This post complements the other posts I’ve done so far on value investing and how to choose a company. My investing style (or FFN investing methodology) has been modelled after Warren Buffett. I’ve also incorporated into the methodology, my own criteria that I look out for. I look out for stocks with a mix of value investing, dividend play and technical analysis. Below is a summary of my style:
Value investing portion
The company I’m looking at MUST have:
- Earnings and free cash flow growth year-on-year
- Little or no debt
- Considerable amount of cash in hand but not in excess
- Low capital expenditures (CAPEX)
- High ROE above 12% and ROA above 7%
- Predictable business with a wide-moat
- Competent and honest management
- Future growth plans in place
- Lastly, the business must be undervalued
It would be preferable if the stock is under-researched, if not, not researched at all by analysts and investment houses. In this way, the price would be beaten down relative to the value of the business.
Dividend play portion
When I invest, I’m looking at both capital gains and income. So, I look out for a few criteria. They are:
- Dividend yield around 5%
- Dividend payout ratio of 30% to 50%
- Dividends paid out growing year-on-year
At times, it would be hard to find an undervalued company which is giving out consistent dividends. If the company is fundamentally very strong without a proper dividend plan, I would still consider purchasing the company.
Technical Analysis portion
Before buying the business, I look at the technicals to have a better entry. The daily candles should be in an uptrend channel and above the 20DSMA and 50DSMA to prevent me from catching a falling knife. The weekly candles should also be in an uptrend.