How to steadily aim for returns in stock investment? Tips for selecting stocks using the quarterly report | Let's build assets while saving on taxes | Moneyクリ Money's investment information and media useful for finances.

To achieve returns in stock investment, it is said that the basic principle is to "buy low, sell high." The famous British economist Keynes likened stock investment to a "beauty contest." If you want to predict who will be chosen in a beauty contest, you should not choose the person you think is the most beautiful, but rather choose the person that "everyone else thinks is beautiful."

Similarly with stocks, it means that "it is important to choose stocks that everyone wants rather than the stocks you want the most." But what kind of stocks are the ones that everyone wants?

There are three types of returns from stock investments: "capital gains," "dividends," and "shareholder perks." No matter which return you aim for, checking the company's performance is crucial. This is because if the company does not perform well, it will not grow, and there will be no dividends or the possibility of perks disappearing. Nobody wants a company that does not grow and has no dividends or perks. Naturally, the stock price will not rise either.

Therefore, it is clear that checking performance is essential. This time, I will share the key points for selecting stocks with a focus on strong performance.

Three Points to Choose Stocks That Will Increase in Value

There are about 3,900 companies listed in the Japanese stock market. The US stock market has over 5,000 companies. Checking each company one by one would take too much time. Therefore, it is necessary to conduct a certain level of screening.

Before entering the "performance screening" based on sources like the quarterly reports and the "screening function" on websites, it is better to conduct a "thought experiment" and "association game" on the following three points to narrow down the industries and stocks to invest in.

Key point 1 for selecting a brand: Will it still be needed in 10 or 20 years?

First, let's consider whether the products and services provided by the company will continue to be needed in 10 or 20 years. For example, products and services that address issues such as population problems, food issues, and resource issues will remain solid in the future. The demand for themes such as "health," "healthcare," "beauty," and "medical care" is also likely to be universal. By riding the trends of social conditions and providing services that will continue to be needed, growth potential can be expected.

Point 2 for selecting a brand: Is it providing a rich and enjoyable life?

Next, let's check products and services from the consumer's perspective. Products that enrich and make life enjoyable, as well as useful services, have continued to sell throughout the ages. Let's confirm whether we are offering products and services that we ourselves would find "desirable" and "convenient."

Key Point 3 for Selecting a Brand: Does it have a strong competitive advantage with high entry barriers and a DNA of continuous growth and evolution?

Companies that have even one strength that cannot be imitated by others have room to grow, as it serves as an engine for their development. Businesses that have a high market share in certain products or services, hold patents, or possess large-scale platforms are promoting businesses with high "barriers to entry," which are expected to achieve steady growth. Companies that invest in human resource development, research and development, capital investment, and M&A are also expected to grow.

Keeping the above points in mind, we will seek evidence through numbers (performance).

The Shikiho is Convenient for Performance Checks: 4 Checkpoints

The "Shikiho" is a book that comprehensively covers the performance, financial status, and stock price trends of all listed companies in Japan. It is published four times a year, in mid-March, June, September, and December. Since its first publication in 1936, it has been loved by many investors as the "Bible for Investors," and recently it can also be read on the websites and apps of securities companies. At Monex Securities, it can be checked on the website after logging in.

The company quarterly report contains detailed data on listed companies as shown in the following figure.

From the book "Hajimete no Shin NISA & iDeCo" (Seibido Publishing)

Checkpoints of the Company Quarterly Report

Let's check the following four points.

Checkpoint 1 of the Shikiho: Article Column [Headline]

Pay attention to the first headline in the "article section" and check whether it is a strong headline indicating good performance. Headlines such as 【絶好調】, 【連続最高益】, 【利益倍増】, 【大幅拡大】, and 【躍進】 indicate the company's strong performance. Also, pay attention to 【独自増額】. This refers to the situation where a journalist from the company’s quarterly report, based on interviews, judges that "the company's plan is too conservative" and independently raises their forecast.

Shikiho Checkpoint 2: Performance section "Sales", "Operating Profit", "EPS (Earnings Per Share)", "Dividend Per Share"

Essential for checking growth potential are "revenue" and "operating profit," which represents the amount earned from core business operations. Figures for the past three or five periods and projections for two future periods are provided. Let's choose companies where both revenue and operating profit are on an upward trend.

