Recent headlines:

The 9 Golden Rules according to Lincoln

Posted by ozstock on Jul 13th, 2008

This list is a set of 9 so called rules to decide if a company is worth investing in.

Rule 1. Financial Health
Lincoln suggest to invest in companies with Financial Health ratings of Strong or Satisfactory. Unfortunately, this rating is only available from the Lincoln Stock Doctor. However, we can do our own assessment in determining financial health. Some of the indicators that may be helpful are: debt levels eg. debt to equity < 1, current ratio > 1.5 (for retail companies), ability to service loans -> Interest cover (receipts to interest payments) > 3, cashflow history, and so on.

Rule 2. Management Assessment
Lincoln measures management using ROA and ROE, thought I don’t believe this is a good measure. For biotech companies for example, ozstock uses the qualifications of its management team and directors. Back to Lincoln; they suggest ROA > 8% and improving is good. In addition EPS > 8% for last 18 months is good. For bank and insurance companies, Lincoln suggests ROE > 14% and improving, as well as EPS growth of > 12% (>8% over past 18 months)

Rule 3. Share Price Value
Lincoln suggests a PE ratio less than industry average may be underpriced and so a buying opportunity. When the PE is greater than industry average, they suggest using PE/EPS growth ratio where PEG < 1 is good.

Rule 4. Liquidity Volume
Liquidity level is to ensure that you can sell your stock when you need to. Lincoln suggest the average daily volume traded should be 5 times of your exposure level.

Rule 5. Share Price Trend / Sentiment
Buy when the trend is positive. Never buy when a stock price is “screaming down hill”.

Rule 6. Market Capitalisation / Size
Large companies, ie those with large market capitalisation, are seen to be less volatile and have greater liquidity, i.e. higher traded volume. Lincoln considers stocks only if they have market capitalisation > $100m

Rule 7. Company Activities
Have a basic understanding of the company’s activities, potential opportunities and threats that can affect future earnings of the company or industry.

Rule 8. News and Announcements
Lincoln suggest to look for positive announcements as this generally improve share price of company. Ozstock believes that the market tend to overreact quickly with good news and may overprice a stock. On the other hand, in the current bear market, it looked like even genuine good news may still result in share price dive – be careful in bear market. Lincoln also suggest that investors beware of negative news or announcements. Again, ozstock has found that once negative news hits the press, the shares would have dived already.

Rule 9. Follow all the above rules
Apply the above rules in a consistent manner.

Editor’s Note:

This article is posted by Ozstock that runs a blog on equity analysis of Australian companies (particularly biotech companies) and an overall review of the Australian sharemarket.