Were trying to get a handle on the expected dividends over the next five years. Some estimates are made in determining this number; however, these approximations err on the side of caution—the actual return is more likely to be higher rather than lower.
First of all, we know the average payout for the past five years—it’s 6.3%. That is on average during the past five years, 6.3¢ out of every dollar of net income was paid to shareholders in the form of a dividend. We assume that this payout ratio will be sustained in the future.
One of the assumptions used through this analysis is that earnings will increase steadily. We have assumed that within five years, earnings will grow from $1.06 per share to an EPS of $2.37. This change corresponds to an annual compound growth rate of 17.4%. (We used the preferred method to calculate earnings growth rate.) If earnings are increasing and the payout ratio remains the same, the dividend should increase too. Based on this assumption, we calculate a new dividend yield—based upon the current stock price: the price that prevails on the day of the analysis. Here’s how it’s done.
First of all, we want to calculate the average EPS over the next five years. Two ways to do this will be illustrated. The first, based upon approximations of growth stated earlier, is more precise. The second is a straightforward, though surprisingly accurate estimate.
In the first method, we calculate the earnings for each of the next five years, then calculate the average. Those earnings are
1999 | | | | | 1.06 | x | 1.174 | = | 1.244 | | | |
2000 | | | | | 1.244 | x | 1.174 | = | 1.461 | | | |
2001 | | | | | 1.461 | x | 1.174 | = | 1.715 | | | |
2002 | | | | | 1.715 | x | 1.174 | = | 2.014 | | | |
2003 | | | | | 2.014 | x | 1.174 | = | 2.364 | | | |
2004 | | | | | 2.364 | | | | | | | |
| | | | 5 | 8.798 | | | | | | | |
| | | | | $1.76 | | | | | | | |
The earnings of each succeeding year are assumed to be 17.4% greater that that of the preceding year. The calculations are carried out above. The earnings per share found in the box are for each of the years listed on the left hand side of the table above. These earnings are summed together to give $8.798, and the average is taken by dividing by five. The average is $1.76.
A quick (and clean!) alternative for this calculation is to calculate the earnings in year three and regard this as being the average of the next five years. It’s close enough. In the calculation above that’s taken from the completed SSG, this alternative method is used. The value of $1.72 is taken as the average for the next five years.
With an average payout ratio of 6.2% and average earnings for the next five years of $1.72, the average dividend is the product:
$1.72 x 0.062 = 0.1066 ~ $0.107
Next we calculate the dividend yield for these earnings, based upon the “present price” in the SSG analysis
The calculation in the SSG example above breaks the rule I have been harping on—it uses a percentage in a mathematical calculation! However, there are two steps, in the first something is transferred from a percentage into a decimal, in the second the result is a decimal that’s converted into a percentage. The SSG doesn’t bother to do any conversions in this calculation, since one cancels out the other—so to speak! The average dividend yield over the next five years is 1.2%. So in the next five years, we expect that about 1.2% of earnings will be paid out to shareholders in the form of a dividend.
Now why use today’s price when we hope the price will go up in the future. If the price goes up, the dividend yield will fall. Well, if we’re going to buy this company, we will purchase it at or around $9.00 per share. If we get this price, the dividend yield on our purchase price should average around 1.2% over the next five years.
C. Estimated compound annual return
We have a handle on the dividend yield, and we have an estimate of the capital gain. If we put these two things together, we can calculate a compound annual return for this purchase.
The diagram for 5C from the Toolkit SSG is below. However, I am going to refer to the paper copy which should be in the appendices.
In section 4E of the SSG, the five year appreciation was calculated. This number is 421.1%. A simple average is taken to get the annual appreciation. Dividing the five year appreciation by five gives 84.2%.
The average dividend yield was determined in the last paragraph, 5B, to be 1.2%. These two numbers are added together to give a composite annual return over the next five years of 85.4%.
