may not be so bad, but if you borrow to bet, the result could be disastrous. 

For those who are smart, they will first find out how they can win. How many market players do this? You can’t win without having a competitive edge. 

What is a competitive edge? Experience, knowledge, wisdom, patience and discipline put together will give you the competitive edge. Do you have them?

Do you know how to identify a good company for investment or a good time to enter a trade based on technical analysis. 

Knowing fundamental and technical analysis will definitely give you an edge, simply because the majority of players in the market do not have such knowledge and skill.

The next important thing to know is to know your own traits. It is said that success in the stock market does not depend so much on your intelligence, but rather on your traits. Thomas Edison, one of the smartest men on earth failed miserably in the stock market. He said that he could calculate the movements of the stars, but he was unable to calculate the madness of man. 

Know your own traits; know how much risk you can take; know whether you can cut loss without feeling the pain of losing. Once you know who you are, then think out a strategy to suit yourself. Never do anything without a strategy. 

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The Internet of Things (IoT)

The IoT will reshape the world. It will change our lifestyle dramatically. The most emphasised word nowadays is: Smart.

Smart phones have been around for a few years. Smart cars that are driverless, more efficient and safer than conventional cars will soon be a common sight.  

A smart plane embedded with sensors will signal you when certain parts need to be upgraded and changed for the plane to remain safe and efficient.  

A bridge embedded with sensors will warn you when it is overloaded. Doors open for you when you are near them. Alarm bells ring when intruders force open your doors. All smart utensils will operate smartly. 

Gartner Inc., predicts that by 2020, some 26 billion devices will be connected to the internet. Thus you can easily figure out the importance of sensors and semiconductor chips. 

Which companies are going to benefit? IQGroup, KESM, MPI, Unisem, MMSV, Penta and Inari are some of them. Presently, my interest is in the first two which have strong balance sheets and growth in earnings.

If you are interested in these two counters, visit my blog: www.blisswise.blogspot.my to read about them. And if you are interested to join my Super Telegram Group, use the link below:

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IQ Group (LEDs, Sensors & Connectivity)

IQ Group Holdings Berhad is a Malaysia-based company principally involved in investment holding and providing management services. The Company's operating segments include investment holding (includes management services); manufacturing of passive infrared detectors, motion sensor light controllers, wireless video communication devices, door bells, home security system, lighting fixtures and plastic products; trading of security lighting systems, passive infrared detectors and motion sensor light controllers, and development, design, manufacture, sale and distribution of light emitting diode (LED) Luminaires and the manufacture of light engines for use in luminaires. The Company has operations in Malaysia, Japan, British Virgin Islands and People's Republic of China (PRC). The Company's subsidiaries include IQ Group Sdn. Bhd., IQ Japan Co., Ltd., IQ Industries Limited, IQ Group (Dongguan) Ltd. and SILQ (Malaysia) Sdn. Bhd. (Source FT.com)

For the fiscal year ended March 31, 2016, the IQ Group’s metrics are as follows:

Revenue: RM190m

Net income: RM20.86

EPS: 23.7 sen

Share Capital: 88m; Par Value RM1 per share

Dividend 10 sen

ROA: 12.60%

ROE: 16.26%

ROI: 15.86%

Book value per share: RM1.55

Current Ratio: 4.37

Quick Ratio: 3.22

Borrowings: Zero

Cash and bank balances: RM48m or 54 sen per share

Lasted traded price RM2.04 as at 3.8.2016

The above metrics show that this stock is safe and undervalued with a good dividend yield.

The management of the group is full of confidence for the group. Appended below is the Chairman’s statement: 

Corporate Developments 

Another exciting year for IQ-group! Despite the global uncertainty and volatility of market conditions, the repeated strong performance in FY15/16 illustrates the robust position IQ-group currently enjoys. Our signi cant emphasis on R&D drives considerable new product development with related results maintaining 

strong support from our established and developing customer base. 

IQ-group’s revised vision statement (as below) sums up our unrelenting ambition which is enthusiastically supported by the developing strategies within the business. 

