Prospecting for great stock values

How do you find great stock prospects?

Well, it's easy but it requires work. The easiest way to begin with some sort of specified list - typically, this works best if you've defined an area or areas of the market that you prefer to invest in. That way, when you see a "wonderfully" priced stock (i.e. read "cheap"), you'll know it, and be able to act on it. This is one of the keys to outperformance - being able to recognize value.

Let me give you two examples from my own portfolio - two stocks - very cheap stocks - that I found. The first was Xceed Mortgage Corp., a Canadian sub-prime lender.

At the time I bought it, it was growing its earnings at a 40-50% rate annually, and yet the PE of this "undiscovered gem" was only in the nine or ten range. In situations like this, you're apt to get rewarded very quickly ... like I was ...



How did I find this? Well, I went through a list of about 400 Canadian financial stocks, eliminating ones that didn't fit my criteria (small/micro cap stocks, as it's easier to find undiscovered value in that area than anywhere else). I then researched the more promising candidates in detail. Overall, this took the best part of two weekends, but I was paid very handsomely for my efforts.

Another area I focus on is herbal medicine/businesses. Spending the better part of a weekend working through a list, I was able to find another undiscovered beauty that also rewarded me very quickly. This was American Oriental Bioengineering, and I found it at a PE of around nine, with an earnings growth rate of better than 50% annually. I was rewarded very quickly in this case too ...



But you can see how much better I would have done, had I even found this stock one month earlier ...

In each case, I also found a couple of other stocks I invested in at that time as well, but it was very clear to me that these two were easily the best ones of those lots, and I invested pretty substantially in both. It probably would have been pretty clear to just about anyone, as the value wasn't that hard to see - what was harder was having the patience and discipline to weed out the others that weren't as promising.

As one final benefit, while the "other" stocks I concurrently invested in didn't do as well, they still did OK, because they at least offered reasonable value. The best thing was that going through those other stocks gave me great confidence that those two both did offer great value and therefore I wasn't scared to overload my portfolio with them - and enjoy the benefits thereafter.

Finding great stock values - easier than you might think.


JW

The Confused Capitalist

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