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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;
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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!
Section 3 – P/Es and Outliers First, remove any outliers that don’t seem to fit the pattern. Can you find them in this grid?
Section 3 (cont.) Notice the change in the average high and low P/Es when we 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 the PEG, but never more than 30.
Section 3 (cont.) And what about the low P/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 at 30 and multiplied it times our estimated future EPS from Section 1. This gives us our high price.
Section 4 – Low Price Toolkit uses the last full year’s EPS to calculate the low price.
Section 4 – Low Price (cont.) But some prefer to use the next 4 quarters EPS since we “are” looking into the future.
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 – Relative Value Once you have found a “buy”, always check the 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 high or 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 return is our estimated growth divided over 5 years. Without the power of compound- ing, we need 20% to double our money every 5 years.
Section 5 (cont.) And on the other side, we have our compounded return. Here, we only need 15% to double our money every 5 years. These are best-case scenarios!
Section 5 (cont.) But also notice the Projected Annual 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 your Preferences 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)
