Chapter 7: The Stock Checklist

 

 

What is the SCL?

 

v    History Tool

 

v    Price Tool - Too high or good buy

 

v    Not a thorough analysis

Ø    Do not use with companies with deficits (d) or cylindricals

 

v    Use both SCL for 3 months, SCL & SSG for 6 months then SSG only

 

 

Interpretation

 

v    Earnings and Sales growth - Should the company perform in the next 5 years?

Ø    In the long run earnings should not outperform sales growth

Ø    Turn in SCLs that meat or beat 14.9% or higher, (20%+ for Motley Fool)

Ø    Be cautious if price gains are higher than sales & earning gains

 

v    P/E Ratios - Is the current stock price too high, or ok to buy?

Ø    Growth companies have higher P/E's, lower P/E's can show companies on the rise

Ø    Adjusting the P/E – Use projected Value Line columns

§       Estimate the P/E using est. EPS from Value Line, and the Current Price

§       The next years' P/E is lower, adjust the P/E lower

§       Estimated P/E for current price lower than Avg. Low could be a buy zone

§       If the P/E is lower than the industry or the industry is in a down swing

 

v    Price Ranges

Ø    Avg. High P/E times Est. High EPS = High, Avg. Low P/E times Est. Low EPS = Low

§       High - Low = Range

Ø    Top 1/3 Range - sell, Middle 1/3 - hold, Bottom 1/3 - buy

Ø    Current P/E lower than 5 year high/low average = good price

Ø    P/E 1.5 times Avg. P/E = too high

 

 

Where to get data

 

v    See Money Central handout

 

v    Value Line

Ø    Sales, Revenues, etc. - Line 11 of Value Line

Ø    Earning per share - Line 3 of Value Line

Ø    See Value Line Handouts

 

v    Current Annual Report, 10-K, 10-Q

 

 

Numbers that count

 

v    Debt to Equity Ratio

Ø    Long term debt divided by share holder's equity

Ø    Lower than 20% is good

 

v    Current Ratio - Enough Cash on Hand?

Ø    Current Assets divided by Current Liabilities

Ø    Higher than 1, but not too high

 

v    Price to Sales Ratio (Motley Fool)

Ø    Market Capitalization divided by sum of last 4 Qtrs. revenues

§       Market capitalization = Shares outstanding * Current Price (+ Long Term Debt)

Ø    Lower the better, varies between industries

v    PEG Ratio (Motley Fool)

Ø    P/E divided by growth rate

Ø    Over 1.5 be cautious, .5 or lower - price looks good

 

v    Upside/Downside Ratio - Potential gain vs. loss

Ø    (High price - Current price) / (Current price - Low price) : 1

§       Less than 3:1 is unfavorable

 

 

Other types of portfolios

 

v    Foolish Four (Dow Approach)

Ø    10 Highest Dividend Yield Dow Stocks [dividend/price]

§       (yield)²/price = RP variation, rank highest to lowest

·      Invest equal amounts in #2 - 5, or weigh 2 higher than 3, 4 and 5

 

v    Rule Breaker

Ø    Top 100 timely companies (Value Line)

§       Top 10 Relative Strength (Investor's Business Daily)

·      Purchase equal amounts of top 4 or 5

 

 

 

I used the NAIC Guide, NAIC Houston Chapter class notes, Motley Fool Investment Club book, Investment Club book by Wasik, www.fool.com, www.azstarnet.com/~les/abc.htm, investorama.com, better-investing.org for my report.