We have calculated simple averages above, not the compound average. The fact is that there is interest on interest—compounding. This compound effect has not been taken into consideration.
The table in the paper SSG has a scale for taking a simple interest rate (in the rate of 2 to 40%) and converting it into a compound rate. Our number is off-scale, a fact that will be discussed later. It turns out that the simple rate of 85.4% translates into a compound rate of 39% per year.
A word on simple versus compound rates
Let me reproduce the table developed earlier to show the increase in EPS over the next five years.
1999 | | | | | 1.06 | x | 1.174 | = | 1.244 | | | |
2000 | | | | | 1.244 | x | 1.174 | = | 1.461 | | | |
2001 | | | | | 1.461 | x | 1.174 | = | 1.715 | | | |
2002 | | | | | 1.715 | x | 1.174 | = | 2.014 | | | |
2003 | | | | | 2.014 | x | 1.174 | = | 2.364 | | | |
2004 | | | | | 2.364 | | | | | | | |
| | | | 5 | 8.798 | | | | | | | |
| | | | | $1.76 | | | | | | | |
You’ll find this table a few pages back. The table shows that if you increase an EPS value of $1.06 at a rate of 17.4% every year for five years, you arrive at a value of $2.36.
In the calculation in section 4E, we had an initial price of $9.00 and a five year high price of $46.9. It was determined that $46.9 was 421.1% greater than $9.00. In section 5C, this percentage difference was divided up 5 to give an annual rate. This annual rate was 84.2%.
Let’s follow this reasoning for the table above. We start off with an EPS value today of $1.06 and in five years end up with a value of $2.36. So, what’s the percentage difference between $1.06 and $2.36? Following the reasoning in 4E we get
We have determined that $2.36 is 123% larger than $1.06. In 5C, to calculate what annual increase in the value of $1.06 is needed to arrive at $2.36 in five years, you divided the total percentage increase by 5 to get
This we know to be wrong. We know that the answer is 17.4% a year, because that’s what we used to get to $2.36 in the first place. The reason for this difference is that 24.6% gives the simple interest; 17.4% is the compound rate. When we increase $1.06 by 17.4%, the next year we increase $1.06 again and the interest accumulated the first time. Using a compound rate, you determine the effect of getting interest on interest.
Let me show you how the simple interest rate works. The simple interest rate assumes that the principal amount gets interest, nothing else. So, the $1.06 gets 24.6% interest in the first year—that’s $0.261. In the second year, the interest is again $0.261—it’s that amount in the third, fourth and fifth. In other words, the total interest becomes
5 x $0.261 = $1.304
So the total return is the interest ($1.304) plus the principal
$1.304 + 1.06 = $2.36
Let me revisit what’s going on here. At the end of the first year, you have $1.06 which has earned interest of $0.261. So you have a total of $1.32. In the second year, you get interest on the original $1.06—not the $1.32 which you have accumulated.
In the case of compound interest (the compound rate is 17.4%), $1.06 becomes $1.24 in year 2 ($1.06 x 1.174). In year two, the entire sum of $1.24 grows by an additional 17.4%—not just the original amount of $1.06.
In simple interest, you calculate interest on the initial investment. With compound interest, the interest is calculated both on the initial investment and any interest accumulated from previous years.
How does one apply the results of the SSG analysis?
It depends. It depends on a number of factors. If you’re thinking in terms of a one time purchase of the company, that’s one thing. If you are a regular investor who participates in a DRIP and likes to send a check each month, that’s another. It depends too on your time horizon. So in this section, all three scenarios will be discussed.
The Stock Selection Guide breaks down into two major divisions. The first divisions is made up of sections 1 and 2; the other division contains the remaining three sections. Complemented with the SCG, the first section answers the question of whether you should buy the company. The second division tells you when.
