Creating a watchlist

Beginning investors often have difficulty reducing the market to a manageable number of shares to follow. Searching for trading opportunities by scrolling through hundreds of shares on a daily basis is a waste of precious time.

The average share portfolio comprises eight to twelve shares. It is not necessary to have extensive lists of shares when only one or two replacements are needed.

Who are their competitors?

There are a number of different ways to create a valuable list of shares to watch for entry and exit signals. One of my favourites is a list of 26 shares I created from several investment newsletters. It is a list of monopolies and near monopolies, companies that are usually among the most dominant in their sector. Barriers such as the Australian Federal and State structure, tax structure and limited population make these companies difficult to compete against without considerable cost and risks. Setting up the infrastructure to compete against a monopoly would be a considerable expense. Generally, monopolies have low P/E ratios, high cash flow, high dividend payout ratios and high yields. Among the companies in this watchlist are Australian Stock Exchange (ASX), Alinta Gas (ALN), Woolworths (WOW), Woodside Petroleum (WPL) and Macquarie Airports (MAP).

Takeover targets

Another of my favourites is a list of 30 potential takeover targets, created from a newspaper article and a financial magazine in March 2005. The brokers recommending these companies considered, among others factors, both fundamental and technical analysis. Another important consideration was how much a company could contribute financially to help fund their acquisition. Companies in this watchlist included Tap Oil (TAP), CSR, Jubilee Mines (JBM), Oil Search (OSH) and Rural Press (RUP).

Selection process

Here are two ways to use the internet to create watchlists:

1. The first is a website using fundamental analysis.
The ninemsn website has some fundamental research tools that could save investors a lot of time in finding healthy, low risk companies. The Investment Finder has nine basic predefined searches compiled by independent research company Aspect Financial. Aspect Financial rank companies on the basis of Value, Risk, Growth and Income. Below are two examples of their searches.

Turnaround Stocks
A number of our highly ranked value stocks are companies that have had poor returns but have strong growth forecasts.  This query returns all companies with a Value Rank of 1 or 2, with negative total returns in the last year and with a two year forecast growth above 20%.

I ran this search on July 11th and 30 companies met the criteria.

Growth at a Reasonable Price
If the thought of investing in turnarounds makes you a bit queasy, this query, which focuses on stocks with a strong growth track record, might be for you.  These are top value stocks with EPS growth over the last five years above 15% and forecast growth above 20%.

34 companies met this criteria when the search was run on July 11th.

2. The second is to follow the pros.
Another way to create a watchlist from the internet is to track the professional fund managers. Listed Managed Investments (LMIs) are managed funds that trade like shares. They can be traded on the internet, or through a broker, just like any other listed company. There are 6 different types of LMIs:

• Property Trusts
• Listed Investment Companies (LICs)
• Infrastructure Funds
• Exchange Traded Funds (ETFs)
• Pooled Development Funds
• Absolute Return Funds

At last count there were 150 Listed Managed Investments on ASX. To view the list and their performance visit the Listed Managed Investments section of the ASX Website, and download the Performance returns PDF under the Research and Tools heading.

If a specific fund appeals because of charting, fundamentals, managerial style or technical analysis, it is possible to identify the fund's major holdings. Go to the Research tools page in the Listed Managed Investments section, select the desired fund, and you will be taken to their website where most, if not all, of the LMIs list their major holdings along with other information.

Other approaches

The last two examples of how to create a watchlist are done with searches using computer software.

The first search is using fundamental criteria. There are several software packages available that will search for and list companies meeting specific criteria. For example, an investor might want to find companies that meet the following criteria:

• Inclusion in a specific Sector (such as Diversified Financials)
• Market Capitalisation greater than 250,000
• P/E Ratio less than 30%
• Dividend Yield greater than 3.5%
• Return on Equity greater than 7 %
• Earnings Growth greater than 8%

The last example uses technical analysis to create a list of shares to follow. Most charting software packages allow investors to search for and list shares meeting specific technical criteria. For example, an investor might want to find companies that meet the following criteria:

• Closing price above a 28 Week Moving Average (to establish major trend)
• Daily RSI (7) below 35

This approach is designed to find shares in a minor correction (retracement) within an overall rising trend.

Newsletters, magazines, brokers, computer software packages and the internet are all valuable sources of information that can be used to create a list of companies to follow. Watchlists are an effective time management tool, reducing the market to a manageable number of shares meeting specific criteria. An investor would monitor their watchlist, looking for opportunities to enter or exit trades based on the written rules of their trading plan.

About Jim Berg

Jim Berg, author of The Share Trader’s Handbook, is a former broker, private trader and lecturer with over 20 years experience in the investment industry. He’s appeared on CNBC Asia and Market Wrap and is a regular guest speaker at the Traders and Investors Expo, ASX, SFE and the Australian Technical Analysis Association.

Jim is a well respected Financial Market figure who has educated thousands of clients in Australia and abroad. His successful proven strategies are detailed in his home study course, "Trading Strategies With MetaStock".

Using the tools and trading strategies demonstrated in his investment workshops and seminars, Jim won the 2002 Personal Investor Magazine Trading Competition.

(c) All rights reserved 2005. This article has been prepared by a third party and licensed to ASX. The views are those of the author and not necessarily of ASX. This material is educational and it is not intended to constitute financial advice. It has been prepared without taking account of any person's objectives, financial situation or needs and because of that, any person should, before making an investment decision, consider the appropriateness of the advice having regard to their objectives, financial situation and needs.

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