I have exciting news to share: You can now read @JordanFinance’s Newsletter in the new Substack app for iPhone.
With the app, you’ll have a dedicated Inbox for my Substack and any others you subscribe to. New posts will never get lost in your email filters, or stuck in spam. Longer posts will never cut-off by your email app. Comments and rich media will all work seamlessly. Overall, it’s a big upgrade to the reading experience.
The Substack app is currently available for iOS. If you don’t have an Apple device, you can join the Android waitlist here.
We talked in our previous newsletter on how to start investing in the Amman Stock Exchange.
Now you need to ask yourself: which company should I invest in?
There are many things to consider, mainly:
-Income + Cash-flow Statement
-Growth Plans
-Balance Sheet
-Branding*
*Branding is an essential part of a company (the way it presents itself to others through advertising). Customer retention, customer satisfaction are things that cannot be seen in a balance sheet
The Amman Stock Exchange has a good primer on how to read financial statements here: How to Read Financial Statements
Basics of a balance sheet can be seen in this beautifully simple thread
Let’s look at the different tools to valuate the different candidates.
Financial Ratios in Value Investing
Warren Buffet, the Oracle of Omaha, despite being considered somewhat antiquated in some investing circles for his value investing strategy, is still an iconic role model investors aspire to be.
“Value investing is a a strategy that focuses on a company’s fundamentals, picking companies that have strong moats or competitive advantages in the markets that they compete in, companies that are profitable and have very straightforward cash-flows and growth horizon, they have great long term intrinsic value and stable intuitive products.” (Modern MBA)
One traditional financial metric that is mostly used is: Bookvalue
By definition Bookvalue is:
Book value is the amount found by totaling a company's tangible assets (such as stocks, bonds, inventory, manufacturing equipment, real estate, and so forth) and subtracting its liabilities.
https://www.investopedia.com/articles/fundamental-analysis/09/book-value-basics.asp
Some investors compare a company’s market cap to its Bookvalue to find if it is over or under valued: P/BV < 1
You can also add to this Ben Graham’s equation :
P/BV x P/E < 22.5
Bookvalue however does not matter as much as it did, especially when you consider IP related companies (software, gaming, internet platforms etc.)
To make a better decision, looking at only financial ratios, you can add your own conditions:
-Is dividend higher than inflation? (DIV YIELD> 1.2%)
-Is P/BV < 1
-growth in income/revenue etc.
If you have basic excel sheet skills, you can do a “rundown” on excel and see which companies meet all these conditions together.
It is always important to look at the history and look what is behind the numbers for companies. You need to understand what product/service they are selling, what market they are entrenched in etc. If you do not understand what a company does or who is behind it, maybe it is best to avoid it.
A good example is the now defunct Matches Factory in Jordan (ticker: INMJ that turned to JDFI just like when FCBK turned to META). Had you only checked for dividends back in 2012, you would notice that the company was trading at very high multiples with P/E > 4000 and P/B > 84 (see pic below). But that was only due to the fact that the factory intended on shutting down and it sold all its inventory and machine parts and used the money to pay back its shareholders in dividends before closing down for good. Jordan closed down its last local matches factory.
Forward Guidance and Analyst Rating
Another aspect we lack in the Amman Stock Exchange are future outlooks: analysts at local or international investment firms release reports giving their own personal recommendations with buy/hold/sell signals and price targets.
Other rating agencies also give ESG compliance scores. Maybe for our region (as suggested by a reader), we could also add Islamic compliant scoring: does this company comply with Sharia principles? For e.g. is this poultry factory Halal or is this bank implementing a green program?
Jordan is a small market that is listed as a FRONTIER market and has little to no interest to foreign analysts.
So future outlook (if forward guidance is not released by the company itself) is left to you or your broker and their team of analysts.
Technical Analysis and other predicting tools
As the comic shown above, I personally do not think technical analysis brings anything to the table in predicting future price movements but stock price charts do give an indication.
Another tool used by some superstitious retail investors is astrology and horoscope charts of a company and their management board as is done to Bitcoin.
I personally stick to best valuation and price predictor method available in the Middle East: coffee reading.
Happy Investing!