Sections 1 and 2 combined make a statement about the quality of a company and its management. If the company has
1. Stable growth in sales
2. Stable growth in EPS
3. Stable pretax profit on sales
4. Stable ROE
You’re looking at a quality company. A company that knows how to adapt successfully to its external environment and make revenues grow steadily. It knows its customers and how to market to new ones. It has control of its internal environment—expenses are stable as evidenced by the behavior in EPS and pretax profit. If the SCG (studied next) tells you that the company under scrutiny does these things better than competitors, then you’ve got a quality company.
Sections 3 to 5 tell you if the price that the market is asking you to pay for the company is reasonable. Your risks in purchasing the company are quantified.
The Stock Selection Guide can be viewed as a risk management tool. Whenever you have choices, the NAIC supports consideration of the more conservative option. This tool is very demanding of companies, potentially rejecting dozens before a successful one is identified. When used appropriately, the SSG is tough on things that look suspicious: if growth rates are too fast or PE ratios too high, the company could well be rejected. When applying the SSG, the analyst runs the risk of rejecting a solid, leading company in a rapidly emerging industry. However, the approach is almost certain to reject the many fad companies that are found in such industries. If the SSG appears to be tough on some good growth companies, let me assure you it’s absolutely devastating on bad ones!
There are a couple of other points about leading companies in an industry. The company will likely have superior, more sustainable and often more predictable growth; however, it might also trade at a slightly higher PE in comparison to its peers. If something is superior, you’re asked to pay a little more for it. The leading company is often able to achieve its superior performance using less debt (as a percent of total capitalization) than its peers.
While the SSG is a very demanding tool, if properly applied it can be used to identify those stalwarts, those solid growers, that make a solid investment for many years to come.
I am making a one-time purchase
The criteria discussed above are appropriate in this (and other) cases. The goal is to identify a good company. The choice cannot really be made until the Stock Comparison Guide is completed. The SCG will be discussed in a moment. However, one important point is price. If an investor is buying a company with the idea of holding it and benefiting from capital gains and dividends—to a greater and lessor extent, respectively—getting value for money is important.
Parts 4 and 5 of the SSG address question about price.
1. Is the current relative value 110% (1.10) or lower?
2. Does the analysis show that the investment will double in 5 years—the overall return should be 100% or better
3. Is the upside downside ratio three to one or better?
4. Is the company in the buy zone?
When making a one-time purchase—coupled with the intention of holding the equity for the long-term—price is an important consideration. The impact of the purchase price on the total return should be carefully weighed before the company is bought. If a company is trading at a high PE high above its historical PE average, risk is implied. The stock market is often prepared to teach an investor this lesson; however, it often charges a lot in tuition for the privilege!
I make regular purchases of this company
The situation in this case differs from the one above. The SSG is not a market timing tool—an aid to periodic investing when the market is depressed. It’s a tool that helps in the identification of superior companies coupled with the ability to determine when these companies are ‘on sale.’ The criteria for identifying a superior company have been discussed earlier, but here they are again:
1. Stable revenue growth at a rate higher than competitors—companies within the same industry;
2. Stable earnings per share growth at a rate higher than competitors—companies within the same industry;
3. A stable pretax profit margin; if it changes, it might increase slightly. The profit margin is almost always greater than that of its competitors;
4. A stable ROE, once again, if the ROE changes it increases slightly; the ROE is often larger than competitors; ROE and the pretax profit margin should track;
5. The company might trade at a slightly higher PE when compared to its peers;
6. The company may also capitalize its operation with a lower percentage of debt when compared to its peers.
7. If the company pays a dividend, it’s likely to be small compared to earnings. The dividend never decreases. If the dividend does decline, there better be a really, really good explanation. “The shareholders demanded a smaller dividend” would be such an explanation!
The company could grow both organically (from internally derived funds) and through acquisition. When you scan across the Value Line report for the company, the cash flow per share tracks EPS. The company often has a clearly stated mission that it follows with machine-like efficiency. The company often stands head and shoulders above its competitors. It may also have a different approach to the market. When it’s a small (but growing) company, the larger competitors may simply be dismissive. As far as the big guys are concerned, this small rival is some kind of freak upstart that doesn’t realize how business is done. If you have identified a winner, it could well make sense to make regular monthly purchase regardless of the overall market outlook.
