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Tips & Tricks: 6 Steps To Finding A Great Stock

HOSTS Alec Renehan & Bryce Leske|27 November, 2017

In the book Shopping for Shares, Tracey Edwards presents the 6 steps she uses to find companies to invest in. In this episode, we break down this 6 step checklist, define the key terms and explain what she’s looking for. While we don’t necessary agree with her whole approach, it is important to consider how different investors approach finding investable companies. As always, we also discuss what we’ve learnt in the past week and chat about some of the companies we’re keeping an eye on. In this episode you will learn: • Another reason we’re so lucky to live in Australia • Tracey Edwards’ 6-step stock screener • Some key definitions of stock market terms • 5 companies UBS predict will have a great 2018 • Why Alec’s been thinking a lot about German dog food • An Australian software company that is trying to take on the world Stocks and Resources Discussed: • Shopping for Shares: The Everyday Woman’s Guide to Profiting from the Stock Market – Tracey Edwards • Adacel Technologies (ASX: ADA) • AGL Energy (ASX: AGL) • Aristocrat Leisure (ASX: ALL) • BHP Billiton (ASX: BHP) • Origin Energy (ASX: ORG) • QANTAS Airways (ASX: QAN) • Woolworths (ASX: WOW) • Zooplus AG (ETR: DO1) • Credit Suisse Global Wealth Report 2017 • UBS names its best bets for 2018 (article behind paywall)


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Bryce: [00:01:29] Equity Mates, episode twenty four. Great to be with you guys again. This is a podcast where we break down the world of investing to make it easy for you guys to be more accessible and excited to be here on another lovely Saturday morning up in Sydney. And as always, I'm joined by my equity buddy Ren down in Melbourne. How are you? [00:01:47][18.0]

Alec: [00:01:48] I'm very good. Bryce great to be with you and great to be doing another episode. Just the two of us chatting. [00:01:54][6.0]

Bryce: [00:01:55] Yes. We've been on that interview vibe for the last few episodes, so it's good that we can get back in the chair and discuss a few things that we've been pondering over the last few weeks. So let's get stuck in, I guess, this week where we'll start off by giving you guys a bit of an update on the competition that we're running. And then, as always, we'll go into something that both Ren and I have learnt over the last week or so that's investing or finance related or whatever it is. Last time I think it was a Netflix documentary recommendation. [00:02:27][32.0]

Alec: [00:02:28] So I still haven't watched it, though. [00:02:30][2.3]

Bryce: [00:02:31] And you did have one that you're going to say you were going to recommend that you can play. [00:02:34][3.0]

Alec: [00:02:34] Yeah, and I think I've forgotten it again. Let me let me think about it. Hopefully, by the end of this episode, I'll remember what it was like. [00:02:43][9.0]

Bryce: [00:02:44] Fingers crossed. And then it's finally time to jump into a bit of a section from the shopping for Cher's book that I've been reading, that I have promised that I would do some sort of review on. I'm sure that was I think that was almost right back at the start of [00:02:59][15.4]

Alec: [00:03:01] the was 20 full episodes later. [00:03:03][2.4]

Bryce: [00:03:04] We've got well, I mean, this is not a full review. This is just a small part of it. [00:03:07][3.5]

Alec: [00:03:07] But we're going to be around Episode 15 that [00:03:09][2.1]

Bryce: [00:03:12] we're going to be looking at that sort of checklist that you can use to identify long term potential in stocks. And so that will then flow into, as always, a bit of stock chat where Ren and I'll go through a few stocks that we've been looking at over the past fortnight or so. So let's get stuck and do want to give us a bit of an update on that Ren. [00:03:31][19.7]

Alec: [00:06:51] All right. Well, should we kick off with what we've learnt? It's not really just like what we've learnt since the last time we did one of these episodes. [00:06:58][7.1]

Bryce: [00:06:59] Yeah, definitely. Look, I I'm actually going to also go out on a limb here and say that I'm going to leave mine until stock chat. [00:07:06][6.7]

Alec: [00:07:07] Interesting not. Yes. Controversial, but less controversial. [00:07:10][2.6]

Bryce: [00:07:11] Yes. [00:07:11][0.0]

Alec: [00:07:12] You're a maverick structure. [00:07:13][0.9]

Bryce: [00:07:15] I think mine just flows really well with what we'll be discussing later in the episode. So I'll leave you hanging Ren. But that's a bit of a teaser there. [00:07:27][12.2]

Alec: [00:07:28] All right. Well, for what I learnt this week are so would you believe it? But one in 20 Australians are millionaires, [00:07:37][8.9]

Bryce: [00:07:38] so hang on. [00:07:40][1.2]

Alec: [00:07:40] So that's the headline that drives people in. But what I learnt this week or what I was reading this week, Credit Suisse released the Global Wealth Report for twenty seventeen. So I've found it was an interesting read. It's interesting to compare where Australia is to the rest of the world. It does make you very thankful in a lot of ways to be an Australian. Yeah, and there's some there's some interesting, interesting stuff in there in the report, including a I guess an article or part of the report titled The Unlucky Millennial. So if you're if you're a millennial, feeling hard done by, you can give it a read and understand why you are had hardly done by. But yeah, look, the reason I found it interesting was that Australia as a country, we are just unbelievably lucky in how wealthy we are and how how evenly our income is distributed compared to most other countries. And, you know, you sometimes sometimes forget how different our life would be if we were if we were somewhere else. So, you know, it's just some of the stats as as a total percentage of our population, six point four percent of Australians are millionaires. So they have over a million dollars in assets. So I assume that includes housing and so forth. So, yes, that puts the stats a little bit. But as a basis of comparison, the USA is the same, exactly the same six point four percent. China is only zero point two percent. [00:09:20][100.4]

Bryce: [00:09:21] Yet they have got the most billionaires in the world. I'm pretty [00:09:24][2.3]

Alec: [00:09:24] sure. Narvel USA still has the most billionaires, 714. China has five hundred and four growth. So and then Australia has thirty one billionaires. So, you know, even though China only one billionaires. Yeah, I couldn't I tried to ignore the obvious ones that you think of Gina Rinehart's allegations. Yeah, yeah, yeah. I guess Clive Palmer probably isn't one anymore. [00:09:50][25.9]

Bryce: [00:09:50] Self-proclaimed. [00:09:50][0.0]

Alec: [00:09:51] Yeah, yeah, yeah. Yeah. [00:09:52][1.1]

Bryce: [00:09:53] But there must be other there'll be a lot of private ones out there, so [00:09:57][4.1]

Alec: [00:09:58] there'll be a lot that. Yeah. You just have never heard [00:10:00][2.3]

Bryce: [00:10:00] of no family, family, billions. [00:10:02][1.9]

Alec: [00:10:03] So if any listeners out there want to compile a list of all 31 and send it in will we'll put that in Equity Mates thought. Sardars. Yeah. No but yeah. So the one thing that jumped out was the percentage of people with a net worth less than ten thousand US dollars. So Australia only five percent of the population. OK, as a basis of comparison, the UK nineteen percent, so almost one fifth and the US twenty nine percent. So we're getting close to a third of people. Oh yeah. [00:10:39][35.7]

Bryce: [00:10:39] So with less than ten [00:10:41][1.8]

Alec: [00:10:41] grand, with less than a net worth of less than 10 grand. So you start to see just how unevenly income is distributed in. [00:10:51][10.0]

Bryce: [00:10:52] And there are so many flow on effects to just general economic conditions of the country as well. Yeah, almost a third of your country worth less than 10, Kiawah. Then they're going to be in no position to be driving any sort of economic growth or anything like that. [00:11:04][12.8]

Alec: [00:11:05] Yeah, yeah. They're going to be struggling to keep their head above water. Yeah, well, and then so the last two that I've found interesting was the number of people in Australia in the top one percent of global wealth is one point seven million people. So one point seven million people in Australia, the richest one point seven million are in the top one percent in the world. Which kind of puts it in perspective of how well Australia is going. [00:11:31][26.3]

Bryce: [00:11:32] Yeah, definitely. But what is the top one percent? Because I'm pretty sure. The top one percent is actually a lot like the technical definition for the top one percent is a lot smaller. Sorry to be in the top one percent is easier than you would think [00:11:50][18.3]

Alec: [00:11:51] that profit would, however. However, as you did, you're still in the top one percent. So you're still doing better than ninety nine point ninety nine percent of GDP. [00:12:00][9.5]

Bryce: [00:12:01] Yeah, yeah, [00:12:02][0.3]

Alec: [00:12:02] yeah, yeah. But then then the last one, so that they used median wealth as a as a sort of proxy for income distribution. Well I guess wealth and income distribution and Australia actually came second, so second best. Switzerland was the best and the US for comparison was the twenty first. So, you know, we look, we look overseas a lot as Australians and as Australian investors because we sort of think our markets are pretty boring and pretty small in comparison. But, you know, when you when you compare Australia to the rest of the world, we are we are bloody lucky country to to [00:12:46][44.6]

Bryce: [00:12:47] be doing anybody else. Yeah, no, definitely. I mean, we haven't had a recession for a number of years, record number of years. And I think we've had record a record number of consecutive quarters of economic growth worldwide. I think we're up to 26 or 27 quarters of economic growth now, which is incredibly extended period of time. If you look at it from a historical perspective. Yeah. So, yeah, we're doing pretty we're pretty lucky. [00:13:14][27.3]

Alec: [00:13:15] Yeah. So, I mean, that was that was what I wanted to bring to the table this week. Not not necessarily about investing, but just about global economics I guess. Yeah. [00:13:25][9.5]

Bryce: [00:13:25] Yeah. And also a check of a reality check of how good it is to be Aussie. [00:13:30][4.9]

Alec: [00:13:31] Yeah. So what what we'll do this week is we'll put that report in in the Equity Mates thought Dollars email that goes out on Monday. Yeah. [00:13:39][8.6]

Bryce: [00:13:40] Get around it if you haven't already. [00:13:41][1.1]

Alec: [00:13:42] Yeah. Make sure you sign up the report. There's just there's a one page on Australia and there's that sort of article on the unlucky millennial's. So, you know, don't be daunted. It's a 60 page report. You don't read the whole thing. You can just skip straight to Australia. But yeah, it is it is a very interesting life and an interesting global perspective on on how we're travelling. [00:14:04][22.7]

Bryce: [00:14:06] Yeah, nice. Good one, Ren. All right. Well, as I said, I'm going to leave one till the end. So let's kick on, as we mentioned at the start, where. I have read a book called Shopping for Shares The Everyday Woman's Guide to Profiting from the Stock Market by Tracy Edwards second edition. OK, now, I wanted to read it for a few reasons. Firstly, one, I wanted to know why she was distinguishing buying shares between men and women. [00:14:33][27.8]

Alec: [00:14:34] Yeah, that's that's my big question as well. Yeah. Do you have the answer to that? [00:14:38][3.8]

Bryce: [00:14:38] Absolutely not. There is no information in here. There is no information in here that would be any different to what would be in a book if it was entitled Shopping for Shares. The everyday man's got to profit [00:14:50][11.8]

Alec: [00:14:51] from the stock market. It was what was her name? [00:14:54][3.1]

Bryce: [00:14:54] Tracey Edwards. I actually have asked her to come on for an interview, but there has been no response, so. [00:15:00][5.2]

Alec: [00:15:00] Well, let's Tracey, if you're listening, come on the show. And that will be our first question to [00:15:05][4.7]

Bryce: [00:15:05] debunk your book. Yes, I look at it. It's a really good book in the sense that it's written very it's straightforward. There's not a lot of jargon. There's not a lot of stuff to get your head around it. It addresses all of the key things that you do need to know, everything from dividend strategies through to finding a broker. And then the book From Memory finished with a whole bunch of things on auctions, warrants and futures and that sort of stuff, which was good for me just to refresh on. But yeah, I mean, it's only one hundred and eighty odd pages, but I think one of the she's a value based investor and she explains in the book what you need to be looking for in terms of a value stock. So she's very much out there, similar to Warren Buffett trying to find stocks that are priced below what she thinks that should be valued. And one of the sections in the book is called Choosing Companies with Long Term Potential. And she has six rules that she goes by that not necessarily has to be tik-tok against a company. And not all of them have to make four or five out of the six is a good indication that you're on the right track to choosing a company. So I thought it would be a good thing today to run through these six rules, because I know that from personal experience coming across the ways of thinking by various investors is always incredibly beneficial for myself. And I'm sure you would be the same Ren in formalising your own method of finding companies and stuff. So this is by no means the only six rules that you should be following. I would just want to put the caveat in. This is hers. And she also does mention that the other things that you need to be cautious of, but this is just a general indicator. [00:17:01][115.7]

Alec: [00:17:02] So, yeah, it's worth saying that, you know, there's obviously no right way to do any of these strategies. If you ask 10 different value investors, they would all come back to you with ten different criteria for what value stock is. And even within that, Warren Buffett, when he was a pure value investor, he had three different types of value investments that he looked for. So all of these screenings are really helpful to sort of understand what people are looking at and how people look at companies in the market. But if you read a book or if you hear us talk about one of these criteria or checklists or anything like that, it's never gospel. It's always just another, you know, another string to your bow, just exactly. You think about it and then listen or read about the next one and add that information. And, you know, as you go, you'll build and build an idea of what the important indicators are and what your common amongst these different strategies. And, yeah, you'll hopefully be able to pick some winners. [00:18:05][62.7]

Bryce: [00:18:05] Yeah, definitely. Now, also, I just want to say that this second edition that I read was written in 2011. So a lot of the examples that she uses throughout the book, especially in terms of prices, are obviously very dated. And I think some of the figures that she uses in these rules are not reflective of the market that we're seeing at the moment, especially some of the real six Ren, which I'm sure you get a little light on. [00:18:30][24.4]

Alec: [00:18:30] And, yeah, we'll get into that. Yeah. And so you can kick off with the first one. But it's probably worth saying that some of this jargon we would have gone over in the our part in the jargon episode a couple of nights ago. Yes. We'll try and define it as we go if we miss anything. There's that episode and we have a glossary on our website that you can check out as well if you want to. [00:18:53][22.8]

Bryce: [00:18:53] Yeah, good call out. All right. Well, I'll kick off. And what I think what we'll do is I'll say the rule and then summarise what Tracy says about it and then we'll sort of put our own comments in Ren. How's that sound? Sounds good. All right. So rule number one for Tracy, when finding a company with good long term potential is to ask the question, is it a market? Later and by that, she means, is it listed in the All Ordinaries, the ASX 200 or if you're looking overseas, you know, the Dow Jones or Nasdaq? [00:19:24][30.5]

Alec: [00:19:24] Just to explain what that is, the Dow Jones is a basket of the 30. They traditionally were the biggest, but they're no longer the biggest 30 stocks. But it's one of the traditional indexes that American investors look at. And the ASX 200 is the 200 biggest companies on the Australian sharemarket. [00:19:44][19.9]

Bryce: [00:19:45] Yeah. So the reason she uses these two as an example is because she wants to find companies that are the head of their market. She wants to find the big dogs because she believes that you have a better chance of choosing stable winners rather than traffic losers if you at least refine your search to looking in the top, top big companies. She also goes on to say that there's more information available about these companies than if you were to look for smaller companies. And this goes into something that we were talking about. And you've done an episode Ussery a blog post on Ren about Moat's. And in my mind, when she's talking about is finding a market leader, you're looking for companies that are very defensible and, you know, strong competition, very hard to compete against. So that's her first rule is find a market leader or is it a market leader? So what do you think? Ren. [00:20:42][56.9]

Alec: [00:20:42] So I was just going to go back and explain what we meant by Mode's because I'm sure that everyone's read my blog post. And I look just just to explain it really simply when someone talks about a moat in an investing context, they don't mean that buying a 14th century European castle, it's basically it gives the company the ability to price as they want. So and that allows them to defend their position in the market. So a classic example of a moat is Rolex, the watch company. People are prepared to pay more for a Rolex because of the brand than they are for some other watch. And so that gives them pricing power and they're able to defend the position in the market. Another company that has a moat. I think one officer of your head, [00:21:40][57.9]

Bryce: [00:21:41] I was going to say sort of Telstra back in the day because of the. You know, in a way that their coverage and network was far superior to their competitors so they could essentially charge whatever they wanted. [00:21:54][12.1]

Alec: [00:21:54] Yeah, so yeah, Rolex, Telstra, these companies that can charge prices as they want and they can stop competitors taking their customers away, they they have a considered Moat's. And that's what a lot of investors look for, because if a company has a moat, they're going to be a good investment for five, 10 years down the line. [00:22:18][24.3]

Bryce: [00:22:19] Yeah, I also think that when Tracy says this, though, she's not necessarily meaning, you know, that's what comes to our mind. But for the everyday beginner investor, she's she's using this rule number one as a as a way to at least condense your search, because there's I think, like thirteen or fifteen hundred stocks on listed on the Australian stock market. So she's saying for the beginner investor, it might be a good idea to just look at the biggest companies that are listed and start your search there. So I think that's what she's going with, rule number one. [00:22:52][33.4]

Alec: [00:22:53] Yeah, it limits it limits the risk that your your stock will go to zero on the on the flip side, because they are the biggest companies, they are the most heavily scrutinised and so they are going to be the pricing for bigger companies will be more efficient because, you know, they traded more people to study them more. There's a lot more analysts looking at exactly what's going on. So the prices generally going to be more reflective of exactly where they are. You're less likely to find a bargain in the biggest companies in the market. [00:23:25][32.2]

Bryce: [00:23:26] Yes, yeah. [00:23:26][0.6]

Alec: [00:23:27] Yes. But anyway, so that's that's the first filter. Just only look at market leaders, according to Tracey. Yes. Second question is the debt to equity ratio less than seventy five per cent. So we're just quickly explain what debt to equity ratio is. So if we run a business, there are different ways that we can fund our business. We can go to a bank and borrow money from the bank and that obviously would be debt. So we're in debt to the bank. We have to pay them back another way. We can raise money if we can go to our friends and family and say, hey, do you want to invest in my business? And you can have 10 percent of the business. And then that money that we have, we're not in debt to the owner, the person who invested in our business. They just own some equity in our company. And so we're funding our operations through equity. So. There are different benefits and harms to each way of funding your business operations generally, though, if a company has a lot of debt and then starts to struggle, that will make it really hard to be successful as a business because your debt repayments don't stop when you're struggling as a business, whereas if you're struggling as a business and you're funding your business with equity, then you can just stop paying them while you're struggling. So what you with this second question is asking, is it getting you to filter out companies that have too much debt, essentially? [00:24:55][87.8]

Bryce: [00:24:56] Yeah, that's exactly right. And she says that one of the reasons for keeping at or below the seventy five percent figure is to avoid companies that could turn into financial time bombs, as she says, because what she means is if the company does shut down this figure. Seventy five percent means that there is still some money in the company that can be used to pay out its shareholders. Whereas if you are looking at a company with a debt to equity ratio above 100 percent, then it means if something were to go wrong and they needed to close down or whatever it may be, then there would be actually nothing left to pay out. The shareholders of the company and the shareholders would be left with nothing. So it's also good, as I said, Ren that does debt doesn't necessarily mean a bad thing. This is just, as you said, filtering out those that are incredibly leveraged and I mean. Seventy five percent to me, a little bit higher for the companies that I look at. [00:25:57][61.1]

Alec: [00:25:57] And I think I think she should have just chosen a safe. [00:26:02][4.1]

Bryce: [00:26:02] Yeah. Yeah. Now, come on, give us the benefit of the doubt. [00:26:04][2.5]

Alec: [00:26:07] But so look, just as a general rule, if you say a company with a lot of debt, then that is something that should be a red flag. Obviously, some companies go into debt for different reasons. Yeah, there might be tax reasons. There might be it just might be a cyclical business. And so as as you know, mineral prices drop, then the debt seems worse. But then there's mineral prices rise, then the debt seems more manageable. So it's just something that if you say a high debt to equity ratio, you just will need to do a little bit more digging. [00:26:42][34.7]

Bryce: [00:26:43] This is a question that can easily be answered from the company's financial report. As we mentioned in our previous episode of Jargon, we go into a lot of detail about it, but you can find out very quickly what the debt to equity ratio is through the annual reports and that sort of stuff. So moving on, rule number three, so it's the first two rules have been a tick. You can move on to rule number three. She says, does it have a return on equity of 15 percent or more? So what does this mean? [00:27:16][32.9]

Alec: [00:27:17] Ren doing so, so return on equity is when the company takes the shareholders money. How much are they getting in profit from that money? So as I explained before, you can fund your business with debt and equity. Almost every company will have some combination of the two. So let's say that we run a business and we took 100 dollars from people who invested in our business. That's the equity that we have. And then we go and run our business and we save from that hundred dollars how much profit we can make. And so what Tracy saying is her rule number three is that you need to invest in a company under her rules. You need to be getting at least 15 percent return on equity. So for every hundred dollars that a shareholder has put into the business, you expect to be getting 15 dollars back in profit. [00:28:10][53.4]

Bryce: [00:28:12] Yeah, and this Arawa, a return on equity is a rule or. Ratio that is used quite often amongst investors and no more than Warren Buffett, it's one of his fundamental rules, one of his most important and yeah, it's pretty much what shareholders put money in for, really. Like you want to get a return. [00:28:35][23.6]

Alec: [00:28:36] So so when when we're talking about Moat's before, if a company has a moat and that think of Rolex because their brand is so strong, people want their watch over other watches. They can set prices as they see fit. They're going to they're going to say a good return on equity because that allows them to increase prices when they need to. Whereas, you know, standard watch brand that doesn't have that that same brand recognition won't be able to just increase prices if they need to. So if you say a company with consistently high return on equity for the last five years or 10 years, you can you can confidently say in most cases that it has some form of the model [00:31:09][153.9]

Bryce: [00:31:10] Yeah, where do you where do you find this sort of information? [00:31:14][3.6]

Alec: [00:31:14] Ren also, you can find it. You can find it online. Sometimes it takes a bit of digging. Sometimes you might find a website that has has laid out for the last five years or the last 10 years that the last lost years. No, you should always be able to find in the company's annual report. So, you know, if you want to say financial year 2017 information, you should be able to say that on the company's websites now. But, yeah, there's plenty of websites out there. If you just search in Google the company and then return on equity and you click some of the links, you should be able to find what you're looking for. [00:31:53][38.4]

Bryce: [00:31:53] Yeah, and that's good to remember that a return on equity also varies depending on the maturity, the life cycle stage of the company as well. So applying a figure of 15 per cent and this is also industry specific as well. [00:32:10][16.8]

Alec: [00:32:11] So I actually did some deals on this. And NYU Stern School of Business looked at industry averages in America so that across the whole market the average is a scratch over 10 percent cent for return on equity, the biggest or the best three sectors in America. The building supply industry had an average of fifty nine per cent return on equity. Well, yeah, air transport had 41 percent and restaurants had thirty nine point eight percent. So obviously much higher than the 15 percent. And then the lowest for was steel was minus 17 percent. Coal was minus thirty four percent. Oil and gas was minus thirty nine percent and metals and mining was minus forty three percent. So that was all for F seventeen. But you can say that our minerals didn't have a didn't have a good run. Wow. [00:33:06][55.6]

Bryce: [00:33:07] Yeah. Good little good little stats there. So yeah. As you can see a return on equity is very different industries [00:33:14][6.8]

Alec: [00:33:15] and what, what you can. They say is that if there's a company in an industry that isn't reaching the 15 percent but is smashing the industry average and is consistently smashing the industry average, then you can confidently say, well, in most cases that that company has a competitive advantage over the other competitors in its industry because for some reason it's able to achieve consistently higher returns for every dollar that it has. [00:33:44][29.3]

Bryce: [00:33:45] Hmm, interesting. Well, the next one sort of flows into this. Rule number four is will I get a five year share return of 15 percent or more? That's kind of a bit of a confusing question, but essentially breaks. [00:34:00][14.7]

Alec: [00:34:01] If you could answer that question, then you wouldn't really need to worry about any of the other questions. [00:34:04][3.8]

Bryce: [00:34:05] Exactly. I'm going to get 15 percent of the five years done deal. Lock it in now. So what she means by this is the rules broken down into two parts. The first part is, you know, the stock has to be listed on the stock exchange for at least five years. And her reasoning for this is because anything less means that there's not enough information available to her to objectively analyse the figures. And five years is also the period that a long term investor is likely to hold a stock. Now, I disagree with that, putting a figure on that, because, you know, investors hold stocks for any number of years and saying that it's what a long term investor does is just not necessarily the case. But what she's saying is she likes stocks that have been on the stock exchange for five years and have a bit of maturity behind them, especially when it comes to getting access to the information available. So that's the first part of the question. And then the second part is that the company should have averaged a return of 15 percent per annum over the past five years, which is similar to rule number three. So that's what she's saying. Has it averaged out over the past 15 years or so, has averaged 15 percent per annum return over the last five years. And she thinks this is a good indicator for things like, you know, the stability of the company. It's it's consistent earnings and also it's a figure for the return that she's probably looking for. So that's done before. [00:35:32][87.1]

Alec: [00:35:33] So for context, the market compared the market growth between seven and eight percent a year on average. So to find a company that's growing double that every year, like [00:35:44][10.3]

Bryce: [00:35:45] you'd be the best stock picker in Australia. Well, yeah, [00:35:46][1.9]

Alec: [00:35:48] on that, you've obviously found a winner, but it's probably not going to be cheap, [00:35:51][3.1]

Bryce: [00:35:52] you know. So so that's that does bring up another point, Ren. And you're right, when she's discussing this, she's obviously not saying that if one year you've got 15 percent and then the second year you've got eight percent, then you're immediately counted out. I think, as you say, 15 percent year on year compounded is an incredibly big ask. And probably, you know, you'd you'd find it. It's a gem if you if you found something like that. But my take out from this is that she wants to see reasonable returns consistently over a number of five years or so. [00:36:25][33.1]

Alec: [00:36:25] Yeah, because if you compounded one hundred dollars at 15 percent a year over five years, you double your money ends up at two hundred one Dollars. [00:36:34][8.8]

Bryce: [00:36:35] So yeah, yeah, yeah. [00:36:36][1.4]

Alec: [00:36:38] I wish we could find companies like that. Yeah, yeah. But yeah. So, so the point five will return for days lost two. So the fifth one is she asked is it a stable company and does it perform consistently from year to year. So really all you're looking at here is that the company is growing in a consistent fashion. It's not wildly swinging from profitability to losing money to making money next year. So you just want to find companies that are steady growers. Really? [00:37:13][35.4]

Bryce: [00:37:14] Yeah, yeah. Which plays into, you know, they've got good management, they've got a good strategy and all that sort of stuff. So that's [00:37:20][6.4]

Alec: [00:37:21] good. [00:37:21][0.0]

Bryce: [00:37:22] Exactly. So not really much more to say to that one. Is it a stable company and perform consistently year to year done. Number six is the current share price, currently trading at less than 16 times current earnings per share. And this is her way of determining whether the current crisis is more or less than she is prepared to pay for. So I guess we should explain what earnings per share is. Did we go over in our the jargon? [00:37:59][37.1]

Alec: [00:38:00] We went over in pardon the jargon, but it's worth just reiterating because I know that the terms are net income profit and earnings get used interchangeably. So it's a little bit confusing. But earnings are what the companies left with after, you know, cost of doing business. All the tax is its profit. It's what it's left with at the end of the day after it's taken all the costs and stuff out. So our earnings per share, you can think of it as profit per share. So take the company's total profit and then divide it by the number of shares on issue. So, you know, if we're a shareholder in a company that has 100 shares and it made a thousand dollars in profit, then you divide that thousand dollars in profit by the one hundred shares and then each of our shares generated ten dollars in profit. So that's what earnings per share is. [00:38:56][55.8]

Bryce: [00:38:56] So what she's saying is that she's prepared to pay. For one, share a price that is 16 times that figure, that earnings per share figure, she's just using this figure because at the time, I guess that was the figure that she came up with. But if you're failed to look back at 2011 where the market was and where it is now, you know, earnings per share across the board are solid apps across the board is probably significantly higher on average. So applying that 16 times now, I'm sure she would revise that figure. But it's just an interesting way that she's coming up with determining whether or not the process is suitable for her. [00:39:38][41.6]

Alec: [00:39:39] She would like to revise that figure or white. [00:39:41][2.3]

Bryce: [00:39:42] Yes. Yes. Because obviously, as the market moves and the earnings per share of your stock moves as well. [00:39:49][7.1]

Alec: [00:39:49] So you would say, do you want to wait for the companies to improve their earnings so that the price is then cheaper or dipped below that six times? Or you like for the you need to wait for the earnings to go up or the price to go down. [00:40:03][14.4]

Bryce: [00:40:04] Yeah, yeah, yeah. So as an exercise, it was interesting for me to put a filter on this and just see which companies came out at 16 times earnings and I would encourage you guys to do the same. It's not difficult to do but have a play around with it and see what figure you can come up with. I mean, there's no science behind it. She doesn't really go into where she got the 16 from. She's just saying that that's the price. She's prepared to pay 16 times earnings per share. And obviously, earnings per share differs from industry to industry and from company to company. So don't look at it as a set in stone rule either. Yeah. [00:40:42][38.3]

Alec: [00:40:43] All right. So that's the six who just quickly ripped through them as DOT points. So No. One, is it a market leader? Yeah. Is it one of the biggest companies on the share market? Number two is it's debt to equity ratio, less than seventy five percent. Number three, does it have a return on equity of 15 percent or greater? Number four, has the stock had a five year return of 15 percent or more per year? Yeah. Number five, is it a stable company and performing consistently year to year. And the number six is the share price currently trading less than six times current earnings. Yeah. So as we said, that's treacy's. If we go to the last time Tracy Edwards, Tracy Edwards way of screening for stocks, obviously different investors have different ways. But we thought it was a good one to introduce everyone to sort of say what the thought process is for people as they're picking stocks. [00:41:41][58.5]

Bryce: [00:41:42] Nice. Yeah. So hopefully we can bring us some more stuff like that later on as we discover it. But yeah. Go, Tracy. [00:41:49][7.4]

Alec: [00:41:50] Yeah. So speaking of picking stocks, I guess we might as well cap off this episode with a few stocks that we've been looking at. And I mean, you teased everyone with your what I learnt and you said you were going to hold it over till the end. So why don't you put us out of our misery and that? [00:42:10][19.8]

Bryce: [00:42:11] OK, well, the reason I am leaving this till now is because I came across an article titled UBS Bet Best Bets for 2018. And I always love writing [00:42:24][13.2]

Alec: [00:42:24] articles, I want to win the grand final [00:42:26][1.4]

Bryce: [00:42:27] column, my buddy [00:42:28][0.9]

Alec: [00:42:29] for the Coleman [00:42:29][0.2]

Bryce: [00:42:30] account training. Now, I always like these articles because my my first reaction is always, you know, we're in November and they're looking forward into the next year. These are going to be our best bets the next year. But like, why aren't they the best bets for now? You know, like what's going to change between now and next year? That's going to make them significantly different. I know that's not what they're saying, but I like to think it makes me feel like the guys are sitting in that sort of wrapping up proceedings and then they'll just be like, all right, New Year starts in. The companies are almost at zero again, like a footy score and away they go. But I thought I thought I would go and read through a few of them. And I just want to see what you think. Ren so, [00:43:14][44.9]

Alec: [00:43:15] yeah, hit us up. [00:43:16][0.8]

Bryce: [00:43:17] So obviously they are all they've given 10 large cap companies that they've outlined as their favourite stocks for twenty eighteen. [00:43:25][8.4]

Alec: [00:43:26] Why don't you why don't you give us the best three or four or five. [00:43:30][4.2]

Bryce: [00:43:31] OK, did [00:43:32][1.3]

Alec: [00:43:32] you want to. Did you want to do all ten. [00:43:34][1.3]

Bryce: [00:43:34] No, no, no. I was just going to list a few because. Yeah. So BHP is one of them. Yeah. Qantas. Aristocrat Leisure and a revitalised Woolworths are the interesting ones for me, [00:43:51][17.1]

Alec: [00:43:52] so I'm sure everyone will know Qantas, BHP and Woollies, but do you want to explain what Aristocrat do? [00:44:00][7.2]

Bryce: [00:44:01] Sure. So Aristocrat Leisure Ltd, as they're known, is an Australian company that primarily is in the business of gambling machine manufacture. So they make pakhi machines essentially. Yeah, yeah. Yeah. So I'm pretty sure they have offices all around the world, even though they are Australian based, and that's pretty much all there is to it. [00:44:26][25.3]

Alec: [00:44:26] I mean, you can imagine how good a business poker machines are for the companies, like obviously a terrible business for the community and I'm not a huge fan of them. But if you're an aristocrat shareholder, you would have had some really good years because pokies are a good business to be. [00:44:43][17.3]

Bryce: [00:44:44] And definitely, definitely it's an addiction. Yeah. So those are the five so struck out to make Qantas, you know, I'm thinking oil prices. I'm also thinking if it is going to come to fruition, what we are thinking will happen next year or maybe the year after in terms of a bit of a down cycle that affects people's ability to or their willingness to spend on things such as travel that might affect them. Qantas going forward. But, you know, they have done it. They've had a fantastic year this year. [00:45:16][32.3]

Alec: [00:45:17] And certainly these were companies that they're betting on or betting against betting on. [00:45:21][4.6]

Bryce: [00:45:22] These are their favoured stocks. 2018. Yeah. [00:45:25][2.8]

Alec: [00:45:25] All right. Well, why don't we ask you, of those of the companies that you listed, which it would your favourite that be for 20? [00:45:33][8.0]

Bryce: [00:45:34] Yeah, it's an interesting question. I mean, I'd like to say Woolworths for obvious reasons, but I still think that the [00:45:41][6.6]

Alec: [00:45:41] competitors I don't know if that's obvious reasons for people on the podcast. [00:45:44][3.1]

Bryce: [00:45:45] Well, I work for Woolworths. [00:45:46][0.8]

Alec: [00:45:47] And the truth is that one [00:45:49][1.6]

Bryce: [00:45:52] look, you know, I think the competitive landscape of retail next year is only going to increase. And I think we're better placed than some of our competitors, namely Coles, going into next year. But from what I've read through these UBS reports, and I think another one was from Citigroup, the only reason that Woollies is a favoured pick is only because Coles is not the second pick. And I think they want to have something in Australian retail. [00:46:20][27.4]

Alec: [00:46:21] Yeah, well, and it's also because Woollies price has been deflated from Marsters debacle and just like sluggish supermarket growth. So you would because you're buying them at the what you would expect to be the bottom of the long, you would expect that uplifter to be good in twenty eighteen. [00:46:39][18.3]

Bryce: [00:46:40] True. Yeah. But other than that I mean Qantas has always been something I looked at. I'm regretting not getting on it at the start of this year and now two point eighty I think they're six Dollars something now. So they've had a phenomenal year. But as I said, look for what I think is going to be happening next year, maybe later next year. I just don't think it's going to be an economic condition that will suit a business like Qantas. And I don't know and I don't have my finger on the pulse enough at the moment to make significant comment on BHP. I mean, from what I've read, they say the Australian resources sector presents a potential upside for eighteen. But, you know, it's all dependent on what happens in China as well. What is interesting, they have he also mentioned that he thinks that sorry, that UBS think that the ASX 200 will finish next year on six thousand two hundred and seventy five points roughly. [00:47:35][55.5]

Alec: [00:47:36] That's very specific. [00:47:37][0.6]

Bryce: [00:47:37] I know. I know. They go on to say that we won't be able to match the better returns expected in the share markets of the US, Europe and Asia. So I think we're just over six thousand now or maybe a little bit below two hundred and seventy five point increase going into next year suggests to me that I think that it's going to be a very stable market, really. Like if we're not going to be seeing hundred point swings each day, which we did see back in 2008, 2009. That's why I would if I went this way, I kind of think that they have a bullish outlook on the Australian share market next year. They've got BHP, Qantas, Aristocrat Leisure, Woollies, AGL, Origin Energy amongst some of their stock picks for next year. So it's going to be an interesting exercise just to see how those companies do go. But gut feeling for me is not as bullish as these guys are riding out today. [00:48:34][56.7]

Alec: [00:48:35] Yeah, one. OK, so speaking of Europe, one of the stocks that I've been looking at in the last couple of weeks is actually from Germany's. Interesting to tell you a bit about them, so they are a German online pet food retailer called Zoo Klos. OK, now. Yeah, so they they've been around for a while. And the reason that they paid my interest is because they're pretty massive. So they they are an online pet food and supplies retailer to about 30 countries in Europe. They earn about 50 percent of the online pet food market between 2008 and 2016. They've averaged thirty five percent growth per year. So, like, yeah, there. So this is their sales growth or revenue growth. But what piqued my interest is that their profit has just been minimal every year. So, you know, they're growing their sales thirty five percent every year, but then they're not you're not seeing that reflected in the profit that they're getting every year. And so the reason for that is that they have just been investing in their business, taking all of the money that they're earning and opening new markets in Europe. They've created this like super like German level of efficiency in the supply chain and logistics. They control the online pet food market. So obviously, Amazon aren't in Europe. So they're competing with Amazon and they're they're doing all right at the moment. They're still selling some pretty good growth. But yeah. So because I was I was using this stock screener that we talked about earlier, the six points. And so this company, it takes some of the boxes, you know, it would grow more than 15, but its revenue growth, more than 15 percent a year, not share price to market later. So it's in the sort of it's around the 100th biggest company in Germany on the publicly traded company in Germany. It barely has any debt, but its price to earnings ratio was one hundred and forty six point nine, which is when, you know, the author says that she only wants a price to earnings ratio of 16. But I think it it shows it demonstrates how you can't just look at the number you need to dig a little deeper and say why that number is what what it is. Because, you know, if you just saw one hundred and forty six point nine as the price to earnings ratio, you would think this is crazy expensive, like there's no way I'm buying this company. But when you dig a little deeper and you say that they've just been they've been growing and they've been making so much money, but they've just been pumping it back into the business, then you start to say that, well, maybe there is potential. It's you know, it's a similar story to Amazon. Like, they they don't take any of their profits. They pump it all back into the business. And so their price to earnings ratio is similarly very high. [00:51:46][190.6]

Bryce: [00:51:47] Nice. I like I like the pet industry because like that's like the pet industry. It's growing. And it's one of those industries where I think it's one of the last to be affected by a downturn because people love their pets as almost as much as they love their families. So, you know, they often find that the proportion of income that they spend on their pets is quite large. [00:52:15][28.2]

Alec: [00:52:16] Yeah, and it's growing, you know. Yeah. They're buying organic pet food now and they're taking their pets to, you know, taken to that that do surgeries rather than just vet do check ups. And, you know, there's doggy day spa's and all that. There's a there's a trend towards humanising our pets. And as you said, they're part of the family now. So that's obviously good for companies in the pet food business and the pet supplies business. Yeah, nice. Yeah. [00:52:48][32.1]

Bryce: [00:52:49] So what's the price? What's its price at the moment. [00:52:51][1.7]

Alec: [00:52:52] So it's in euros. It's about one hundred and thirty five euro. Wow. Yeah. So it's, it's, it's not cheap. That's expensive. But yeah it's, it's about, I think it's a billion dollars in revenue and it's market cap is below its revenue figure. So yeah. It's, it's one that I thought was interesting because obviously Amazon's just come to Australia and this is a company that is putting a fight to Amazon in in Amazon strength, which is online retailing of long-life. Product, which which animal food normally is, and they're doing like having a pretty good crack beating back Amazon. So definitely want to look at zero zero plus agents there, nine [00:53:44][52.5]

Bryce: [00:53:45] zero plus HP. Yeah. No, I like that. That's good. [00:53:49][4.1]

Alec: [00:53:49] All right, cool. Yeah. So are there any other stocks that you've been looking at or anything else that you think's worth calling out? [00:53:57][7.6]

Bryce: [00:53:58] I do have one. I mean, the five that we kind of went through just before with the UBS report I might stick to this week because I've got one that I've been looking at. It's called I Just Sell Technologies Ltd. And it's I picked it up through the Koppa report. Actually, they do simulation technology and everything to do [00:54:18][20.8]

Alec: [00:54:19] for air traffic controllers. [00:54:20][0.8]

Bryce: [00:54:20] Exactly. Exactly. And training solutions. And I might leave this one to the next week just in the interest of time for us. Ren. [00:54:27][6.8]

Alec: [00:54:27] But they're they're price fell off a cliff a couple of days ago, just as the next one I know. [00:54:33][5.7]

Bryce: [00:54:33] Which is why it's almost a bit more attractive, because it fell off the cliff purely because it didn't make earnings or earnings expectations at their AGM. So as we have discussed many times in this podcast meeting, expectation is one of those things that affects prospect, doesn't necessarily affect the underlying performance of the business. [00:54:53][19.5]

Alec: [00:54:53] So it's a really interesting company because it so it was this sort of training standard for military and civilian air traffic controllers in America. Still is the way that the air traffic controllers get trained is they go through theta flight schools where they have those schools have some discretion on what simulation software they use and then they all have to go to an FAA. So that's the Federal Aviation Administration certified school and they all use A.l technology still. So the industry standard in America. But what we've seen is that A.l have been they've been tendering for a whole bunch of different countries, military tenders for for this software. And they've been picking up a few. But it is a business that is very dependent on the continued winning of tenders. Yes, definitely. [00:55:43][50.3]

Bryce: [00:55:44] Definitely. [00:55:44][0.0]

Alec: [00:55:45] Yeah, yeah. One once once you win the tender, then you have a [00:55:48][3.4]

Bryce: [00:55:49] it's all systems [00:55:49][0.2]

Alec: [00:55:49] go some certainty for three years, five years, 10 years, however long the [00:55:54][4.6]

Bryce: [00:55:55] government intended for. Yeah, absolutely. They actually just want a new tender. Well, not just maybe three or four months ago, a military tender in Central America, that was it's quite a substantial amount. So that'll keep them going for a while. Yeah. Yeah. Look, I might leave the details for that until next time, but if anyone's interested, just jump on how to have a look. That ticker is a.D.A there on the ASX. So that's one. I'm having a look at that, you know, save the details for later. [00:56:19][24.8]

Alec: [00:56:20] That's what. Cool. All right, cool. Well, that would that would come down. Bring us to an end of our stock chat. Yeah. If any listeners want us to talk about any stocks, you know, if there's anything that going on and they want us to have a chat about hit us up on social media or email or. [00:56:40][19.2]

Bryce: [00:56:40] Yeah, definitely. W w w Equity Mates dotcom. [00:56:42][2.6]

Alec: [00:56:44] Yeah. Make sure you enter our competition to win five hundred bucks, the easiest five hundred dollars you could ever make. And who knows if you invest it right you could turn it into [00:56:56][12.5]

Bryce: [00:56:57] a five hundred and one. Yeah. [00:56:59][1.9]

Alec: [00:57:00] Yeah. And then last but not least, make sure you sign up to our weekly email. Five interesting and insightful resources or articles delivered straight to your inbox. Make sure you check your junk mail, though, because some have been ending up there. [00:57:18][17.9]

Bryce: [00:57:18] Yeah, we need to work our way around that somehow Ren. But we'll figure it out. Yeah. [00:57:22][3.5]

Alec: [00:57:23] And Losman, at least I said I'm try to remember the Netflix documentary that I got in a previous episode. I did remember it called Silicon Cowboys', and it's about Compaq Computers and how they took on IBM. So after you've watched your recommendation, which was Ikarus Bryce. Yeah, yeah, yeah, yeah. Also check out Silicon Cowboys'. [00:57:48][25.8]

Bryce: [00:57:49] Yeah, definitely. I've got another Netflix recommendation just finished as well. So leave that the next day. [00:57:54][4.4]

Alec: [00:57:55] Is it strange things. [00:57:56][0.7]

Bryce: [00:57:56] No, no, no, I'm not. [00:57:57][1.2]

Alec: [00:58:00] All right. Well until next week or so, next week and the week after, we've actually got to interview. So hope everyone enjoys those interviews. And then we'll be back doing another episode like this in a few weeks time, [00:58:15][15.1]

Bryce: [00:58:17] hopefully to Chrissy. [00:58:17][0.7]

Alec: [00:58:19] Yeah, we might even have your book review about shopping for shares. [00:58:22][3.6]

Bryce: [00:58:23] By my count, it took me this long to get one, one or two pages out. I get your hopes up. Yeah. Yeah, I would say. All right, William, I'm going to chat to you, as always, enjoy the rest of your day and hope everyone got something out of that and those six rules that we went through, we'll put up on online at some point. So or jump in and have a look at the book. Shopping for Shares by Tracy Edwards. It's a great little rates for a beginner. [00:58:50][27.7]

Alec: [00:58:51] And we'll have a link to that. An astronauts. Yes, for sure. All right. Cool. Until next week. [00:58:55][4.6]

Bryce: [00:58:57] Equity out of. [00:58:58][1.5]

Speaker 5: [00:59:02] Equity Mates and the people appearing in this programme may have positions in the company's pension. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:59:02][0.0]

[3125.3]

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Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

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