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Picking winners

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Picking winners

What to look for or how to measure if the stock is priced, say twice its worth e.g. PDN vs uranium price mentioned in MM recent post? As for other stocks, priced to "perfection" - what are we looking at? PE, Price to Book, ?? Kindly elaborate, if able.

Many thanks once again for the great educational journey!

Really appreciate it.

Michael C.

Answer

Hi Michael,

Thanks for the positive comments always really appreciated. Your question just like stock selection & analysis involves lots of moving parts and we generally combine them like a  jigsaw in an attempt to get a clear picture, things we look for:

  • Firstly, we question if we like the sectors growth outlook moving forward, its hard for a company to perform in a contracting market.
  • Secondly if it’s a resources stock we will usually consider if its in the “naughty corner” i.e. not keeping up with the respective commodities with oil a perfect example today. We often talk about the elastic band effect. When the market is bullish a typical commodity, the stock will often trade at a premium to it’s asset base, and vice versa on the downside.
  • We then look at how the  stocks trading from a valuation perspective compared to its history, peers and of course the market. This has more nuances, for example, companies with a low asset base will have high return on equity but that in itself is not a great measure without context. The key takeaway being, that we look at different companies in different ways and that unfortunately takes time.
  • Lastly we consider factors such as the technical picture, insiders buying / selling, volume of shorts etc

When we bring these altogether like a good recipe, sometimes with some simple “Look & feel”, we will make a decision hoping no variables come from left-field but obviously they sometimes do hence investors should always consider spreading their risk.

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Woodside (WPL) v Crude Oil ($US/barrel)
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