Lesson From A Donkey Story

Hi, Greenrookie,
I do not screen just dividend stocks and I usually avoid blue chips and “safe stocks” that too many people loved as they are generally slow in yielding good capital gains unless one buys them around the bottom end of a very bearish market – like around the first quarter of 2009. To me, dividend is a secondary issue or an added bonus that could also be a disadvantage because the stock prices would likely be at a higher level than if they pay no dividend. To identify good growth stocks, I would examine the quarterly results of the stocks that I believe could show substantially improved results in the following one or two quarters. Then I would try my best to understand well the nature of that company’s business and its business outlook over the next 4 quarters. Three important questions that I would always asked myself are –

1. What is the likelihood of seeing a doubling in the stock price within the next 4 quarters if its profitability can be maintained at the same level as the last one or two quarters?
2. Can the stock be considered as “having considerably more upside than downside” where its share price is concerned? In other words, “stock has low downside risk but high potential capital gain”.
3. What is the expected forward PE?

 If the answers to all the questions are favourable, I would start accumulating the stock as a “core holding” to get a “big killing”. Since the stake is high and for good risk management, I would monitor very closely every quarterly results to understand well the reasons for any rise or fall in revenue and profits for the quarter and be alert to ominous sign of any possible inability to meet expectation in the months ahead (eg. greater competition, likely margin squeeze, etc). Any stock that fails to grow according to expectation will be completely divested. Like bull market, growth stocks (especially small caps & pennys) also cannot continue on their up trend indefinitely. Hence, need to pay heed to the wise advice – “Never fall in love with a stock as to let it become your relative – for parting can cost you much money (including paper gains) when your love is no more lovey honey”
As an illustration, I consider Pan United Corp (PUC) a reasonably good growth stock as its quarterly revenue and nett profits have risen well for the last 6 quarters especially in the current poor economic environment, and its business outlook still looks ok for the next several months. I expect its EPS for FY12 to be 8 cts - this translates into a forward PE of 8.5x at 68 cts. In a bull market when the economy is doing fine, I would use a PE of 7x as a good entry point for non-S-chips growth stocks (56 cts for PUC; also its NAV) as I expect the stock to have little difficulty attaining a PE of 15x. Under the present economic and stock market environment, I would only  consider a PE of 5x (40 cts) as a good entry point to build up as a core holding because of the need for greater safety margin in a bearish environment. I hope I have answered all your questions, Greenrookie.
Is the approach described above really workable? I can only say that it works well for me. I had 10 growth stocks as “core” holdings (mostly S-chips) from 2002 to 2007 (bull market cycle) using this approach. Eight of the stocks attained more than a doubling in their share price within an average of 3 quarters (bull market environment). Two of them (both S-chips) failed to perform because of poor corporate management. In 2009, I also accumulated OCEANUS (considered as having above average risks & above average gain) as a core holding stock at 14 cts (Forward PE of 3.5x) and below. My exit level was 36 cts (Forward PE of 9x) after it hit a high of 47 cts.
Growth stocks are difficult to find but they offer great opportunity to make a “big killing”, if one can find them and be able to capitalize on the opportunity offered. I did “bottom fishing” in 2008 and in the past 2 years – took some hard knocks as my fishing boat capsized” for lack of relevant skills.
 
 

Hi observer2,
Thank you for your detailed reply! 
 

Thank you observer2.
What other stocks are on yr radar screen now?

Hi observer2,
I fully agree with you. The key to investment is growth stocks. Divident is an added incentive for holding a stock. During economic or financial crisis go for recession proof stocks.
I don't think Pan United Corp fit in the growth stock profile as the performance is not steady. Growth stocks should be on the uptrend year after year.
What other stocks that fit your investment profile?

Growth stocks you are looking for, Mr Rock? I recommend DUKANG DISTILLERS!

Rock & Pilot - As the reporting season is now on and the latest results would provide a clearer picture of each stock performance, I would prefer to wait for the results before making a decision on the merits of any stock that appears promising. Evaluation of a good growth stock is a subjective matter as much depends on one’s ability to obtain all the relevant information desired and to analyze them correctly. Hopefully, whatever stock we pick using whatever methods, would always perform to our expectation by the end of the day.