The Criteria in Action

State of Play: I have a long list of 583 shares listed on the Australian Stock Exchange (refer first post) from which I want to pick 12. I have a list of seven criteria (refer previous post) to bring down my long list to a short list. Here goes.

Criterion 1 - Daily Dollar Volume: From $100,000 to $25m.

I downloaded the Industrial Market daily report and the Mining and Oil Market daily report for 9 Jan 2009 from the AFR website (http://afr.com/home/tables.aspx). For the 583 shares I found the volume and closing price (using the sumif() function in Excel, not by hand) and multiplied them together to get the Daily Dollar Volume (DDV) for each share. I then sorted the list by the DDV and deleted all the shares will a DDV below $100,000 and above $25 million.

Have a guess how many shares were left. Go on. Remember I started with 583 shares.



62.



Yep 62. Only 62 shares were left. That’s 12% of the original list. I thought, there must be some mistake, so I went to the full market list and did the same thing. Of the full list of 2,310 securities that you can invest in on the ASX, fully 49% did not trade at all on 9 Jan 2009. That 1,138 securities that if I owned I could not have sold on 9 Jan 2009. (I use the word securities because the list includes options and other types of instruments, not just shares.)

A further 817 had a DDV below $100,000. Only 18 shares had a DDV of greater than $25m (I told you that figure would be high for the Australian market). So, from the full list of available securities only 294 (13% of the market) meet this criterion. This matches my results on the long list and as the aim of the game here is to get down to a short list, I’ll move on with the 68.


Criterion 2. My Relative Strength Proxy: 90 or Higher

As discussed in my last post. I don’t know where to find the relative strength of shares so I’m going to rank them by last sale price divided by the 52-week low (both as at 9 Jan 2009).

So starting with the full list of securities from the Industrial Market daily report and the Mining and Oil Market daily report, I deleted all the options and other strange securities. That left 1908 shares. I then sorted by the “return” (closing price divided by the 52-week low). The results are worth a look at.

The highest return was 6900% for a company called Q Ltd. Their 52-week low was 0.5 cents and their closing price was 35 cents. I figured this was worth a further look, even though they did not trade on 9 Jan 2008 so they won’t be on my shortlist. Looking the company up on the ASX website (www.asx.com.au) revealed a serious downward trend in their shareprice from June 2008, when they were trading at above $2.00. This highlights just how flawed my little proxy is, but we shall press on.

188 shares or 10% of the market had a 0% “return”. This means they are at their 52-week low. It might be interesting to track this figure to see if it gives any clues about when the market is turning.

I then checked whether any of the 68 made it into the top 10% of “returns”. No. Top 20%? One – Australian Education Trust. Right. I now pronounce this whole criterion a waste of time so I’m sticking with the 68 shares from Criterion 1 and moving onto Criterion 3.

Criterion 3. Earnings and Sales Growth: 25% or Greater

For those of you paying attention, you would have noticed that I listed this last time as Criterion 5. However, you can pull these figures off Yahoo’s finance website (au.finance.yahoo.com) under Key Statistics, so I’m going with this one next.

I didn’t believe any stocks would meet this test and I was eye-ing my bookshelf to see what book I should move onto as I searched the yahoo site. However, a whole eight shares from my list of 68 had both earnings and sales growth above 25%, they are:

NAME Sales Growth Earnings Growth
AWB LIMITED 48.20% 262.90%
WOTIF.COM HOLDINGS LIMITED 41.80% 29.40%
JB HI-FI LIMITED 41.10% 59.40%
ABB GRAIN LIMITED 41.00% 532.00%
FLIGHT CENTRE LIMITED 40.20% 51.70%
INVOCARE LIMITED 36.80% 24.30%
CHARTER HALL GROUP 27.20% 35.20%
THE REJECT SHOP LIMITED 25.30% 35.10%

[Sorry about the formating, I'm afraid my blogging skills don't extend to tables.]

AWB immediately rings alarm bells. They are the crowd involved in the Iraqi oil-for-food scandal (check out Wikipedia for the full story) and litigation is on-going, they have lost the right to be the sole controller of Australian wheat exports, there is uncertainty over its share structure, its under threat of class actions and its having to pay (remaining) staff extra because they all want to leave (wouldn’t you!).

Criterion 4. Cashflow from operations: a positive number

Again, I’m not sticking to my original order, but again this is something you can look up on the Yahoo Finance website. All the shares get through on this one except AWB.

NAME Cashflow from operations
WOTIF.COM HOLDINGS LIMITED 46.28
JB HI-FI LIMITED 42.44
ABB GRAIN LIMITED 4.3
FLIGHT CENTRE LIMITED 391.93
INVOCARE LIMITED 38.6
CHARTER HALL GROUP 45.28
THE REJECT SHOP LIMITED 19.02


Criterion 5. Net Profit Margin: At Least 7%.

Strangely, this isn’t in the key statistics listed on the yahoo site, so I downloaded the latest annual reports for each company of their websites.

NAME Net Profit Margin
WOTIF.COM HOLDINGS LIMITED 3.6%
JB HI-FI LIMITED 3.6%
ABB GRAIN LIMITED 2.1%
FLIGHT CENTRE LIMITED 10.2%
INVOCARE LIMITED 12.1%
CHARTER HALL GROUP 70.0%
THE REJECT SHOP LIMITED 4.7%

As the table shows, only three companies meet the test and yes, the net profit margin for Charter Hall really is 70%. I think this has to do with it basically being a fund manager, but we can look into this further if it makes it all the way through.

Criterion 6. The company’s sales are $500m or less.

NAME Sales
FLIGHT CENTRE LIMITED $1,407m
INVOCARE LIMITED $228m
CHARTER HALL GROUP $91m

Who knew Flight Centre was such a big company? People who bother to look at these thing I suppose. However, they are too big according to the Motley Fools, so we are down to just two.

Criterion 7. Insider Holdings: 10% or more

I’m glad I was only down to two companies for this one, because it took a lot of flicking through pages on the annual report to work this one out (and even then I’m not entirely sure its correct.

For Invocare (funeral directors, by the way, odd what you find on the ASX) it appears that the directors of the company own a grand total of 1.5% of the shares. So Invocare doesn’t make the cut.

Charter Hall contained a nice list of its top twenty share holders, which consisted of 18 institutions (superannuation funds and such) and two people. The two people were directors holding 1.54% and 1.49% of the shares respectively. Its possible that if the information was there for all the directors it would amount to 10%, but I don’t think it would, besides, one share does not a portfolio make. So Charter Hall is out as well.

So what have we achieved from all this? Well we could throw in the towel and conclude that there are no companies worth investing in on the ASX or, as I said earlier, we could find another book. Coming to an end (perhaps) of one of the worst downturns on the market in history, I can’t believe that there are no companies worth investing in, so its time to turn to “The Intelligent Investor’s Guide to Share Buying” by Tim Hewat and see what he has to say about things.