Latest Stock Pool: Earnings Explosion

1. Q1 net profit surged year-on-year, with growth significantly outpacing that of Q4 and Q3 last year. 2. Since the Q1 earnings release, the stock’s price appreciation has been modest relative to the broader market. 3. Valuation is not high: PE < 20, or PB < 2, or PEG < 1. Of these three criteria: the first defines ‘explosion’—not merely high growth, but a discernible inflection point; the second defines timing—assessing whether the information has already been priced in by the market; and the third defines margin of safety. Speculating on near-term earnings growth is inherently short-term oriented; salaried investors who cannot monitor markets constantly must preserve sufficient room for maneuver. Stock pool below: Click to view full-size image. Average PEG calculations referenced in “Updated Stock Pool (I)” When using this list, please note the following: 1. Earnings previews typically report only net profit growth—not revenue growth. For growth stocks, dual growth (revenue + profit) is superior to revenue-only growth, which in turn is superior to profit-only growth. A sharp net profit surge without corresponding revenue growth may signal weak sustainability and limited upside for the stock price. 2. The reported growth figures do not exclude impacts from M&A activity or non-recurring items. Readers familiar with any of the listed stocks are welcome to share insights in the comments—I’ll highlight and comment on those contributions that prove especially helpful to others. 3. A low P/E ratio following a single-quarter earnings explosion warrants nuanced interpretation: the P/E denominator reflects the inflated current-quarter earnings—a backward-looking figure. An exceptionally low P/E should prompt careful scrutiny of whether the company can sustain such growth—or even maintain this quarter’s earnings level—into the future. After all, investing is about the future; only speculation focuses solely on the present. 4. Using this list demands clarity of purpose: Are you seeking stocks where earnings have turned a corner, indicating long-term improvement and genuine investment merit—or are you planning a short-term trade capitalizing on the market’s delayed reaction to recent results? Both approaches are valid. What must be avoided is adopting a short-term trading mindset yet holding through drawdowns, or conversely, embracing the vision of investing in great companies while selling after just two or three days of underperformance.

Value Investing Practical Handbook, Volume II: Personal Notes

Company Market Cap = P/E Ratio × Net Profit Type I: Random, with no systematic method. Type II: Profiting from changes in P/E ratios a) Focuses on selecting stocks whose P/E ratios are low—or substantially below—the industry average or the company’s own historical average, aiming to capture price appreciation as the P/E ratio reverts to its mean. Key features include reliance on undervaluation, portfolio diversification, and willingness to accept probabilistic losses in pursuit of overall mean-reversion gains. b) Pays little attention to current P/E levels, instead relying on some conviction (e.g., thematic tailwinds or catalysts) that the P/E ratio will expand, thereby driving price appreciation. Common examples include momentum-driven investors and ‘sector-chasers’ focused on hot fundamentals. Type III: Profiting from changes in corporate net profit c) Centers on business growth as the core driver, treating P/E expansion as a bonus. Broadly subdivided into: (i) value investors prioritizing low P/E ratios and strong margin-of-safety considerations; and (ii) growth investors emphasizing future corporate potential and tolerating higher P/E ratios. Both require deep research into industry prospects, financial statements, and competitive dynamics. d) Investors targeting turnaround or restructuring situations—requiring specialized foresight and access to timely, privileged information. Characteristics of High-Quality Businesses Benjamin Graham’s Four Guidelines for Ordinary Investors: 1. Adequate—but not excessive—diversification: allocate capital across no fewer than 10 and no more than 30 stocks. 2. Select large, prominent companies with conservative debt policies. 3. Choose companies with a long, uninterrupted record of dividend payments. 4. Purchase only stocks with low P/E ratios—specifically, market cap no greater than 25× the average net profit over the prior seven years. If using the most recent four quarters’ net profit, the upper limit is 20× P/E. (This principle later informs Lao Tang’s valuation method.) Business Analysis Framework: Porter’s Five Forces Threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products/services, and intensity of competitive rivalry. Estimating Intrinsic Value (Graham’s Approach) 1. First, screen for all stocks with TTM (Trailing Twelve Months) P/E ratios below X. TTM P/E = Market Cap ÷ Net Profit over the most recent four fiscal quarters. 2. X = 1 ÷ (2 × risk-free rate). Example: if the risk-free rate is 4%, then X = 1 ÷ 8% = 12.5. The risk-free rate is typically taken as the higher of the 10-year government bond yield and the AAA-rated corporate bond yield. 3. Among those, select only stocks with debt-to-asset ratios < 50%. Debt-to-Asset Ratio = Total Liabilities ÷ Total Assets. 4. From the resulting list, select at least 30 stocks. Allocate no more than 2.5% of total capital to any single stock—capping total equity exposure at 75% of capital. 5. Invest the remaining 25%—plus any unallocated funds due to insufficient qualifying stocks—in government bonds or other risk-free instruments. 6. Sell any individual stock once it rises 50% from purchase, reallocating proceeds to newly qualified stocks or risk-free assets. (This highlights the contrast between Graham’s ‘cigar-butt’ approach and Buffett’s ‘long-term companionship’ philosophy.) 7. By the end of the second calendar year following purchase, sell any stock still up less than 50%—again reallocating to newly qualified stocks or risk-free assets—unless the stock remains on the current qualified list, in which case hold it. 8. Repeat this process cyclically.

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