Page 5 - SHB 2020 Issue 1

Using the Stock Exchange Handbook to Build a Portfolio
Step 1: Use the sector graphs (page 56)
A survey of the indices enables you to find sectors that are in a trough – potential value
shares – and those that are in strong upward trends. Avoid sectors that are drifting sideways
with no particular trend.
Graphs are everywhere, but the advantage of the sector graphs at the front of the handbook
is that you can very quickly see the five year trends of over 50 sectors.
Pick 5 to 10 unrelated sectors as a starting point.
Step 2: Use the sector table to narrow your selection (page 63)
Based on the P/E column, choose a couple of shares in each sector to investigate further.
You might pick one low and one high P/E share, for example. If you’re just starting out, you
may want to avoid shares with negative P/Es or very high P/Es (over 40) – neither mean a
share is not necessarily worth buying, but such shares are often harder to evaluate.
Step 3: Check the 5 year graph of the selected share
Determine whether the price trend is up, down or sideways. If the share price has been
falling, the key question you have to answer is whether the share has good prospects as
a recovery stock. Conversely, if the price has been rising, the key question is whether the
upward momentum is likely to continue.
Step 4: Check the liquidity of the selected share
Liquidity figures are located just above the share’s 5 year graph. There are a number of
small- and medium-cap stocks with liquidity figures of less than R10 000 a week. While this
may sound fine, illiquid stocks are problematic for various reasons: the last traded price is
not always a good indication of current offer prices, for example, and they can be difficult to
sell. If liquidity looks low, go online to check the daily trading volumes – avoid shares that
only trade once or twice a week (or less). Remember that averages can be deceiving.
Step 5: Check the fundamentals of the selected share
At this stage, this is a quick “sanity” check – the handbook makes this brilliantly easy to do.
Remember that you need to evaluate recovery stocks (value opportunities) and momentum
stocks differently.
• The ideal value stock is still making profits and paying dividends.
• The ideal momentum stock has consistently grown turnover and profits for the last few
years and looks likely to continue improving both.
• The key line items to check in the handbook are Turnover, Attributable Income (profit),
Liabilities and Dividend Cover.
Before Clicking on the BUY Button…
The Stock Exchange Handbook is a great way to construct a list of possible shares to buy, but it is
only a starting point.
Obviously, if your initial selections prove unsatisfactory you should go back to the sector list and
look for other possibilities.
Before adding shares to your portfolio go to a website like www.sharedata.co.za to see what the
share price has done since the handbook was published in February. Check that the P/E ratio is still
in line with your expectations.
Check the company news for any new developments and/or profit announcements.
After Clicking on the BUY Button…
Be patient… but not too patient. Give your selected shares time to show their colours. On the other
hand, a share that behaves contrary to your expectations needs to be carefully re-evaluated – some-
times it’s best to cut your losses, other times (if the fundamentals still look good and there’s no bad
news around) the right decision may be to hang in or even double down.
And don’t be too quick to take profits on your successful investments – you have to go the distance
in order to hold ten-baggers.

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