“Investment Modeling” Developing an Investment Model using StockPointer © and the EVA approach “A GPS in the Stock Market Jungle” .

“Investment Modeling”

Developing an Investment Model usingStockPointer© and

the EVA approach

“A GPS in the Stock Market Jungle” www.stockpointer.ca

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Our objective today StockPointer© : the kernel to our model Investment objectives Investment strategy Investment rules On-going portfolio management Appendices

– Canadian filter– American filter– Stocks in the current Model

Summary

Copyright © 2001 StockPointer©

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Our Objective today

Present the methodology used to develop a typical Investment Model allowing Investment Advisors to present a highly professional approach in portfolio development and investment management:

Comprehensive and well structuredEasy to explain and understandDemonstrates value for fee-based accountsHighly productive for IA’s

Building a trust relationship with your clients and prospects

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StockPointer

StockPointer’s EVA-based lists of top-ranked stocks have significantly outperformed the TSX over the past 6+ years

Produce economic portraits of over 6,500 Canadian and American stocks with data updated daily

Trusted and exploited by over 250 Investment Professionals across Canada

Strategic partnership with

User credentials can be found on www.stockpointer.ca

The EVA© (“Economic Value Added”) model:

Recognized concepts Emphasis on wealth creation for shareholders Highly structured and disciplined Professional image Easy to understand and appreciate by clients

and prospects

EVA© is a registered trademark of Stern Stewart & Co.

StockPointer© is based on the EVA© (“Economic Value Added”) economic performance approach

“EVA analysis is at the heart of understanding how companies create shareholder wealth. Most importantly, it helps investors measure and

understand those factors that create or destroy value.”

Steven Einhorn, Global Investment Research, Goldman Sachs & Co.

20,3% / yr

7,8% / yr

Over 6 years 10 months

S&P/TSX Index

Nov99 2000 Aug06

StockPointer Index

SPiX – Top 40 Buy/Hold – 12 Months

2001 2002 2003 2004 2005

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Objective Specific target

Targeted ROI

To outperform the S&P/TSX over a mid-term investment period. Consider Dividends even though not calculated in ROI. Consider Transaction Costs even though not calculated in ROI.

Investment Term

Objective is to adopt a Buy / Hold strategy over 12+ months unless strong indications to do otherwise To encourage stability. To create confidence.

Investment objectives

« La Bourse reflète la perception des investisseurs, et non la réalité. La réalité, c’est quelque chose qui se matérialise à long terme. »

« The stock market reflects investors’ perception and not reality. Reality is something that happens longer term. »

Stephen Jarislowsky, Affaires Plus, Mars 2006

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Investment strategy (1 of 2)

To invest only in companies that create wealth for the shareholders and are not overvalued by the market

Economic Performance Stock Price Evaluation

Identify the companies that properly manage their capital in the best interest

of their shareholders and generate a return that is higher than expected for a

similar level of risk

Wealth Creation (or EVA) becomes criteria #1

Insure that stock is not over-priced compared to the company’s

Intrinsic Value

EVA-$ = NOPAT-$ – Cost of Capital-$

= ROC-$ – COC-$

= (ROC-%-COC-%) x Capital

> 0 if and only if ROC > COC

Performance Index = ROC / COC

Intrinsic Value = NPV of future EVA’s

Performance Index > 1 0.4 < P\IV < 2.5

« Better to invest in an economically sound company at the reasonable price than invest in a poor company at a cheap price »

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Investment strategy (2 of 2)

To align the risk associated with a portfolio with the degree of tolerance that the end-customer is

comfortable with

Level of risk associated with a stock

Adjust the desired level of risk of the overall portfolio using the Future Growth Value (FGV) calculation for each of its stocks

FGV = Market Value of Company – Current Operations Value

= MV – NPV of future Profits

= or < 0 for minimum risk

FGV < Acceptable Risk level

Other risk factors include:

- Sector over-weighting compared to Top-80

- P/IV too good to be true

- Profit and EVA going in different directions

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Objective Basic Guidelines

Reduce volatility of the portfolio

Adopt a good diversification strategy along four pillars: +/- 25 stocks, size of companies, sector weighting and a good Canada/USA split Choose companies with a demonstrated economic performance over many yearsAvoid paying a premium associated with expected growth Respect a minimum sales volume ($250M in Canada and $2.5B in the US) Analyze many convergent sources of information (fundamental vs technical, tradepress, newspapers, etcAvoid the 4 major levels of risks: over-pricing, sector weighting, “to good to be true”, EPS vs EVA trends Growing Dividend over the years is always a good sign of prosperity Free Cash Flow generation is a good indication of wealth creation

Investment guidelines

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Objective Guide/Rules

Buying/Selling Rules

Use a filter to get initial list Sales over $250M in Canada and over $2.5 Billion in the USA Performance Index > 2 Return on Capital > 10% Price / Intrinsic Value < 1.5 but > 0.4 FGV < 30% Price Change (12 months) > -20% but < 25%

Get rid of any stock that is not paying dividends Get rid of any stock for which IV < Adjusted IVTry to match the SPiX 80 sector weighting; get rid of the least performant stocks that are over weighting a sector Use american stocks (or ADR’s) to compensate for weak presence of canadian economy in some sectors No stock should weight for more than 7.5% of the portfolio Objective of 10% cash should be kept in portfolio

Investment guide/rules

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Objective Guide/Rules

Keep Value

A more important annual review will put emphasis on replacing old investments that could have performed well but are now at a point where some new comers are better.The annual review is also good to make appropriate sector weighting Choose the right time to replace individual investments; not necessarily all at the same time Follow-up closely tendency changes in major StockPointer indicators such as EVA

Investment management

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StockPointer Investment

Model

Canadian stocks US stocks

US filter Canadian filter

Recommended stocks

Recommended stocks

Final selection

SPiX – Top 80Sector weighting

Investment Model

Minor Monthly reviews

Major Annual reviews

Other sources of information

Building a portfolio

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Canadian filter

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USA filter

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The resulting Model

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The resulting Model