I’ll share my stock picking template here. This serves as a guide for me whether to invest or not. May not suit everyone’s investment style so don’t take everything here as financial advice.

// Investment Style

For me, I’m a long term investor who dollar cost average on growth stocks that are traded in the US. I invest in companies that have the potential to give 10X return in 10 years time. Always ready to buy the dip with cash or leverage (ie loan or margin).

Since I’m invested in growth stocks, many of them are not profitable. How do you value them? PE ratio is only available for profitable companies and it’s not the best way to capture the forward looking earning potential of a company.

// Valuation Metric
So, I came across this valuation metric called Market Cap to Revenue ratio which is commonly used by venture capitals to evaluate startups.

If you look at Tesla, it currently has a market capitalisation of USD 1 trillion (use Yahoo finance to check) while let’s say the projected annual Revenue for 2021 is USD 50 billion. You get a Market Cap to a Revenue ratio of 20 by diving the numbers.

Is 20 high or low? That’s the subjective part but I would typically compare this with other industry players. Apple is around 7 but this is a mature company. A high growth company that has annual revenue growth rate of 50% and above usually have a higher ratio. SEA the group that owns Shopee is around 13 right now but it was around 20 at one point. Search up Li or Nio, do the calculation yourself and it should be 20 or higher (or use to be before the Chinese stock sell off).

Another way to judge this number is by looking at the share price trend. If the share price has been stagnant at a certain price range for a long period of time, that may indicate the share price and “ratio” is fair to the market.

If the ratio is lower than the “norm”, then the stock is undervalued. I would put a larger sum of money into the market to buy it. If it’s not, I still dollar cost average to buy it every month.

// Finding a good business
Now that you know of a way to value a stock, how do you know you’re buying a good company? Valuation don’t matter if the company is crap.

I look into B-F-M. The Business Model, Financials and Management team.

This post is getting a bit lengthy so I’ll just put the keywords here.

I use the Business Model Canvas to understand how a business operates. Of them all, I tend to focus more on the revenue stream to see if this is a proven concept that can be scaled.

Look for PESTL model to understand the macro environment. The political and covid situation have big influence in stocks.

Look for the market size of that industry. How big is the pie? Is it a growing pie? For EV and Gaming, these are growing and you can see the 5 to 10 year projections by market research company.

As for Financials, yahoo finance and hypercharts have high level financials. The official quarterly financials from the company official site are good if you know what to look at. Revenue super important and 50% YoY growth is the magic number. This needs to be balanced with a positive cash flow. Being a net positive cash company is more important than being profitable in the short term.

Lastly get to know the management team and the culture of the company. A company is basically an end product of a group of people after all. Are they able to execute? Can they be trusted (look at the founder of Nikola and the way he spoke gave me bad vibes already)? Is the company hiring people of Grade A, B or C (sorry to be classifying people but let’s face it there are coding gurus and there are average joes). Personally, I think Elon and the people around him are some of the best minds in this world.


// Final words
The stock picking template above can be used for a high level sense check or a detailed research.

Honestly sometimes I use this framework in a short 15 mins to decide to buy a stock or not. Though, it’s a small sum of money. Always buy in batches and not all in. This is not a casino.

Other times I would deep dive into building out the details of this framework by putting in days before I invest. It took me quite a while before I decided to invest a significant chunk into GameStop. Went in before the hype and profited 140X from my call options.

One final advice, best way to learn is to go to sources that have digestible content. I read posts in Lowyat finance and Reddit (wallstreetbets used to be a great learning place). I should be given a Reddit scholarship by now. That aside, follow YouTubers that have deep understanding of a company (ie Tesla Daily). Let’s not forget, our workplace has many examples of what a great or bad company can be.