Starting and Running a Profitable Investment Club

 

Chapter 13

 

Portfolio Evaluation Review Technique

What is PERT? It stands for Portfolio Evaluation Review Technique. It’s a method for systematically following up on stocks and a portfolio in terms of fundamentals. These fundamentals are the same ones that are used in the NAIC Stock Selection Guide like earnings-per-share growth, pre-tax profit growth, pre-tax profit margin, tax rate, current P/E ratio etc. PERT is an organized way of verifying that the company you have invested in is meeting the goals that the Stock Selection Guide indicated. PERT like any of the other NAIC stock study tools is recommended to be familiar with the manual version. The NAIC stock study tools are intended for stocks that the investor seeks to double in value in five years. They are an aid to judgment, but not a substitute.

 

Why PERT? The expected future growth rate of a company that can be financed from internal sources of apital is shown by this formula:

% Return on Equity X (1-Dividend Payout Ratio) = limit on growth rate

Also, other factors are used such as amount of debt being used, the number of shares outstanding, and the amount of competition the company faces in manufacturing and/or selling its products and services. The calculation of these items can be expressed in the following calculation (%ROE- % return on equity)

%ROE = Pre-Tax Profits X (1- Tax Rate)/Sales X Sales/Assets X Assets/Equity X 100

Where:

            Pre-Tax Profits X (1- Tax Rate) = Net Profit Margin

                        Sales                                                                

 

                                    Sales = Asset Turnover

                                    Assets

 

                                                Assets = Balance Sheet Leverage

                                                Equity

 

Net profit margin is the amount of profit generated for every dollar of sales, this is the most important component of profitability for any company. Net Profit margin is based on the amount of pre-tax income a company can generate from doing business, which includes producing products and services that are in demand and can be sold at a competitive price, as well as how well a company can manage and control its costs. Asset turnover is the amount of sales generated for every dollar of assets. The greater the turnover, the greater the profit contribution from this component of ROE. Balance sheet leverage is how much a company is using borrowed funds and other liabilities to help support its business and operations. The more debt that is used, the bigger the company can get in terms of total assets and the greater the contribution to profitability from this component of ROE. The greater the use of balance sheet leverage, the greater the risk a company is assuming in order to achieve a given level or ROE. The future price action of a stock, in the long term is primarily dependent on two factors: earnings per share and price/earnings ratios.

 

PERT Worksheet A is a systematic method of collecting quarterly operating data about a company. The quarterly data to be used in the sheet are earnings per share, pre-tax profit, and sales. Also, there must be a computation of the earnings per share, pre-tax profit, and sales for the same quarter a year ago.

 

Interpretation of Data

There are three ways of looking at the data:

a)      Involves examining the calculations and trend of data

b)     To chart the twelve month’s trailing data on a Stock Selection Guide and examine the actual results and trends compared to expectations at the time you bought the stock.

c)      The PERT report, including PERT Worksheet A and B.

There are two fundamental factors drive the price of a stock up and down

a)      growth of lack of growth of earnings per share

b)     price/earnings ratio

PERT Worksheet A with the calculation of growth and percent profit margin is one of the tools to use to aid your decision if the idea of adding more shares to the portfolio of stocks of companies already in the portfolio.

For PERT Worksheet B you also need the fiscal year price range. A source where you can find the information needed can be the company’s annual reports.

PERT is an accurate way to keep track of the fundamental performance of the stocks in your portfolio. It supplements the SSG. It also helps your portfolio management efforts to verify growth, profitability, and value of a stock. As you may have seen PERT needs many calculations to be done, so there are two computer programs available to help create them. Once is called STB Stock Analyst and the other one it is included in the Investor’s Toolkit Complete.