The process of regular investing may also be referred to as dollar cost averaging. By setting aside a fixed amount each month and investing it in the stock of a company, the vagaries of the market are canceled out. The investor purchases more of a company when the price is depressed and less when the price is very high (and probably unstable!).
With investing regularly, the investor does the one thing necessary for success—spending less than he or she earns. The money that is thus saved is invested in common stock. The benefits of regular invested can be turbo-charged by investing all dividends back into the company stock.
It is important to monitor the companies that one owns. Later when we discuss the PERT, there’ll be a discussion on looking for problems in your company. However, using the SSG, you can identify when your company is on sale. The discussion that follows is not an effort to “time the market”; however, it is an effort to take advantage of temporary shortfalls the market might have in figuring out the value of a company.
Let’s say you have a portfolio of seven companies. You save $500 each month, which you invest in these companies. You regularly contribute $50 to each of these companies, but what do you do with the $150 that’s left over? If you take a look at the completed SSG, page 1, one thing that you notice is that the stock price jumps all over the place. The range from high to low in a given year can be quite dramatic. In fact, the average stock on the NYSE varies 60% between its high and low in a given year. If you look at the Value Line chart for the same company, the stock price does not often increase steadily month after month. If you complete the SSG, using Toolkit say, each month, you are provided with the relative value and the projected relative value discussed earlier. When the relative value falls below 110% (1.10)—and nothing else changes—the company is on sale. If you monitor the relative value of each of the companies you buy regularly, you might want to make any excess contributions to those companies with the lowest relative value.
The approach outlined above lets you augment regular investing while taking advantage of information offered by the SSG. It is important to realize that nothing in the fundamentals of the company should have changed. This matter will be discussed in more detail when we talk about the PERT.
I want to buy cheap and make a quick buck
Sorry, you’re in the wrong class.
The Stock Comparison Guide
The Stock Comparison Guide (SCG) tool allows the investor to compare companies in the same industry and select the firm that is superior to the rest. It’s important to compare apples with apples. McDonald’s does not compete with Wal-Mart, or Continental Airlines, or the Home Depot. Marketing strategies adopted by these companies should not have a direct impact on McDonald’s. The profit margins and ROE will differ; the growth rate may not be the same. So when using the Stock Comparison Guide, the stock of companies in the same or similar industries should be used. The SCG is less useful when companies from completely different industries are compared.
The SCG is a very simple tool. It’s more qualitative (touchy-feely) than quantitative (numbers driven). The SCG takes information from the Stock Selection Guide—growth rates, relative value, &c., tabulates this information, and allows the user to read across the table to see which company stands out. The line on the SSG from where the information comes is given in parentheses in the first column of the SCG.
An SCG for Clayton Homes and some other companies in the industry follows. The other companies chosen are Champion Enterprises, Fleetwood Enterprises, and Oakwood Homes. The SCG will be broken up into its various components.
The SCG breaks down into four main sections: Growth Comparisons, Management Comparisons, Price Comparisons, followed by Other Comparisons. These areas follow the SSG. Growth is obtained from section 1, the management information comes form section 2; sections 3 to 5 of the SSG provide the price comparison information for the SCG. The SCG illustrates the fact that the Stock Comparison Guide is the cornerstone of the NAIC approach to fundamental investing. Most of the information required in the SCG was already located when completing the SSG. Further, if you use a program such as Toolkit or Stock Analyst, when the information is entered to complete an SSG, it can be transferred directly into an SCG. The banner across the top of the SCG contains general information.
In the examples that follow, four companies will be examined. The initials of the person who completed the SSG from where the information comes are listed first. The date of the SCG follows.
Growth Comparisons
The growth comparisons, taken directly from the SCG, follows.
