BetterInvesting Class Overview

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Judgment and the Stock Selection Guide (SSG)BetterInvesting

Adding Judgment to the Stock Selection Guide Serieswww.BetterInvesting.org/AddingJudgment

Judgment and theStock Selection Guide

Ann Cuneaz, Education Program Manager, BetterInvesting

Ken Kavula, President, Mid-Michigan Chapter

Welcome!

Disclaimer

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• The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvestingTM

National Association of Investors Corporation (“BI”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvestingTM. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

• Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the CEO of BetterInvesting or the Director of Chapter Relations.

• This presentation may contain images of websites and products or services not endorsed by BetterInvesting. The presenter is not endorsing or promoting the use of these websites, products or services.

• This session is being recorded for future use.

BetterInvesting• Offers non-profit investing education• Founded in 1951• Supports individual investors and

investment clubs• Provides materials and software to

help in stock analysis

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Class Overview• Define a quality company• Discuss need for judgment on the Stock

Selection Guide (SSG)• Identify judgment items on the SSG• Discuss how judgment is tied to

conclusions on the SSG• Emphasize that better judgments lead to

better results

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Ten years of historic data has generally included two business cycles.

The next five years will generally include a single business cycle.

10 yrs

5 yrs

History Projection

BUSINESS CYCLE

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“BARBED WIRE”

The Stock Selection Guide answers two questions:

1. Is this a HIGH QUALITY GROWTH company?

2. Is it selling at a FAIR PRICE?

• Evaluate quality FIRST• Remember the barbed-wire fence

Is This a Quality Company?

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Look for CONSISTENCY

UP, STRAIGHT AND PARALLEL!

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Evaluate Historical Growth

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More than 40% Sales Growth

Less than 6% Sales Growth

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Growth still explosive

Growth is slowing

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Ask some questions: size of company, consistency of sales and earnings, long-term and recent trends,

comparison of growth rates, etc.

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• % Pre-tax Profit on Sales (Profit Margin) should be steady or rising– KEY measure of management effectiveness– Industry comparisons are valuable

• % Earned on Equity (ROE) should be steady or rising– 15% or greater is a good number– Great companies achieve ROE of 20% or more

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As a general rule, the percentage debt to capital ratio should be less than 33%.

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How would you evaluate

this company?

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REMINDER: We are trying to answer TWO questions.

IS THIS A HIGH QUALITY GROWTH COMPANY?

IS IT SELLING AT A FAIR PRICE?

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The Stock Selection Guide is not a formula to be blindly followed. It is a guide to

judgment, and aid to judgment, but not a substitute

for judgment.Ralph Seger

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FUTUREHISTORY

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It begins with sales . . . earnings follow sales and stock price follows

earnings!

Once growth rates for sales and earnings have been selected, the projected sales and EPS five

years in the future are calculated.

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$3.44

$3.96

$4.55

$5.23

$6.02

$6.92

Using 15% growth for sales and for earnings, the EPS Calculation is:$3.44 x 1.15 x 1.15 x 1.15 x 1.15 x 1.15 = $6.92

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$3.89

$4.47

$5.14

$5.92

$6.80

$7.82

Starting the growth calculation from the ttmfigure of $3.89, the EPS calculation is:$3.89 x 1.15 x 1.15 x 1.15 x 1.15 x 1.15 = $7.82

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$7.82

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YOUR NEXT JUDGMENTS ARE TO SELECT THE AVERAGE HIGH AND AVERAGE LOW P/E

VALUES FIVE YEARS FROM NOW.

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• P/E is a ratio or fraction

• P/E is calculated by dividing the stock price per share by the earnings per share

P/E

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• P/E is the price investors are willing to pay for $1 worth of earnings

• P/E helps investors determine how stocks are valued by the market, independent of the stock price per share

P/E28

COMPARE THE STOCK PRICE AND P/E VALUES

Price data as of 1/22/2014

TICKER PRICE P/EAAPL $551.87 13.9

AMZN $404.87 1,466.0

GOOG $1,165.02 31.7

NFLX $333.73 279.3

PCLN $1,213.30 35.0

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Review the P/E History

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P/E x EARNINGS = PRICE

FROM FRONT!

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YOUR JUDGMENTS AFFECT THE SSG

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AGAIN: P/E X EARNINGS = PRICE

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You have CHOICES for the fifth judgment - LOW PRICE.

As beginners, we urge you to choose choice (a). If choice (a) gives you an unreasonable low price, rethink your Average Low P/E judgment.

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A reasonable low price choice should be 15-20% or more

below the current price.

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Stocks that pay a dividend have a payout ratio.

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Whole Pie = 100% of company earnings

EPS paid out as dividend

(payout ratio 30%)

EPS retained to grow the company (70%)

Payout Ratio

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THE LAST JUDGMENT

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THE LAST JUDGMENT

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FROM DIVIDEND

FROM STOCK PRICE

APPRECIATION

ASSUMES SALE IS MADE AT HIGH P/E

PROJECTION

CALCULATING TOTAL RETURN

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ADDING JUDGMENT SERIES• Present and explain the use of

standard sources• Demonstrate one method for

collecting and organizing data• Further explain and refine the

judgment process on the Stock Selection Guide

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ADDING JUDGMENT SERIES• Research and YOUR Stock

Selection Guide (FREE)• Adding Judgment 5-Class Series

– All class sessions are recorded and may be accessed for 120 days

– For more information visit www.BetterInvesting.org/AJ

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THINK

READ

ANALYZE

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Questions or Comments?

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BetterInvesting Class Overview

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