Tuesday, April 20, 2010

Picking stocks without corporate governance issues

Recently wanted to write on this as I am close to done on my research on stocks to buy while the markets continue to range trade and hopefully fall. Most importantly, I have decided to buy some of the most scorned of companies on the exchange, namely S chips listed on SGX. Honestly, I think some of them are punished far too much versus other counters.

Reading an recent article from JP Morgan in 2008 on red flags, I felt it would be good to let readers know more about spotting dubious firms. Here are the factors that the report stated. I presume this report was from their Asset management arm.

  1. Extremely low deposit rate for cash (Check what amount is on deposits)
  2. High cash levels and also high debts (What for? Firms should pay it off to avoid interest expense)
  3. Much higher capex for the same capacity (Check depreciation)
  4. High gearing and working capital requirements but somehow still alive (Magic!)
  5. Frequent fund raising (Leeches)
  6. Hit and run (Major changes in major shareholders post IPO or capital exercise)
  7. Resignation of key management, directors or auditors (Disagreements to opinions)
  8. Acquisitions that do not make sense (Fair price? Affiliated parties and transactions?)
  9. Lack of sufficient disclosure 
  10. Low dividend payout despite high cash levels (Let me add share buyback too)
Good list here which I believe is sufficient to analysis on top of reading the footnotes carefully!

On the side notes, I have been recently reading alot on managers saying Singapore is a dead pool while considering dual listings which give rise to higher valuations. Therefore, overseas analysts and investors understand and appreciate their business unlike Singapore analysts  and investors who do not know anything.

From the statement, I deduce the following:

  1. Investors who pay the most are the best investors in the world
  2. A high stock price is the most immediate benefit and goal of the manager
  3. Dual listing is a platform to access more (not necessarily cheaper imho) capital

Does this sound logical?
We shall see how the overseas markets will "better understand" with the performance in future.


Xiaozhuang said...

Nice list


Buying stock in any company entails risk.

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