Chapter 8

 

The NAIC Stock Selection Guide and Report:

 

The objective of the stock selection guide is to help us find a company with a record of growth; it is growing sales and earnings per share that make a company increase in value and make its stock price go up. If a company meets our growth objective, we next look at its pre-tax profit margin and earnings on equity. We compare these figures with those of its competitors and the standards of the industry. We want a company for which these figures are in the top half of its industry. If a company meets these tests, we check to see whether we can buy it at a favorable price, if not than we must postpone action. Completion of a Stock Selection Guide in one form or another, should be performed for every prospective purchase. The Guide allows you to use the past as a basis for estimating the progress of a company and the price of its stock; the guide is really a judge of management.

 

Recording information on the guide:

The graph in Section 1 of the Stock Selection Guide is a ration chart or a semi-logarithmic graph. The horizontal scale is in familiar arithmetic proportion; it is used to show time. The vertical scale is based on logarithms (equal vertical distances that represent equal percentage changes; regardless of absolute values, it is designed to show compound growth rates.

The five vertical time lines on the right side of the heavier line of the graph are reserved for projecting results five years into the future.

The guide was designed to analyze the figures of manufacturing, sales, and similar businesses. Banks, insurance firms, and utility companies have different names for their key operating figures. The guide can be used for these companies also, but you must use the figures that are pertinent for those types of companies.

 

Plotting the figures:

• The heading is self-explanatory.
• Some of the information to fill in the capitalization block is provided under the heading “capital structure” on the left side of the value line report.
• If a company has common stock of 87% of capital that means debt is 13%.
• The Value line “Business” paragraph shows what percentage of the total stock is owned by insiders.
• The “institutional Decisions” box on the value line shows the number of shares owned by institutions, divide by the total for percentage.

• The quarterly figures called for in the space at the upper left of the graph in the stock selection guide are found at the lower left of the value line report.

• The percentage change is calculated by subtracting the previous quarter value from the current quarter value, dividing that difference by the previous quarter, and multiplying by 100.
• The first figures we record on the semilog graph are the sales for the past ten years. If the sales figure grew by one digit in the past ten years we will need to use two cycles of the graph.
• Number the lines in the bottom cycle from 1 to 10 billion and lines in the second cycle from 10 to 100 billion.
• Plot the latest year’s figures on the heavy line, the sixth vertical line from the right side.
• After plotting all years connect the dots.
• To get a better picture of historical growth rate, we draw a trend line over our plotted data.

·       We must finally compare the trend line with the trend lines drawn on the graph in order to find our percent growth.

·       Next we record earnings per share on the graph, much like we recorded sales.

·       The final step in completing the graph is to record the high and low prices for each rear on the vertical year line.