I have decided to make some changes to my entry point and position sizing accordingly to the 3 factors I posted earlier..
1. Entry Point
Fundamentals
Operational History
Strong fundamentals with close to zero debt , with nearly 16 billion in cash, annual growth has averaged 120% since 2001 and also passed most of the pre-set screening criteria.
Even though Google has a dominant position in the industry but there are very few switching costs in internet switch and fickle customers might switch to competitors which provide a more useful experience.. One thing also to note is that it is classified as "Very aggressive"in accounting risk so this is something I might want to factor in when buying/selling the stock.
I have read through the in-depth analysis which discusses the positives and negatives on Google in morningstar and have come to a conclusion that this is a good fundamental stock I can hold.
Valuation
| Stock | Industry | Stock's 5Yr Average* |
Price/Earnings | 28.0 | 24.6 | 67.1 |
Price/Book | 4.2 | 5.5 | 10.5 |
Price/Sales | 6.7 | 5.0 | 13.6 |
Price/Cash Flow | 18.7 | 22.0 | 21.7 |
I will ignore P/B as this is only usually applicable to capital intensive industry like banking.. For the rest of the ratios , it is currently less than the 5 year average so this might be a bargain. This is especially worth noting as the price/sales is currently only at 50% of the average.
Even though it is trading higher than the industry but personally I think it is justifiable given its position in the industry and its prospect/financial health /cash flow.
Momentum
1. Relative Strength
3 Month relative Strength - 78 (Passed)
6 Month relative Strength - 81 (Passed)
12 Month relative Strength - 76 (Failed)
2. On Balance Volume
OBV is currently slightly upward sloping (Neutral)
3. ADX
ADX is currently at 16 therefore indicates the stock is non trending. (Failed)
4. Moving Averages
The fast moving average(14) has crossed over the slow moving (25) one and stock is currently trading slightly below the 200d moving average. (Passed)
5. Trend
2 successive trend lines have been developed therefore I think it has the potential to go further up in the short term (Passed)
Position Sizing
This is how I weigh the factors..
Operational history - 2/3
Valuation - 2/3
Momentum - 3/4
Total of 10 points : 7/10
I will only enter f the total points is more than 5.
I will be using a 50d ATR to estimate the volatile and it is currently at 15.137. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
For a start, i will set a 2% risk.
- Find out the ATR
Multiply ATR by 2(static)
15.01* 2 = 30.02
- Derive the position by taking amount to risk divide by the above sum
500 / 30.02 = 16.65 shares
~~ 17 shares.
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