ssg – sections 3, 4, & 5
DESCRIPTION
SSG – Sections 3, 4, & 5. Looking for Value. Recap of Section 1:. Reasonable insider & institutional ownership; Reasonable debt: Preferably under 33%; Double-digit growth in the most recent rolling 4 quarter review; Clean railroad tracks on Visual Analysis; - PowerPoint PPT PresentationTRANSCRIPT
SSG – Sections 3, 4, & 5
Looking for Value
Recap of Section 1:
Reasonable insider & institutional ownership; Reasonable debt: Preferably under 33%; Double-digit growth in the most recent rolling
4 quarter review; Clean railroad tracks on Visual Analysis; Double-digit historical growth (look for 15%); Estimate sales and earnings no greater than
20%.
Recap of Section 2:
Pre-Tax Profit stable or increasing;
Higher than industry and competition;
Preferably 15% or more.
Return on Equity stable or increasing;
Preferably 15% or more.
Recap of Quality Issues
If the company does not pass the
Quality Issues…do not move on to
Sections 3, 4, & 5.
Bad-Quality companies look great
on the Value Issues!
On to Value!
Section 3 – P/Es and Outliers
First, removeany outliers thatdon’t seem to fit the pattern.
Can you find them in this grid?
Section 3 (cont.)
Notice the changein the average high and low P/Es whenwe remove the outliers.
Section 3 (cont.)
Compare the new average P/Es to the 5-year average and the current P/Es.
Section 3 (cont.)
Now check your estimates on the front of the SSG.
Are your P/Es realistic?What is the PEG?
It shouldn’t exceed 1.5x your 5-year EPS estimate.
Section 3 (cont.)
What if the High P/Es looks like this?
Ellis says cap the high P/E at 1.5x thePEG, but never morethan 30.
Section 3 (cont.)
And what about the lowP/E?
The 5-year average low, or the lowest in the last 5 years, will be your best choices.
Section 4 – High Price
In this visual, we’ve capped the high P/E at30 and multiplied it times our estimated future EPS from Section 1. This gives usour high price.
Section 4 – Low Price
Toolkit uses the last full year’s EPS to calculate the low price.
But some prefer to use the next 4 quarters EPS since we “are” looking into the future.
Section 4 – Low Price (cont.)
Section 4 – Low Price (cont.)
Here are our options
There are many differing opinions on the selection of low price…
…but Ellis says to be mindful of your selected P/Es and earnings, then choose Option #1.
Section 4 - Zoning
Toolkit automatically figures the zones, which we have set to 25/50/25.
Section 4 – Understanding Zoning
Sell
Maybe
Buy 1/3
1/3
1/3
P oten tia l H igh P rice$100
P oten tia l Low P rice$10
T op o f B uy$40
T op o f M aybe$70
1/4
1/4
1/4
1/4
3 :1 U ps ide -D ow ns ide R a tio$30
Section 4 – Relative Value
Once you have found a “buy”, always checkthe Relative Value. We’re looking for 85-110%.
Section 4 – Relative Value (cont.)
Relative Value: Current P/E divided by Signature P/E
Tells us whether we missed something when we addressed the “quality” issues.
Lets us know if the price is unusually highor low. A call to investigate.
Section 5 – The Final Section
Section 5 gives us the results of our efforts;• Total annual return, and• Compounded annual return.
Section 5 (cont.)
Total annual returnis our estimated growth divided over5 years. Without thepower of compound-ing, we need 20% to double our moneyevery 5 years.
Section 5 (cont.)
And on the otherside, we have ourcompounded return.
Here, we only need15% to double our money every 5 years.
These are best-case scenarios!
Section 5 (cont.)
But also noticethe ProjectedAnnual Return.This is our select-ed EPS x the average P/E—a more conservative compounded figure.
This is an option you must select from yourPreferences Tab in Toolkit.
Summary of Sections 3, 4 & 5
Either eliminate outliers or cap your high P/E at a PEG of 1.5, not to exceed 30.
Use the average 5-year low P/E, or the lowest P/E in the most recent 5 year period.
Consider using the forward 4 quarters for your estimated low price.
For growth stocks, use Option #1 for low price.
Summary of Sections 3, 4 & 5
Always set the zoning for 25/50/25 to ensure we have a true 3:1 upside ratio.
Look for a Relative Value between 85 & 110. And look for an compounded rate of return of
at least 15%, which will double our money every 5 years.
(See the handout for more specifics)
The End