< ShareAnalysis Top 5 Stocks Methodology
The Top 5 stocks are published in Money magazine each February. The Top 5 track record commenced in January 2012 with a notional $50,000. Every January we follow a disciplined filtering process to find top stocks to buy. The process is methodical and not influenced by human opinion or bias. We then liquidate the portfolio at the start of the following year and the capital gains plus dividends are reinvested in the new Top 5.
Our first criterion was quality - companies rated A1, A2, B1 and B2. Next we excluded companies that didn't make any money and further narrowed the list to just value stocks: companies whose share price was less than ShareAnalysis intrinsic value. Only companies forecast to deliver growth, and pay a dividend yield of at least 4 per cent, were left. To find the Top 5, companies were then ranked based upon their future growth forecasts and dividend yields.
We began our search by immediately removing companies that didn't turn a profit, and only focused on those that achieved ShareAnalysis preferred stocks ratings of A1, A2, B1 and B2. Because of the lack of value in the market in 2013, A3 stocks were also included in the search. Only companies that offered value, were expected to deliver growth and forecast to pay a dividend yield of more than 4 per cent remained.
By the end of 2013 the ASX had risen to the point where there were very few good value opportunities. So, in 2014 we went global. The portfolio sourced the best-looking stocks from Australia, the United States, Canada, Hong Kong and London.
The 2014 filter began by finding companies awarded with ShareAnalysis premium stock ratings of A1 and A2. Listed investment companies were excluded, and only companies with analyst coverage remained. We then applied our growth value criteria to come up with a shortlist of top stocks to buy.
First we removed companies that don't make money, and just kept the ones rated A1, A2, B1 and B2 by ShareAnalysis. We also included A3 stocks as they have excellent quality balance sheets and their performance could be on the cusp of being highly rated by ShareAnalysis.
Next companies had to pass three ratios: return on equity more than 0 per cent, net debt/equity less than 40 per cent and a long-term funding surplus. The last two criteria isolated companies forecast to deliver future growth and also offering value for money.
This is a hypothetical portfolio. The transactions in this portfolio did not actually take place and may not have been replicable. Transaction costs and taxation effects have not been taken into consideration. Investments can go up and down and may result in the loss of some or all of your capital, and reduced dividend income. Past performance is not a reliable indicator for future performance. Portfolio returns are prepared in good faith and we accept no liability for errors or omissions. Performance assumes that rights issues were not taken up.