Since the start of my dabbling in stock investment, I have looked high and low for the “perfect” stock screening criteria. But as with all things in life, there is no such thing as a magic bullet.
There is no secret recipe to follow which can guarantee you a 100% ROI on a stock investment. There is, however, a simple way to approach stock investment which in my humble opinion is grounded in common sense.
Now I’m not a super investor by any long shot, what I’m sharing here is adapted from other very successful investors in the local market. Check out this list of super stock market investors in Malaysia you should be following and learning from.
Stock Investment Core Selection Criteria
My philosophy boils down to finding good quality company at cheap or reasonable price. My thinking is heavily influenced by Cold Eye’s 5 Yardstick of starting your stock investment journey as I believe it is a simple, common-sense guide for most newbies.
Metrics measuring good quality
Return on Equity
Return on equity ideally should be more than 10% over the long run.
Free Cash Flow
Free cash flow should be at least 5% of sales / revenue of the company
Metrics measuring price
Price/Earning ratio
P/E ratio should ideally be less than 10. However, as this is not an ultimate guide, there is no hard and fast rule as P/E ratio doesn’t reflect everything. For a growth company, you can consider P/E as high as 15 and never more than 20.
Dividend yield
Dividend yield should be at least FD rate, i.e. more than 3%.
Summary
My stock screening method can thus be summed up as:
- ROE at least 10%
- FCF at least 5% of sales
- P/E ratio of below 10
- DY of at least 3%
Conclusion
These 4 criteria forms a solid ground to start researching on stocks. However, please bear in mind that this is not a magic bullet for striking it rich as there are many other factors involved, which I have not touched on.
Thoughts? Feel free to comment below!