Stock pick guidelines

Let me share some guidelines on how you can narrow down a certain stocks to choose from before doing a thorough research on each stock. From the list that I have posted here,

1) Choose a fundamentally stable company which has high Return on Equity (ROE) ratio, low Debt to Equity ratio and high current ratio.

ROE is a measure of how much net income can be generated from shareholders’ capital. A higher ROE means a higher net income is generated from every shareholder's invested capital.

Debt to equity ratio shows how much leverage a company takes when carrying out their business. A higher ratio means the company has higher liabilities or debt compared to shareholder's invested capital.

Current ratio measures how well a company can pay their current debts. A higher ratio indicates the ability to easily pay off their short term liabilities with its short term assets like cash.

2) Choose a stock that is undervalued. Simple undervalued criterions to look out for are its price to earnings (PE) and price to book (PTB) ratios. A very low ratio for both PE and PTB means a company is undervalued. It is good to compare a company’s PE relative to its sector and industry to gauge how much valuation the company has compared to its peers. It is also important to check its historical PE in a 52 weeks range to have a rough idea how much valuation is changing in the company.

3) Choose a stock that has been oversold. The 30 days Relative Strength Index is a momentum indicator that tells how much a stock is sold or bought within the past 30 days. A stock is oversold if its index is near 30 and overbought if its index is near 70. The price change relative to its 200 days Simple Moving Average (SMA) is also a good technical indicator. Any price that is near or falls below its 200 days moving average can be considered a good buy.

4) Pick a stock from various sectors to diversify. Putting your money in a single stock is very risky.

After short listing a few stocks, you are then adviced to research in greater detail on each stock by looking at its annual financial reports and understanding its business. Note you are not adviced to purchase stocks solely on the criterions listed above.