“To achieve global market disruption as we detect, illuminate and announce your arrival via shockingly exciting solutions!” 

ere is no doubt that we are in exciting times. ‘LEDs’, ‘sensors’ and ‘connectivity’ are buzz words which are often central to discussions as the world progresses increasingly towards connected devices and ultimately to ‘the internet of things’. IQ-group is undoubtedly well positioned as we bring our reputation, expertise and innovation in these 

areas to the market place. 

In the past year we have continued to invest in people, signi cantly bolstering our breadth and depth of capabilities and so we look forward to the future with con dence and anticipation. 

Financial Overview 

e Group continued to maintain strong nancial performance, delivering a very similar result to last years’ record performance. For the nancial year ended 31 March 2016, the Group achieved a revenue of RM190 million, a slight decrease of 2% as compared to the previous year’s revenue of RM194 million whilst still being able to maintain pro t attributable to the equity holders of RM21million for nancial year ended 31 March 2016. 

e Group has maintained a healthy statement of nancial position with zero gearing. As at 31 March 2016, the net assets of the Group stood at RM137 million with a net cash and bank balances of RM48 million (or RM0.54 per share). 

Future Prospects 

IQ-group is blessed with valued customer relationships and many developing opportunities. As a business, IQ-group has increasing self- belief and ambition. With the clear growth based strategies in place, we remain motivated and con dent regarding the prospects ahead of us. 

Appreciation 

On behalf of the Board of Directors, I again wish to thank each and every member of the IQ-group team for their commitment and tireless e orts which have resulted in another encouraging year end result. 

My sincere appreciation also goes to my colleagues on the Board for their valued and appreciated participation over the past one year. 

Chen, Wen-Chin also known as Kent Chen 

Chairman 

Investment is never without risk. You are fully responsible for your own action.

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KESM, the burn-in Specialist

KESM is principally involved in specialized electronic manufacturing activities. More specifically, the company is engaged in providing burn-in services. The company has business dealings with virtually all the American semiconductor manufacturers.

For the 9 months ended April 30, 2016, KESM’s EPS shot up to 52.7 sen. This is an improvement of 244.44% over the corresponding period of the previous year when its EPS = 15.30 sen.

In the past 2 years, the 4th quarter was better than any other quarter of the year. Based on this fact, the 4th quarter for the fiscal year 31.7.16 should not be lower than 17.6 sen per share. Thus earnings for the full year are likely to be not less that 70.3 sen per share. 

According to its filings with Bursa, KESM has following metrics and key ratios as at 30.4.16: 

Paid-up capital: RM40.015 m. Par value: RM1

Market Cap: RM240.45 (Last traded price: RM5.59)

NTA: RM6.52 per share

Current Assets: RM197.72 m

Current Liabilities: RM63.57

Current Ratio: 3.11

Quick Ratio: 2.956

Cash & short-term investment: RM112.50

Total loans: RM44.66

With a strong balance sheet and good growth in earnings, KESM should deserve a PE of not less than 10. Should the full year’s earnings be not less than 70.3 sen per share, the fair value of KESM should be no less than RM7.30 per share. (This is my opinion. You may have yours.)

Historically, small-cap stocks with strong balance sheets, have performed better than most big-cap stocks. In Malaysia, a stock with a market cap of RM500 million is considered a small-cap stock. 

Since the end of 2015, demand for smart phones, i-pads, tablets and computers have slowed down. However, the internet of things (IoT) are envisaged to pick up going into the 2nd half of 2016. The automotive sector is the likely leader in this respect as car manufacturers compete against one other to produce smarter cars.

To produce smarter cars, more and more newly innovated chips are indispensable. And thus the demand for burn-in and testing services will increase by leaps and bounds. This is where KESM will benefit the most as the company’s growth engine is in the testing of semiconductor chips.

KESM is well prepared.  In 2014, it completed its final phase in its development program mainly for these services. Its plans for 2016 and beyond are in place according to its CEO, Samuel Lim in the 2015 annual report. 

I am bullish on this stock. I had recommended the stock as a buy when it was at RM5 recently.

Investment is never without risk. Please do your own research before buying. 

Remember, you always buy at your own risk. 

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