ASX Investor Hour DISCLAIMER: The following material was presented at ASX Investor Hour. The views, opinions or recommendations of the presenter are solely those of the presenter and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ( ASX ). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. Presenter: Colin Nicholson, author Topic: Building wealth through shares share selection strategies Date: 5 October 2011 Location: Melbourne Investor Hour
Building wealth through shares Share selection strategies Colin Nicholson ASX Investor Hour Melbourne 5 October 2011 Copyright Colin Nicholson 2
Investing Part ownership of profitable companies Income stream Capital growth Total return Copyright Colin Nicholson 3
Speculating Exploit changes in price Capital growth Copyright Colin Nicholson 4
XAO XAOA D @ D 040584-270911 3000.00 Investors total return 2000.00 1000.00 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 Speculators price change 100.00 90.00 80.00 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Copyright Colin Nicholson 5
Objective of Investors Beat Accumulation index Or Target return Copyright Colin Nicholson 6
My portfolio return Copyright Colin Nicholson 7
Investment grade stocks Make profits Pay dividends Afford a margin of safety Copyright Colin Nicholson 8
My two models Value Growth Copyright Colin Nicholson 9
Distribution The value model Distribution Downtrend Buy breakout Or buy in uptrend Uptrend Accumulation Copyright Colin Nicholson 10
Example GUD - G.U.D. HOLDINGS > +.6% +0.04 to 6.35 W @ W 030197-311204 12.00 10.00 9.00 8.00 7.00 Distribution 6.00 5.00 4.00 Uptrend 3.00 Downtrend Accumulation 2.00 1.80 1.60 1.40 1.20 1997 1998 1999 2000 2001 2002 2003 2004 Copyright Colin Nicholson 11
The growth model Buy breakout Or buy uptrend Uptrend Consolidation Uptrend Copyright Colin Nicholson 12
Example WOW - WOOLWORTHS LTD > +.8% +0.20 to 26.31 M @ M 300793-310709 40.00 30.00 uptrend Consolidation 20.00 Uptrend Consolidation 10.00 9.00 8.00 7.00 6.00 Uptrend Consolidation 5.00 4.00 Consolidation 3.00 2.00 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Copyright Colin Nicholson 13
Complementary tools for stock selection Fundamental analysis Good: Estimating value Poor: Timing Technical analysis Good: Timing Poor: Estimating value Copyright Colin Nicholson 14
The way I use these tools Timing Technical analysis Likely to trend upwards (breakout) or already trending Margin of Safety Fundamental analysis Low price earnings ratio High dividend yield Conservative debt to equity Strong return on equity (ROE) Sufficient liquidity Copyright Colin Nicholson 15
How I find these stocks 1 Timing Technical analysis New 52 week highs (stocks that make profits and pay dividends) This is my primary weekly scan Example Copyright Colin Nicholson 16
Example of technical analysis scan Copyright Colin Nicholson 17
How I find these stocks 2 Margin of Safety Fundamental analysis Low price earnings ratio (stocks with positive PER and pay dividends) Best after reporting seasons Finds a lot of stocks headed out backwards Example Copyright Colin Nicholson 18
Example of fundamental analysis scan Copyright Colin Nicholson 19
Case study Thorn Group (TGA) Copyright Colin Nicholson 20
New all time high TGA - THORN GROUP LTD > +.6% +0.01 to 1.655 EXP MOV AVS 260(0) day 0.7192 52 week high M @ D 131206-031209 1.20 1.00 0.90 0.80 0.70 0.60 0.50 J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 J F M A M J J A S ON D 2009 J F M AM J J A S O N D 2010 0.40 0.38 Copyright Colin Nicholson 21
