Forum Archive Index - June 2000

["nick" <acummin@es.co.nz>]

              I have come up with a five rule system for

picking stocks.  I set out to try and look for a system which would

find stocks which were undervalued.   Here it is, let me know what

you think.

 

Rule 1  p/e must be less than 10

Rule 2  eps must be expected to grow in next forecast year

Rule 3   Gross dividend yield of at least 8%

Rule 4   must be within 20% of 52 week low compared with high

Rule 5  Sell when p/e over 12

 

         This strategy is designed to select stocks at a time when they are weak

and sell once they have recovered.   Rule 1 is fairly self explanatory, various

studies have shown that stocks with a low p/e will over time outperform others

        Rule 2 aims at illiminating the generally bad stocks which have a low p/e

because earnings are in decline.   By only selecting those which expect to increase

eps then an improvement is much more likely

   Rule 3 gives a good income while waiting for share price to rise. The yields

are likely to stay good provided the company's make their earnings forecasts

 Rule 4  ensures we are in near the bottom.  If a share drops into its bottom 20%

i recommend waiting to see how near its low it gets before stabiling. Once it hits

yearly low then buy.

    Rule 5 ensures we hold the shares until they have recovered.

 

           None of these rules on their own would be a success, but together i believe

they have potential for finding undervalued stocks, which are fundamentally sound

with reasonable prospects in the future.

         I have run this system over NZ stocks and only 3 company's at present qualify

for selection.  They are

 

                              price              p/e           eps          gross yield         high low  

                                                              1999  2000fc

   Restaurant b        1.15               8.5       14.7    16.4        11.5            156-110

   Force corp           0.41              7.8       5.05      6           14.5             1.03-41

   Breirley               0.32               5.3      3.8       5.2         9.3                54-32

  

          Fletcher building was a strong qualifier but its price has now moved

 off its 20% low compared with its 52 week high.  The system picked building when

it was around 2.00.  Restaurant brands too would of been picked out when it

hit 2.10 but it is still a comfortable qualifier at 2.15.

            There were a few that nearly qualified such as air new zealand, the reason

they didn't was that earnings per share are not expected to increase in the next forecast

period.  Owens group has reached a low but could still be falling, the yield has been cut

and is below 8% so that one didn't make it.

           I used ratios and brokers forecasts from datex on line.  Most sharetables seem to vary

over p/es etc. so i stick to the one source.

           Early days yet but i like the look of this system.  It has been divised with the nz market

in mind, where else can you get such good dividends and low p/es?

          I will monitor this system weakly for performance and check to see if any new

qualifiers, hopefully the market will rally and all stocks will be off their lows!!

    

          Disclaimer own force and breirleys (bought last week) expect to buy restaurant brands this

week

 

  nick