A Stress-Free Way to Pick Singapore Stocks

A Stress-Free Way to Pick Singapore Stocks This article is written and contributed by Glenn Ho, Co-Founder of Streetpips.com. Glenn believes that trading of financial markets should be systematic based on strategy, and automated using software. Instead of relying on your friends hearsay, media rumours or broker “sales pitches” on stock recommendations, why not fall back on systematic strategies that have stood the test of time? A non-discretionary strategy which demonstrates earnings persistence over a significant period of time is definitely worth a look. Systems Can Perform Better Than The Human Mind If you are new to systematic stock selection, you can check out the website of the American Association of Individual Investors. The stock screening page is a good learning ground and offers decent exposure with over 60 stock investment strategies and performance ranked. As of this article’s writing, the top systematic investment strategy is Piotroski’s High F-Score, boasting a 5 year annual return of 56.2 percent and 10 year annual return of 28.8 percent. The beauty of rules-based investment strategies is that because you are following a fixed set of criteria, you will be able to evaluate your strategy over time. Compare this against any other form of discretionary investing, where you can evaluate performance but how do you improve if you cannot quantify your decision making process, even if it were consistent? Besides, life is always easier with an instruction manual. Best Performing Strategy Joseph D. Piotroski is an Associate Professor of Accounting at the Stanford University Graduate School of Business. He developed Fundamental Score (F-Score) back in 2000 while at the University of Chicago. F-Score can help to construct a stronger value investing portfolio by using a robust system based on historical financial information. A lot of research has highlighted the positive returns of a high book-to-market investments strategy. The success of this specific strategy relies on the strong performance of a few stocks. Investors can benefit by separating companies with good fundamentals from a value perspective (companies being overlooked) from companies that are weak prospects deserving of their low valuation (dogs).

Let us study the stock life cycle. The day a company lists on the stock exchange is usually its proudest moment, where growth prospects are secure, and companies commonly experience growth. However, all companies historically eventually meet with a decline. This could be due to the company’s performance itself, or a general market meltdown.

At the first sign of a downturn, we call these stocks early stage momentum losers. Their price to book ratios drop rapidly and they hit a base. Towards the end of this base, some stocks start to recover. We call them recovering dogs. The best of these recovering dogs turn into early stage momentum winners, reaping capital gains for their shareholders. This is the concept of the F score stock picking strategy.

Characteristics Of Value Investing

    Growth stock picking is based on long term forecast of sales where investors rely on non-financial information. Value stock picking on the other hand, is based on financial statements which represent both the most reliable and accessible source of information about listed companies.
    Value stocks tend to be neglected because:
    Thinly followed by the analyst community
    Low levels of investor interest
    Analyst forecasts and stock recommendations unavailable
    Limited access to most “informal” information dissemination channels
    Voluntary disclosures may not be viewed as credible given their poor recent performance

F Score’s 9 Criteria
Piotroski selected 9 signals. A signal of 1 is good, 0 is bad. The F-Score is the sum of those 9 individual binary signals. The higher the F-Score the better. You can find the detailed formula in his research paper here.

According to the strategy, high scoring stocks of 8 or 9 points are great candidates to lead the recovery in stock prices. These companies fare well in all 3 categories above, and chances are, the market has not realized these gems.

On the other hand, research has shown that stocks with 2 points or fewer, were 5 times more likely to delist, or go bankrupt. There are many ways you can use this system.

You can evaluate how healthy your current portfolio is, you can use it as a stock screen to pick stocks, and you can also use it as an exit strategy, when you find that your company reduces in score over time.

We applied the F score strategy on stocks listed on the Singapore Stock Exchange and here are the top 5 scoring stocks as of this writing (data from Bloomberg 22 Jan 2014):

In conclusion, this is a buy and hold stock picking strategy. You will unlikely enjoy returns overnight from this method of stock picking, as you are buying the stock before the market does.

It will take time before the market takes notice of the recovering stocks you found. But what you can be sure of is that this strategy separates late stage momentum losers from early stage momentum losers, and protects you from buying companies with poor future prospects.

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