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Stock Analyzers are up on site; management-related questions here
Two things: First, I did post the stock analyzers last night, but there is
one caveat -- some of the value lines I used were older than others, so some
of the stocks will have a new valueline available before the next meeting.
I put the dates of the valuelines I used in the "general page" and sometimes
I added notes from the Valueline (dated) in the notes section, also on the
Second, I mentioned the "management related questions" that are part of the
written SSG used by NAIC, of which our (or Bob King's) stock analyzer form
is but a copy. If you want to use these questions as a guide for further
research, and apply directly to reading the stock analyzer plus additional
information you can gather from other sources (They are discussed in the
book): here they are -- some are outdated, but given the rocky markets this
year, I think they still apply even during the longest economic expansion in
Goals in Selecting a stock:
You want to look ahead 5 years by judging management capapbility and
evaluating the price you should pay for a stock. You should also look at
Other considerations and reach a conclusion. Your findings are registered
in the table below, as are your conclusions:
1. Our goal is to find a company with able management and (2) to buy a
stock at a good price:
Earned on Sales
Earned on Equity
High in 5 years
Low in 5 years
Upside Downside ratio
State of Business cycle
Stock Price Trends
Quality of Stock
Capitalization and Finance
Novice and professional investors to varying degrees may act hastily on new
products, tips, technical clues and snort term factors rather than being
methodical in their decisions. Thirty years of experience with this type of
report tends to show that there is a rule of FIVE. which is: If five
companies are anlayzed for their five year future, one may have
unforeseeable trouble, three may be on target and one may have unpredictable
Conclusion: (fill in the blank based on your judgment of the "five"
companies and your knowledge of the industry derived from your research)
Method Data Instructions
This report (stock analyzer) organized data presentation in a concise
professional manner, avoiding among things the agony of deciding what
factors to cover. Because writing is a chore, the cross-out-method lets
you report your judgments with ease. The data used comes from Valueline
reports. You may wish to check your 5 year "high estimate" with Valu Line's
estimated target price range for 3 to 5 years hence. Other sources of data
are annual and quarterly reports from companies; brokers reports and visits
to company annual meetings.
1. What does the visual analysis show?
The trend of (sales) (revenues) is (up) (down) (sideways)
The trend of (earnigs per share is (up) (down) (sideways)
The price trend of the stock is (up) (down) (sideways)
If sales trend is up, the increase seems to have come from (taking a
greater share of the market) (mergers and acquisitions) (new products or new
product applications produced by reasearch.)
In my opinion, the stock should be (investigated) (discarded)
because the trend of sales is (favorable) (neutral) (unfavorable); the trend
of earnings per share is (favorable) (neutral) (unfavorable); the
price trend is (favorable) (neutral) (unfavorable).
Also for other reasons as follows (add other info you've learned, if
2. Does the company pass the three management tests?
Investors lose money because of failing to test for good management.
Instead they rely on outlook for the industry, new products or a plausible
story for protection and often lose.
Test 1. Driving force of management: Management as indicated by the past
record has the necessary ability to expand sales (yes) (no). The rate of
sales expansion on the VISUAL ANALYSIS looks like ________% annually. The
rate of sales expansion is likely to be (better) (same) (worse) in the next
Test 2. Earned on Sales: Management seems to have the ability to
(maintain) (increase) profit margins (see Evaluating Management, below) It
shows the Pre-Tax Profit Margins for each of the last five years as follows
in chronological order:
________%; ________%; ________%; ________%; ________%
Test 3: Earned on Equity The company has earned on invested capital from
________% to ________%. See 2B, Evaluating management below. Earnings on
equity are (above) (below) 10%.
I conclude from these three tests that the company has (good) (average)
(poor) management and will be (stronger) (same) (weaker) in five years.
Over a period of five years, a well-managed company will generally gain
ground while a poor one loses its earning power. Remember this in making
3. What is the price range likely to be for the next 5 years.
Commentary: Complete section 3 of the stock Analyzer. Two considerations
are important. (1) it is usually better to project sales and apply profit
margins and taxes than to project earnings per share on the chart because
profit margins tend to have definite upside limits; and (2) it is well to
pay less attention to, or discard, the much higher price-earnings ratios
existing in years of low earnings. Also, avoid being misled by sales
incrases in early years of a new product or attributable to government or
other types of contracts that may not be renewed or are due entirely to the
upswing of a business cycle.
