Say What Wednesdays

How I buy shares – the horror stories and the happy endings, plus Technical vs Fundamental Analysis

Welcome to Say what Wednesday

Today’s question is from Emma. She says, “I’m new to the podcast so not sure if you have covered this in the past. I thought it might be cool to hear you analyse a specific stock or company; not like a recommendation but say something in the past. To avoid people taking it as a recommendation it could be something you have put money into and how it went or maybe something you lost money in and how that happened too.”

Analysing stocks

  1. I’ll talk about the two camps of analysing shares
  2. Look at the pros and cons along with how they work
  3. Talk about how I personally do it, and a few winners and losers, what they did right and what they did wrong.

The Methods of making stock analysis
Fundamental Analysis vs Technical Analysis

  1. Fundamental analysis – Aims to value a share by its intrinsic (fair) value – valuation of shares
    • Done by examining the financials, qualitative
    • Why? Buy the undervalued or expected future performers
  2. Technical – Doesn’t care about intrinsic values
    • Shares are traded using share charts to identify patterns and trends
    • Works off the “Dow Theory
      • market price discounts every factor that may influence a shares price (why [intrinsic] values don’t matter)
      • market price movements are not purely random but move in identifiable patterns and trends that repeat over time – This works off “support and resistance
    • Why? I talked about markets being behaviours of crowds – supply and demand
      • If it’s over-demanded you sell, if it’s under-demanded you buy

What they are and how they work

  1. Fundamental
    • Macro – Trends in the economy
      • Country stats – unemployment, tax rates, weather
      • Thematic trends of society
        • Examples – Lithium (Pilbara), Health care
      • Micro
        • Underlying company financials, understand the management
      • All about looking for evidence in financials and forecasting these out

What to look for:

Fundamentals

  1. Financials – historical – but can show trends, most important thing is cash flow
    1. Earnings per share goes up from a few things
      • Increased dividend growth (profits)
      • Buy backs – reduction in shares
        • Example – RIO
      • Decreasing debts – will show the reduction in costs
    2. Management – hard to know what they will do, as they are make or break as we will see
      • Track record is important, but impossible to know future performance
      • Thematic – trends and the future
      • The important question is – how will these effect the future earnings of the company?
        • This is where share recommendations come from. It also depends on who you talk to as to the value

Technical

  1. Use technical indicators
    1. Moving averages, volumes, trends in the long-term prices
    2. Aims to predict the future direction of the price based on past behaviours of the market
    3. You want to look at trends here, plus some technical indicators
    4. If a share is below the exponential weighted average + oversold = it could rise

 

How do I buy shares?

  • In the early days – Fundamental analysis – smaller cap shares

The horror stories

  • BCI Minerals – BCI – 4th biggest iron ore producer at the time
    • Earnings growth was great, below fair value – bought in 2011 for $2 – 2013 went to $4.50
    • BUT – they took on a massive amount of debt – 2012 (11.7m) to 2013 (67.4m)
      Was fine as long as iron ore prices didn’t go down…but they did…
    • Revenues dropped – their response was to do equity raising to pay off debt – 144m to 228m = Dilute EPS… and they kept going to 393m
    • Today are sitting at $0.145 = 93% loss from $2
  • Medusa Mining – MML – Gold exploration
    • Decline from $9 to $1.80 peaked my interest in 2013
    • Massive bubble but looked stable – EPS went from 54c to 28c, but they had no debt
    • But then they started slowly borrowing after I bought – 2.3m, 2.8m, now 4.6m
    • While revenues have been going up – EPS in 2015 was -94c, now -23c
    • Price now at $0.65c = 63% loss
  • What is the common connection between these two?
    • Single focus companies (iron and gold) with revenues tied to resources – no control
    • Poor management decisions – Being in resources they dug further into their hole –
      • Rather than hunker down and get rid of debt, decrease costs and wait, they got further into it all

The happy endings

  • Dulux Group – DLX – The paint company
    • Can’t take full credit – Fund manager gave the tip – Bought for $3.20 in 2012
    • Revenues going up year on year
    • ROE was in the double figures each year
    • Diverse – Aus, NZ, Asia, and produces lots of hardware/construction for private and section
    • Plus, they had a monopoly!
    • Today $7.64 = 138% gain

 

The mixed, but then great!

  • Codan Limited – CDA – Communication products, detection and mining technology
    • Bought in 2013 for 1.60 – Rise from $1.60 to $4
    • Then they declined from $4 over 5 months – but this peaked my interest
    • After mining boom news came out and dropped to $0.90 I bought 50% more
    • What I liked
      1. Range of markets – Gov, private, and world-wide (Aus, Canada, Middle east, Europe)
      2. After crash they started focusing on paying down debt
    • Cut other costs and got financials back to a healthier position today
    • Smart management is the winner here – Today at about $3.10/$3.20 = 140% gain

 

These days – I use a bit of both

  1. ETF, LIC – Technical
  2. Individual shares – driven by fundamental, but do follow trends to see what direction it is heading in.
    1. Micro caps are too volatile – I don’t buy micro-cap shares personally anymore
    2. Use micro managed funds as they are getting the info I am not, and trading daily
    3. Not a lot of public information to work off
    4. Someone sneezes and their profits can be gone = Price drops!

I hold companies – all because it dropped doesn’t mean you should sell if it is still a stable company out of market favour – sometimes I buy more

Summary

  • They both work off the crystal ball in the end
  • Just better know what you are doing and not freak out
  • Best way to go is to invest for the long term into stable, diversified companies – i.e. won’t go out of business with some bad results
  • Thanks again Emma for the question!

 

Want to hear more like this? About technical analysis or fundamental analysis, or something else? Go to https://financeandfury.com.au/contact/

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