When playing the stock market is fraught with risk, what's the best way to pick a winner?
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Our advanced investor, who can be identified only as Jim from Calgary, is one of the winners of an investing contest we ran in March. The winners were classified into three categories: advanced, intermediate and beginner.
In Week 1, Jim and Tom chatted for the first time to discuss investment strategy: Week 1: Advanced investor discussion
In Week 2, after Jim had read some materials that Tom recommended, they discussed strategies for Jim to get his portfolio in line with his long-term investing objectives and asset mix:
And in Week 3, they discussed various techniques involved in picking stocks:
In the final week, Jim picked a couple of stocks and Tom critiqued his analysis:
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Sonali Verma, Globe Investor: Hello, everyone, thanks for joining us and TGIF :-) Jim and Tom are discussing a stock today, Birchcliff Energy , which Jim has been analyzing. Jim, what did you go looking for when you analyzed the stock?
Jim: I looked into 4 aspects of a company, those being,
-Financials - How strong is the company?
-Valuation - How is it being valued compared to its peers, the market and to its own history.
-Management Effectiveness - How good is management at increasing the value of the money an investor gives them?
-Business dynamics - What are the factors that might have an impact on this company's business? For example, I evaluated an Oil & Gas producer, so considerations were, prices of oil and gas, royalties, technology needs specific to their area of operations.
Sonali: Super. And tell us what you found?
Jim: Financially, the company is reasonably solid (emphasis on reasonably) due to any future credit they might need to invest in technology.
Management Effectiveness, the companies' management is good at acquiring assets with a long-term time horizon, however, there appears to be a weakness in making the assets productive for an investor.
Value - right now it is overpriced
Business dynamics - the commodity prices is a big consideration (which way are they going) and technical risk (as pointed out by Tom, the technology to get at their natural gas could be time and cost intensive.
Tom: Jim, I like the work you've done - looking at the financials, valuation and business dynamics. Where you need to do more work is on the stage that Birchcliff is at in its development. It has accumulated substantial land holdings, but has not brought a huge amount of it into production. So the value of the company is less in the short-term profits, and more in the assets it has accumulated.
In this case, we want to put more emphasis the company's financing (i.e. can they afford to develop all the land) and the technical side of their properties. In other words, how much risk it there that there is gas there and it can be brought to the surface economically. Land plays like Birchcliff are tricky to analyse because the numbers don't always look so good compared to their peers.
Jim, I know you didn't mention it, but I know you did some work on commodity prices, specifically natural gas, which accounts for about 2/3 of BIR's revenue, I think. I'm a bottom-up investor, but we always want to understand the context that we're operating in. Buying gas right now is certainly a contrarian move, but that is often where the most money is made.
Something else that is important, particularly with the junior oils, is management. Part of making money in the juniors is 'riding' a good horse - i.e. a proven operator who has made money for shareholders in the past. There are lots of successful investors that do nothing but follow the 'winners' around and invest in their ventures. Obviously the numbers have to work, but with you located in Calgary, you should keep this in mind.
Sonali: Those are great points. How about the main strengths of this stock?