----- Original Message -----
Sent: Monday, June 05, 2000 8:50
AM
Subject: [sharechat] 5 POINT
PLAN
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
See IRG research reports
