A move made a month ago...part 1

I was intending to post about this before I placed the BUY orders ... but I ran out of time with the Costa Rica trip...and thus no post. I will write about the experience anyway, seeing as how it demonstrates the new foundation which I have been using for picking investments. I am sure that I will make tweaks to it over time, but it definitely fits my current investing style pretty good. At the end of the day it makes sense to me...which is most important for keeping one's sanity.

Backing up... I have read numerous articles, books and online references attempting to find a good recipe for picking that next great stock. Just like everyone else I figured out that there is no secret sauce to make gobs of money...damn! I used to subscribe to the theory of ultra-speculative stock picking ... mainly in tech ... based on my experiences of the late 90s. Those days are long gone...and to be honest, I never ended up doing all that well in that vein anyway. So now what?

Since I am now in my early 30's, I can definitely still afford to be a high risk investor...and there definitely is a time and a place for that...but in general I find myself gravitating towards solid companies with proven track records. I also don't want to go the mutual find route since they tend to under perform after you take into account their true performance and expense fees. Index funds definitely have a time and a place for any sane portfolio but since our 401K and IRA already have exposure here...I figure my butt is already covered with my safe money. So out into the brave world of picking a small basket of individual stocks...

My stock selection criteria is very loose at the moment and still needs a lot of refinement. My basic guiding principles at the moment are:

1. Market cap >$1B: This one keeps me out of a lot of trouble and keeps me from thrill seeking with little stocks that tend to be more speculative.
2. Been in business for at least 5 years: I want something with a stable track record which I can research and analyze.
   
3. Positive EPS (current year): A company that loses money just fundamentally does not work for me.
4. Positive EPS Growth: Future estimated earnings better be showing me at least 10% growth if I want my investment to grow at >10%.
5. Non-Zero Dividend: If the stock is making tons of moolah in today's market, then they should be returning some of it directly to the investors. If the growth rate is high then this can be low...but if the growth rate is marginal to my 10% bar then I want some $$ back as an insurance policy.
   
6. >20% Headroom To Price Target: It is very easy to find the 1 year price target for a company on most financial websites. Since most analysts are crooks and generally wrong...I want a comfy margin on price target so I land in positive ground. When combined with bullets 3, 4 and 5 above...this absolutely screams undervalued stock to me.
7. A good balance sheet: This one comes from reading Jim Cramer's Mad Money: Watch TV, Get Rich book. He does a nice section on how to read the balance sheet to ensure the company can pay off its near term debt obligations. If it can't do this...then it goes overboard.

So what type of stocks does this unearth? Well, I have yet to actually find a stock screener which lets me search all 7 criteria above so there is no easy button there. What I can tell you are the stocks which I was evaluating a month ago which met this criteria:

• British Petroleum (BP): Market cap of $215B, been in business >5 years, current earnings $5.88, 10% earnings growth next year, 3.8% yield, +25% price target and a good balance sheet.
• Globalsantafe Corp. (GSF): Market cap of $15B, been in business >5 years, current earnings $7.18, 27% earnings growth next year, 1.6% yield, +22% price target and a good balance sheet.
• Tele Norte Leste Participacoes S.A. (TNE): Market cap of $6B, been in business >5 years, current earnings $1.67, 17% earnings growth next year, 5.1% yield, +48% price target and a decent balance sheet (higher percentage of debt due to phone network expansion projects). FYI - these guys are the number 2 telco company in Brazil with huge cellphone growth rates.
• Intel Corp. (INTC): Market cap of $119B, been in business >5 years, current earnings $1.08, 24% earnings growth next year, 2.3% yield, +18% price target and a good balance sheet.

So what do you notice? Nothing too sexy to be honest...except for maybe the Brazilian ;-) All are good companies with solid performance and future promise to deliver. I would gladly stand behind any one of these companies...although the Intel has been painful for a lot of people.

Well, it's getting late so I will fill you in on the actual trade and performance tomorrow. Also, we will discuss my daily post-trade analysis and the exit strategy plans which I have laid out for myself...