Have price-earnings (P/E) rations for the past 5 years been trending
(downward) (level) (upward)? Is the P/E ration (higher) (same) (lower) than
its competitors? Have the average price earnings rations of the past 5
years been influenced by years when the ration was (unusually high)
Over the next five years, the stock might be expected to reach a high price
of ______ and also a low of _____ when the next depression comes. It now
sells at ____, indicating (little) (average) (great) risk. Its suggested
buy prices should range from ____ to ____, hold from _____ to _____ and sell
from ______ to _____. (quarters or thirds?)
4. How does the stock meet the three safety tests of price?
Commentary: Unsuccessful investment clubs and investors make two mistakes:
(1) selection of poorly managed companies; and (2) pay too much for stocks.
The second mistake is by far the most prevalent and most damaging, and is
easily corrected. Big losses have been taken in high grade stocks because
they were bought mainly, "because they were moving" or sold "because they
went down." Not because of price. The best results have been obtained by
investors that buy carefully.
Test 1: Shows probablility of getting out even
The stock under review has sold at its present price (________) (none) of
the last five years. The risk of loss seems (small) (average)
(considerable) at the present price on the basis of price history. (three
out of five years is a good standard)
Test 2: Stack the odds in the investors' favor.
The upside-downside ratio from the form is ______ to 1. This is (favorable)
(average) (unfavorable), indicating that we need to pay attention to past
price history (considerably) (some) (not much).
Test 3: These standards help investors avoid loss
The pay-off test is whether at least 100% appreciation is possible in five
years -- or in the case of cyclical stocks, 20% a year for the number of
years held. Analysis shows a high price of _____ is reasonable in _____
years, equal to ______% a year.
(In the case of cyclical stocks, comment should include the number of months
the cycle has advanced and the dangers on this account.)
5. What are the Investment Characteristics of the company?
The company is (well established) (new) and operates (internationally)
(nationally) (regionally). The product line or service is (diversified)
(narrow) and sold to (consumers) (manufacturers) (government) (other
__________________). The business cycle affects sales and earnings (not
much) (severely) (average). The company is (largest) (in top four) (a
smaller factor) in its industry. The company and products are (well known)
(average) (not known) to the investing public. Its common stock is listed
on (NYSE) (ASE) (NASDAQ) (Other _________) (unlisted) and has price records
covering (five years or more) (only _______ Years) It has (a continuous
dividend record dating from ________) (a spotty dividend record) (no
dividend record) Investment characteristics are (good) (average) (poor).
6. What are the characteristics of the company's major industry?
The ________________ industry is (established) (new) and has (exceptional)
(average) (below average) potential. The potential is based on (population)
(product development) (science/technology) (international expansion).
Sales, profit margins and earnings per share fluctuate with the business
cycle (widely -- like the steel industry) (narrowly -- like food) (average
-- like oil). Capital investment per dollar of sales in the industry is
(high--like chemicals) (low -- like clothing manufacture) (average-- like
metal products manufacturing), making it (easy) (difficult) for new
competition to enter the business. Price competition between companies is
(no problem) (severe) (average).
In my opinion, the major industry, everything considered, is (favorable)
(average) (unfavorable). The company being analyzed will be (aded by the
trend of the industry) or (will have to take business from competitors to
7. What about the business cycle?
Commentary: About 33 months is an average business cycle, though variations
from this norm are wide. A well managed company gains on marginal
competitors in a depression or inflation as a general rule. IN a period of
business recovery, high grade stocks advance first, second grade stocks
next, and marginal stocks last, as a general rule. Also, non-growth
cyclical stocks are good purchases when business turns up and should be sold
in the later stages of the cycle because of exposure to substantial drops in
price, earnings, and sometimes dividends.
The trend of business has been (up) (down) for _____________ months
(years?). The current stage of the business cycle tends to (help) (not
affect) (hurt) profits of the company. The present stage of the business
cycle suggests (no concern) (caution) (daring) for the stock under review.
8. What about the stock market and yields on bonds?
The price the stock is selling at is _________ and the DJI averages are at:
Industrials ________; transporation __________; and Utilities _________
(this provides a reference in case of review of this stock in the future.
>From the Valueline, it is seen that the stock under review has performed, as
compared relatively (better) (same) (below).
You may want to comment on the behavior of bond yields and TBill rates.
Yields tend to rise in the later stages of a business cycle (attracting
money from the stock market) and fall when business slows and investors want
Bond yields may (attract) (not affect) (discourage) investment in this stock