Companies with only increasing operating profit are due to the reduction of selling and administrative expenses (labor costs). "Human resources (human assets)" are essential for corporate growth. From the perspective of growth potential, it is important that both sales and operating profit are on the rise.

Earnings per share (EPS) is calculated by dividing the net income for the period, which is the final profit, by the number of outstanding shares. Companies whose EPS has been increasing year after year are demonstrating steady growth, and for companies that are paying dividends, expectations for increased dividends are also rising.

If you are investing in high dividend stocks (stocks with a high dividend yield), be sure to check whether the dividend per share is increasing year by year. This will help you determine whether the stock can continue to pay high dividends or if there is a possibility of increasing dividends.

The formula for calculating the dividend yield from the perspective of the investor is "annual dividends ÷ stock price (at the time of purchase) × 100 (%)". Since the denominator is calculated based on the purchase price, the effective dividend yield will increase with dividend increases. Even if the dividend yield is 3% at the time of purchase, if the company grows and increases dividends, it may become a high-dividend stock exceeding a dividend yield of 10% or 20%. If the premise is long-term holding, it is better to invest in dividend-increasing stocks.

Checkpoint 3 of the Seasonal Report: Financial section "Equity Ratio," "Interest-Bearing Debt," "Retained Earnings," "Operating Cash Flow"

Debt is essential for corporate growth, but excessive borrowing can lead to financial difficulties. The "equity ratio" indicates the proportion of a company's funds that does not need to be repaid (equity). A ratio over 50% is considered to indicate high safety (the average for the banking industry is around 5%, while for leasing it is about 15%, so this varies by industry). On the other hand, having no debt can also be a weakness in terms of growth potential. I believe that a ratio around 50% is an ideal line.

Additionally, having less interest-bearing debt (money that must be repaid with interest) is healthier. When investing in high dividend stocks, dividend growth stocks, and non-dividend reduction stocks (cumulative dividend stocks), it is also important to note that there is a significant amount of retained earnings.

It is common for high-dividend stocks, dividend-increasing stocks, and non-dividend-cutting stocks that even when profits for the year decrease or turn into losses, dividends may be paid out from the accumulated "retained earnings" of past profits. The reason companies go to such lengths to pay dividends is that many investors who invest in dividend stocks tend to sell their shares all at once when a dividend cut (reduction in dividends) or no dividend (no dividends) occurs. In other words, it is paid to prevent a sharp drop in stock prices.

Cash flow consists of three types: "cash flow from operating activities (cash income and expenditure from business operations)", "cash flow from investing activities (cash income and expenditure from capital investments, etc.)", and "cash flow from financing activities (cash income and expenditure from fundraising, etc.)".

The most important thing is the operating cash flow (hereafter referred to as operating CF). Operating CF represents the cash inflow and outflow generated through the business. If the core business is performing well and cash is being collected properly, operating CF will increase, leading to stable management. Additionally, having a high operating CF allows for business expansion without relying on loans, making it a useful indicator for measuring future potential and growth.

However, if the operating cash flow is decreasing and even turning negative, it means that the cash on hand is dwindling, leading to instability in management. If this continues, the survival of the business may also be in jeopardy. Therefore, it is important for the operating cash flow to be positive, and ideally, the higher it is, the better.

Checkpoint 4 of the Seasonal Report: Revision section of performance forecasts

In this issue of the Shikiho, we have indicated with arrows how much the forecast for operating profit has increased or decreased compared to the previous issue.

↑↑Significant Increase: More than 30% increase

↑Increase: Increase of 5% to less than 30%

→Similar to the previous issue: an increase of less than 5%

↓Reduction: A reduction of less than 30% and 5%

↓↓Significant Reduction: A reduction of over 30% "↑↑" (Significant Increase: An increase of over 30%), or "↑" (Increase: An increase of less than 5% to 30%) companies can expect their performance to improve further, so keep an eye on them. Also, if the facial emoji is "smile," it indicates that the operating profit forecast in the quarterly report is more optimistic than the company's forecast (the quarterly report person believes that the company’s forecast is conservative).

Stock investment is now an era where you can start with just one share. Depending on the company, you can receive dividends even with just one share. Shareholder benefits generally require holding at least 100 shares, which is a standard unit, but there are companies that offer shareholder benefits for holding just one share. For those who are making regular investments in investment trusts through the new NISA, how about taking the next step and challenging yourself with stock investment?