The first section compares the growth rates from section one: growth in sales and EPS. The projected values—those values determined by the person analyzing the company—are also provided. In the analysis above, Oakwood Homes appears to have had the best history—the strongest average growth in revenues and EPS. However, when we get to the category called “other comparison,” a measure of how stable these earnings have been will be provided. The diagram above is taken from Toolkit—the software program. Toolkit automatically selects the “best” result for each category. This result is then highlighted with a thick-lined box.
Based on the efforts of the person completing the SSG, Clayton Homes appears to be the leading company—it has the best projected growth rates. If the stability of the historical EPS growth of both companies is examined—the information is found in the “other comparison”—it is clear that while Oakwood has had spectacular growth, it has been erratic. On the other hand, Clayton Homes has had stable and predictable growth in EPS.
Management Comparisons
The management comparison comes directly out of section 2 of the SSG. Once again, information on each of the four companies is provided. When scanning across the completed SCG, it may sometimes be useful to have the completed SSGs for each of the companies under consideration.
There are three entries in this section of the SSG: the pretax profit margin, the ROE and the percentage of insider ownership. These factors give insight into the performance of management and their likely motivation factors.
In the comparison above, Clayton homes performs best in each of the first two categories. Although other companies might have a higher percentage in one or the other, Clayton Homes is highest in both. Currently, the PTP margin and ROE are both even—that means, that they have not deviated much from the past five year average value.
When looking at these two factors, it is probably a good idea to get a copy of the SSG and see if the pretax profit margin and ROE have been stable, and does one track the other. A falling PTP suggest competition. If the 2A and 2B do not track—follow each other through crests and troughs—it could be because the company has taken on more debt. Debt can increase the ROE. However, higher debt suggests higher interest payments, and thus lower profits. More debt affects the ROE in other ways, so using debt to boost the ROE is not sustainable.
Finally, the extent of insider ownership gives an important hint to the motivation of management—if they’re self motivated, that could be a good thing! Ideally, if management compensation is tied to the performance of the company, then management should be motivated to have the stock price as high as possible. A high stock price benefits shareholders too. Ideally, it’s good to have management fixated on the company—high percentage ownership is viewed as a positive thing. In the example above, Clayton Homes has the highest degree of insider ownership.
Price Comparisons
Price comparisons required if the stock is to be bought some time in the immediate future. This part of the SCG is taken directly form sections 3, 4 and 5 of the Stock Selection Guide. A completed SCG of this section is provided below.
In the analysis above, Oakwood Homes appears to be the winner in many of the categories from the SSG. When looking at some of the figures taken from the SSG for this company, it’s clear that the SSG needs to be examined in more detail.
Oakwood Homes is projected to have the lowest EPS over the next five years. Surprisingly, the result is a negative number. If the EPS value is projected to grow at a slow or negative rate, it’s probably not worth considering the company further. If stock price appreciation is driven by earnings, and the EPS for Oakwood appears to be faltering, it would be difficult to develop a good argument for investing in this company.
The cumulative EPS for Fleetwood is higher than that of Clayton Homes; however, until we find out the cost of those earnings—the PE ratio, no meaningful comparison can be made.
The five-year high/low stock price range is given next. The result for Oakwood is quite astounding. The range is extremely broad. If the current price for this company were near the high of this range, a positive conclusion could be drawn. However, as we will see, this situation does not prevail. The fact there is a slow down in earnings is reflected in the stock price.
Finally, the present price of the stock is provided. Something is up with this industry—clearly. Every company is currently trading near the low end of the range for the past five years. Oakwood homes—with a slow down in earnings—is trading close to the bottom of its five-year range. Further, the range is quite broad; the stock price is off over 92% from its five-year high.
The PE ratio for the past five years is given. The average high and low are listed together with the highest and the lowest PE ratio. The current PE ratio is then listed. This information allows you to see how far the PE ratio deviates from its average—it’s a measure of stock price volatility. