Looking at the companies in my long-term portfolio (you can check it out here), some of you may be wondering what is my selection criteria when shortlisting for a company to add to my long-term investment portfolio.
There are a total of 5 areas I look at, and in this post, I’ll be sharing what they are with you (in case you’re wondering, what I’m about to share is nothing complicated, as I like to make my investing as simple as possible):
1. Simple to Understand Businesses
My first criteria is that, the company must have businesses that are easy enough to understand.
Looking at my personal long-term portfolio at the time of writing, you will be able to able to immediately identify the businesses the companies I’m invested in are operating in – OCBC (one of biggest local banks in Singapore), Hong Leong Finance (a financial institution in Singapore), Ascendas REIT (some of you may be working in offices that are managed by the REIT), and finally, EC World REIT (this one may be unfamiliar to some, but it has a simple to understand business, in that their portfolio consists of logistics warehouses in China, and some of its biggest customers include Alibaba and JD.com.)
2. Track Record of Improving Financials
When looking at the company’s financials, my preference is towards companies that have at least 5 full years of post-IPO results.
You can obtain a company’s financials from its annual report, and you can find them by Googling the company’s investor relations (e.g. if I want to obtain OCBC’s annual reports, I will search for “OCBC Investor Relations”, without the inverted commas.)
Some of the key financial figures I focus on include its revenue, gross profit (when can be computed by taking the company’s revenue, minus off its cost of sales), as well as net profit – you can find these figures in the company’s financial statement. Preferably, I’d like to see year-on-year improvements in these 3 figures over the years.
3. Company Must Not be Taking on Too Much Debt
Besides looking at the company’s key financial statistics over the years, another thing I look at is the company’s level of debt.
My preference is towards investing in companies that are in a “net cash” position – meaning when you deduct the company’s cash and cash equivalents at the end of the period (this figure can be found in the company’s cash flow statement) by its total borrowings (you can find a company’s total borrowings immediately after its balance sheet), the number is a positive figure. If the number is a negative figure, it means that the company is in a “net debt” position.
4. Increasing Dividend Payouts
Wouldn’t it be nice if you’re able to receive some “pocket money” from the companies you’re invested in on a regular basis (whether is it once every quarter or once every half a year), and that the company is able to its dividend payout over the years?
Yes, that is exactly what I am looking at when I shortlist a list of companies to add to my long-term portfolio. My preference is towards companies that pays out a dividend to shareholders either on a quarterly basis or on a semi-annual basis, and that, over the years, the company has gradually increased its dividend payouts to shareholders.
5. Identifying a Preferred Price Point to Invest in the Company
If a particular company fulfils all the 4 criteria above, then the next thing I’ll do is to identify my preferred price point to invest in the company.
When it comes to long-term investing, I do not immediately invest in a company just because it fulfils the 4 criteria I’ve just talked about earlier. Rather, I will patiently wait for my preferred price point to come before I invest in the company.
So, how do I identify my preferred price point? I make use of technical analysis to identify the best point of entry – what I normally do is to look at the company’s share price movements since its listing (I am using TradingView for this task), and then identify a price point where, over the years, it does not get hit often; but when it does, the share price usually bounces up quickly.
To best explain this, let me show you how I identified my entry price point of S$0.710 for EC World REIT:
The above image is the unit price movement of EC World REIT since its listing. Notice that over the years, its unit price seldom touches S$0.710; and even if it does, its unit price tend to bounce back up pretty quickly.
To summarise, the above is the exact selection criteria I am using right to this very day to shortlist for companies to invest – they include a simple to understand business, improving financial results over the years, and at the same time, not taking on too much debt, as well as being able to pay out an increasing dividend payout to shareholders on a quarterly (if not on a semi-annual) basis. I’ve also showed you how I identified my price point to invest in the company through the use of technical analysis.
I hope this post is of use to those who are new to investing. If there’s anything you need clarification in, you can reach out to me with your questions here.
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