Company profile Established with the opening of a store in Sydney in 1937, the Company has a long history of renting electrical appliances to Australian consumers. Today, the Company offers a wide range of audio visual products, kitchen and laundry appliances, computers, furniture and gym equipment through a national store network, making it a leading operator in the household goods rental market. The underlying strength of the core rental business and associated positive operating cash flows has enabled the Company to achieve substantial growth in recent years and provides a sound platform for development of strategic initiatives. The Company is building on its substantial core business and competencies to provide an even broader range of products and services to the Australian marketplace. This includes consumer cash loans through its Cashfirst brand, specialised commercial rental via Thorn Business Services and internet retail via BigBrownBox.com.au. Source: Thorn Group Annual Report 2009. Comment: It seems to me that Thorn Group s business is centred on low income earners and I difficult retail conditions, their business might thrive by allowing consumers to rent as they pay off the cost, so conserving funds, although at a cost. As such the present tough times for consumers, who are reluctant to spend might be perfect for Thorn Group. Copyright Colin Nicholson 22
Model identification TGA - THORN GROUP LTD > +.6% +0.01 to 1.655 EXP MOV AVS 260(0) day 0.7192 W @ D 131206-031209 1.20 1.00 0.90 Uptrend 0.80 0.70 Downtrend 0.60 0.50 J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation J F M A M J J A S ON D 2009 J F M AM J J A S O N D 2010 0.40 0.38 Copyright Colin Nicholson 23
Earnings and dividend quality Copyright Colin Nicholson 24
Margin of safety Pre purchase Checklist Mkt Av Any Assessment Margin of Safety Criteria Stock Plan Req Guidance V Plan Price Earnings Ratio 9.34 14.6 no ok Dividend Yield 4.92* 3.73% no ok Franking yes Yes no ok Debt/Equity Ratio 8.70% <60% no ok Mkt Capitalisation $135m >$100m NA ok Liquidity (22 day Av) $264,000 Enough NA maybe * My calculation ROE was ~30% - my guide >20% Copyright Colin Nicholson 25
Chart analysis TGA - THORN GROUP LTD > +2.5% +0.04 to 1.63 W @ D 131206-031209 1.20 1.00 0.90 0.80 0.70 0.60 0.50 J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation pattern J F M A M J J A S ON D 2009 J F M AM J J A S O N D 2010 0.40 0.38 Copyright Colin Nicholson 26
Set stops TGA - THORN GROUP LTD > +2.5% +0.04 to 1.63 W @ D 151206-031209 1.20 1.00 0.90 0.80 Sell-stop $0.89 0.70 New method: Trough low $0.89 Soft stop $0.885 Hard stop $0.87 Position size calculated on hard stop J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation pattern J F M A M J J A S ON D 2009 J F M AM J J A S O N D 2010 0.60 0.50 0.40 0.38 Copyright Colin Nicholson 27
Calculate position size Total Capital 2,001,561 Buy Price 1.10 Sell Stop 0.89 Risk 0.21 Always play for meaningful stakes Max Gunther The Zurich Axioms % Capital to Risk 0.5 Maximum Position 47,656 % Capital to Invest 2 Position it buys 36,392 Position allowed 36,392 Lesser of the two Buy % capital risked 0.38 Copyright Colin Nicholson 28
Subsequent earnings and dividends Copyright Colin Nicholson 29
How the chart unfolded TGA - THORN GROUP LTD > +2.5% +0.04 to 1.63 W @ W 151206-300911 2.40 Sold 2.00 1.80 1.60 1.40 Bought 1.20 1.00 0.90 0.80 0.70 0.60 0.50 J FMAM J J ASOND 2006 J FMAMJ J ASOND 2007 J FMAMJ J ASOND 2008 J FMAM J J ASOND 2009 J FMAM J J ASOND 2010 0.40 0.38 JFMAM J J A SOND 2011 Copyright Colin Nicholson 30
Result of investment Total sale proceeds 54,578.31 less Total purchase cost 39,323.21 plus Dividends 5,331.60 plus Imputed credits 2,284.96 Net total return 22,871.66 % of capital 1.14 Note: dividends 33% of total return Copyright Colin Nicholson 31
Key points Timing Technical analysis Likely to trend upwards (breakout) or already trending Margin of Safety Fundamental analysis Low price earnings ratio High dividend yield Conservative debt to equity Strong return on equity (ROE) Sufficient liquidity Copyright Colin Nicholson 32
My complete Investment plan with examples and case studies Also consider Max Gunther The Zurich Axioms Copyright Colin Nicholson 33