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Index
Contents
About the Author
Acknowledgements
Chapter 1: The Equity Edge
Introduction – Putting the odds in your favour
Creating an equity edge
A framework for your investment decisions
Chapter 2: Screening for Company Shares
Chapter 3: Earnings Checks
Chapter 4: Sales Checks
Chapter 5: Cash-flow Checks
Chapter 6: Dividend Checks
Chapter 7: Debt and Solvency Checks
Chapter 8: Competitive-advantage Checks
Chapter 9: Book Price and Valuation Ratios
Chapter 10: Qualitative Analysis
Chapter 11: Broker Valuations
Chapter 12: Long-term Fair Value
Chapter 13: Charting for Investors
Chapter 14: When to Sell Shares
Chapter 15: Managing Investment Allocation
Chapter 16: Bringing it all Together
The resources and tools you will need
Screening and data websites
Financial news
Company news
Charting software
The Equity Edge website and newsletter
Summary
Chapter 2: Screening for Company Shares
Introduction
Income screens
Screen 1: Quality income screen
Screen 2: Growth and income screen
Value screens
Screen 3: Low PE screen
Screen 4: Low PCF screen
Growth screens
Screen 5: Zulu growth
Screen 6: Naked growth
Economic moat screen
Summary
Chapter 3: Earnings Checks
Introduction
Earnings information
Positive earnings
Earnings growth
Broker views – Future expected earnings growth
Pre-tax profits
Earnings valuation
Summary
Earnings checks
Pre-tax profits checks
Earnings valuations
Chapter 4: Sales Checks
Introduction
Sales information
Sales growth
Sales valuation
Inventory to sales ratio
Receivables to sales ratio
Summary
Revenue checks
Sales valuation
Chapter 5: Cash-flow Checks
Introduction
Quality of earnings cash indicator
Cash to capital expenditure
Cash valuation
Summary
Cash checks
Cash valuation
Chapter 6: Dividend Checks
Introduction
Progressive dividend history
Expected future dividends
Dividend cover
Dividend outlook
Average future five-year dividend yield
Sector comparison of dividend yield
Dividend checks for growth companies
Summary
Dividends checks for income and value companies
Dividend check for growth companies
Chapter 7: Debt and Solvency Checks
Introduction
Debt levels
Net borrowing
Net borrowing to EBITDA
EV/EBITDA
Net gearing
Solvency ratios
Current ratio
Quick ratio
Interest cover
Altman Z-score
Piotroski F-score
Summary
Debt checks
Solvency checks
Chapter 8: Competitive-advantage Checks
Introduction
Return on capital and equity employed
Operating margin
Consistency score
Relative strength
Summary
Chapter 9: Book Price and Valuation Ratios
Introduction
Book value
Net asset value per share (NAV ps)
Price to tangible book value (PTBV)
Combining valuation ratios
Summary
Chapter 10: Qualitative Analysis
Introduction
Financial news
Investors Chronicle
Financial Times and Bloomberg
Google financial news and Google search
Bulletin boards
Company website and annual reports
Business model
Source of sales and profits
Discontinued operations
Business segment analysis
Geographic diversification
Customer and supplier base
Business focus
Growth strategy
Future direction and outlook
Competitive advantage
Cost leadership/low pricing
Product differentiation
Established position in niche market
Adapting product line
Excellent brands
Strategic assets
Dominance in a market (tolls)
Strong balance sheet/cash generative
Switching costs
Management
Leadership
Management discussion and analysis
Conference calls
Management pay
Shareholder ownership
Director dealings
Summary
Chapter 11: Broker Valuations
Introduction
Calculating broker valuations
Sales-based broker valuation method
Earnings-based broker valuation method
Broker target price: Hybrid sales-earnings-based broker valuation method
Producing a consensus broker valuation
Summary
Chapter 12: Long-term Fair Value
Introduction
Required investment return
Growth assumptions
Earnings yield
Asset-based fair valuation
Earnings-based fair valuation
Sales-based fair valuation
Quick and easy dividend-based fair valuation
Dividend-based fair valuation
Overall fair valuation
Summary
Chapter 13: Charting for Investors
Introduction
Weekly chart set-up
Candlestick charts
Moving averages
Defining a weekly price trend
Market direction and stages of the price cycle
Company share price direction
Daily chart set-up
Daily candlestick charts
Moving averages
Defining the daily trend using daily moving averages
Identifying support and resistance levels
Horizontal support
Horizontal resistance
Trend support and resistance
Buying strategies
Strategy 1 – Buying dips in an uptrend
Strategy 2 – Buying in a strong uptrend
Strategy 3 – Buying support during sideways trading
Summary
Chapter 14: When to Sell Shares
Introduction
Know when to cut your losses
Use a stop loss
Use a time stop loss
Sell if the investment thesis no longer holds
Don’t fall in love with investments
Know when to take your profits
Additional rules for selling shares
Sell company shares when they become expensive
Sell income shares when the current dividend yield falls below 2%
Sell income shares when the current PE ratio is over 20
Sell growth shares when the PEG ratio is over 3
Sell value shares when three out of five value measures signal the shares are expensive
A cut in the dividend may signal a time to sell
Knowing when to buy back in
Summary
Chapter 15: Managing Investment Allocation
Introduction
Specific investment risk
For portfolios worth less than £500,000, the largest proportion of the portfolio allowed to be invested in a single company is 5%
For portfolios worth between £500,000 and £1m, the largest amount of the portfolio allowed to be invested is £25,000. This keeps the proportion allocated between 2.5% and 5%
For portfolios worth more than £1m, the largest proportion of the portfolio allowed to be invested in a single company is 2.5%
Sector risk
Position risk
For portfolios worth less than £500,000, the maximum position risk allowed is 2%
For portfolios between £500,000 and £1m the maximum position risk is set at £10,000
For portfolios in excess of £1m, the maximum position risk allowed is set at 1%
Changes in position risk
Portfolio risk
Regional risk
Rebalancing the portfolio
Tax efficiency – Allocating money and shares between different accounts
Individual savings accounts (ISA)
Capital gains allowance
Dividend allowance
Hold assets jointly
Inheritance tax
SIPP
Take financial advice when considering pension options
Summary
Chapter 16: Bringing it all Together
Introduction
Weekly routine
Saturday
Sunday
Monday to Friday
End-of-quarter routine
Yearly routine
Conclusion
Publishing details
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