The criteria for 'cheap' would be a low price earnings ratio (P/E) of say below 7 times coupled with a high dividend yield of say 7% or more.
A P/E of 7x would indicate an earnings power of 14% on invested capital. We love to look at earnings power (EP) because as investors, in line with Warren Buffett's philosophy, we regard all of the companies' earnings as our earnings regardless of whether they retain it or distribute it in the form of dividends or share buy backs.
Sure beats the fixed deposit rate we get from a bamk, as well as the inflation rate of 3%.
And why we like dividend paying companies is because that is income for us without needing to create it artificially by selling a part of our stock holding while the market still pays us pennies on the dollar for it.
So, here we go:
- Chip Eng Seng - yield 8%, EP 35%
- BRC Asia - yield 8%, EP 22%
- Casa Holdings - yield 9%, EP 25%
- Elec & Eltek - yield 11.9%, EP 13%
- Cogent - yield 23%, EP 11%
- Food Junction - yield 24%, EP 10%
- Global Yellow Pages - yield 12%, EP 26%
- Dapai - yield 7%, EP 29%
- FSL Trust - yield 14%, EP 14%
- Macq Int Infra - yield 13%, EP 26%
This list can go on. It is easy for most investors to flip to the stock listings of Business Times to discover these gems. Of course, this is just the very first step in studying and filtering the companies we want to invest in based on other factors such as cash flow track record, debt levels and competitive advantages. Last but not the least, it is how well we simply know or like the company - its management, its culture, its products, and its customers. And even after this exhaustive sieving process, we thoroughly consider the entire portfolio as well as the needs and objectives of the investor i.e. a financial planning review before we decide how much to allocate in what securities and for how long.
The premise of this piece is simply 80/20. As with life itself, more than 80% of research, analysis and selection can be achieved by looking at less than 20% of the information. In my experience, it is often skewed as far as 95/5. This author can almost wager that a basket of stocks each bought into using equal dollar amount would yield handsome returns for the investor over a 5 plus year time horizon. Diversification is key as is holding power. Of course, there would be some lame ducks but even a few multi-baggers would make the portfolio highly profitable.
Dear investors, you don't need to put a person on the weighing scale to tell if she is fat. Let us go for the obviously attractive 'no brainers' that give us ample margin of safety without needing to split hairs in our analysis.
