Our cheat sheet to give shares a health check

BUYING Australian shares is trickier than it was a year ago, after stocks rose 18 per cent in 2019 and have climbed another 5 per cent since January 1.

That’s why it’s good to have a cheat sheet for establishing a stock’s financial health.

Wealth Within chief analyst Dale Gillham said the choice the Australian Stock Exchange offered was “overwhelming”.

“The first step in finding a share that has a good future is to narrow down your focus,” Mr Gillham said.

For long-term gain, focus on the top 50, without counting on broker recommendations susceptible to “analyst bias”, he said.

For perspective, read finance news from a range of outlets and focus on liquid shares with weekly trading levels above $3 million. And avoid fixating on sky-high dividends that can mask poor value.

“It is far better to look for growth first and dividend second, because your risk is lower if the share price is rising,” Mr Gillham said.

He said stocks that measured up included BHP, Rio Tinto, Fortescue Metals Group, Woolworths, JB Hi-Fi, Cochlear, CSL and Wesfarmers.

For further insight into valuation accuracy, study the price-to-earnings ratio (PE), Mr

Gillham said. This is a ratio of the current share price divided by its earnings per share, and is one of the most widely used stock analysis tools.

Investment newsletter Marcus Today’s chief operations officer, Chris Conway, said the PE should be under 20.

He said investors should

“sort the wheat from the chaff ” by assessing a prospective stock’s trajectory.

“Obviously, I like to see a price chart that’s nice and strong, and the chart is bottom-left to top-right,” Mr Conway said.

Platforms such as CommSec and E-Trade’s charting software let you examine the top 50 or 100 listed shares, he said. Mr Conway advocated “trend following”by identifying a strong trend with the price moving in the right direction.

Or seek stocks that have sold off sharply but historically reported well, meaning they yield a “discount” when normality resumes.

Filter all data tightly and boil the market’s 2000-odd stocks down to 20 before circling back.

“I’ll then go and eyeball those charts and make sure that everything’s lining up as I like it,” Mr Conway said. “One or two or three or four or five might look better than the rest.”

Next, he looks for a 20 per cent-plus return, solid revenue growth and rising earnings per share “because to me that says the company is becoming more efficient”. He also looks at consensus buy or sell ratings. Websites such as CommSec or Morningstar can help with this.

“You can have done all your research, and everything will be lined up and looking sweet,” Mr Conway said.

“But if the whole rest of the investing universe is saying it’s a sell when you’re going to buy, well, you’re creating problems for yourself, making it harder than it needs to be.

“You don’t want to be swimming against the tide.”