Mary Ann Davis

1
The Basics of Adding Judgment

• Presented By
• Mary Ann Davis
• Director of NAIC Computer Group

2
Patience

• Beginner to Advanced
• Manual and/or Computer
• Questions
• Stock Selected Is For Demonstration
• Not Recommendation

3
Topics To Be Covered

• Stock Selection Guide
• Visual Picture
• Trends of Stock Market
• Trends Logic Judgment
• Compare Judgment with Value Line
• Interpret the Data

4
Stock Selection Guide

• Basic Analytical Investment Tool
• Recognize Good Growth Companies
• Well Managed
• Buy At A Reasonable Price

5
SSG Software

• Toolkit 4.0.4
• Stock Analyst Plus
• NAIC Classic
• Judgment Is Required

6
Information Block
7
Debt

• Debt As Percent of Capitalization
• Look For 33 or Less
• Compare Debt With Industry

8
Projections - Consider

• Trend of Market
• Trend of Historical Growth Rates
• Trend of Recent Quarterly Data
• Company Information Guidance
• Analysts Projections

9
NAIC Guidelines

• Do Not Project Growth At A Rate Higher Than 20
• Even 15 May Be Too Optimistic
• The Earnings Growth Rate Should Usually Not Be
  Greater Than the Sales Rate

10
Recent Quarterly Data
11
Value In Value Line

• Projected Growth of Sales EPS
• Five Year Projected EPS Sales
• Five Year Projected High Price
• Compare Five Projections with VL
• Are Your Projections in the Ball Park?

12
Visual Picture

• Consistent Earnings Revenue Growth
• Recent Trend EPS, Sales Pretax Profit
• Projected Growth of Sales EPS
• Projected Sales EPS
• Check Projections with Value Line

13
VL Projected Growth Rate
14
Check Value Line Projections

• Compare Your Projections of Growth of Sales
  EPS - Pages 10 11
• Annual Rates Box
• Left side
• Fourth box up from bottom
• Sales Growth in right column
• Earnings Growth in right column

15
Annual Rates
16
Projected EPS
17
Value Line Projections

• Compare Your EPS with Value Line
• Earnings Per Share
• Top Right Under Value Line Pub
• 3rd Line Down - Earnings Per Share
• ACE, Zacks, First Call, Ibes
• Slightly Less Than VL Projection

18
Sales Projections
19
Value Line Projections

• Sales
• Top Right Under Value Line Pub, Inc.
• 11th Line Down - Sales (mill)
• Compare Your Sales Projection with Value Line

20
Visual Picture

• Consistent Upward Trends
• Trend of Recent Sales EPS
• Quarterly Earnings Above Projected Trendline
• Price Bars Moving with Trendline

21
Visual Picture

• Pretax Profit is Plotted
• What Is It Telling You?
• Greater Than Sales EPS - Good
• Same as Sales EPS - OK
• Less Than Sales EPS
• EPS Price Usually Drops

22
Evaluating Management

• 2A Percent Pretax Profit on Sales - Ratio
• Up Arrow - Good
• Management Controlling Costs
• 2B Percent Earned On Equity
• Down Arrow - Bad
• Money Earned On Equity

23
Evaluating Management
24
Evaluating Management
25
Evaluating Management

• Compare Last Two Years With Average
• Last Year Most Important
• What Is The Trend?
• Compare With Industry

26
Price-Earnings History - Sec 3

• Column A - High Price
• Column B - Low Price
• Column C - Earnings Per Share
• Increasing Each Year

27
Price Earnings History - Sec 3

• Look At Columns D E
• Are There Any Numbers Not Like The Others?
• If So, Eliminate Those Numbers
• Are Numbers Going Up Or Down?

28
Columns D and E
29
Dividends

• Steady/Increasing Dividends
• Dividends Less Than Total Earnings

30
Forecast High Price
31
Projected High Price

• Average High PE x EST High EPS
• Equals Forecast High Price
• Check Answer With Value Line
• Second Box On Top Left 2001- 03 Projections
• Price Slightly Less Than Value Line High Price

32
VL Projected High Price
33
Projected Low Price

• Select (a) For Growth Stocks
• Select (b) For Cyclical Stocks
• Select (c) For A Severe Market Low
• Select (d) For High Dividend Yield
• Compare Low Price To 52 Wk Low

34
Effects of Low Price

• Estimated Low Price Has Greatest Effect on U/D
• Higher Low Price Raises U/D Ratio
• Lower Low Price Lowers U/D Ratio
• High Price has Lesser Effect on U/D

35
Zoning

• 33-33-33 Traditional
• Top of Buy Zone Is 2.x1 U/D
• 25-50-25 Software Allows
• Top of Buy Zone Is 31 U/D
• Advantage - Know Buy Price 31 U/D

36
Upside/Downside Ratio

• Potential Gain Vs Risk of Loss
• NAIC Recommends 31
• Too High (101 or Higher) May Indicate Increased
  Risk
• Maybe Someone Knows Something You Dont!

37
Relative Value

• Current PE RV
• Five Year Average PE
• 90 - 110 RV is Acceptable
• Above 110 - Stock Overpriced
• Below 90 - Stock Undervalued

38
Review The Basics

• Check Projections with Value Line
• Trend of Market
• Persistent Upward Trends of
• Earnings Sales
• Pre-tax profit Price Bars

39
Review The Basics

• Management Trends - Up
• Relative Value , 90 - 110
• Upside/Downside Ratio, 31
• Total Return, 8 - 20

40
Summary

• SSG Is A Very Effective Tool
• Dont Force The Numbers
• Look For A Better Stock
• Keep SSG Studies Two - Three Years
• Study How To Improve Judgment

41
You Are The Analyst

• Make Judgments Based On Facts
• A Good Analyst Always Questions
• Take Credit For Your Gains
• Accept Responsibility For Your Loses

42
Invest the NAIC Way

• Mary Ann Davis
• Director, NAIC Computer Group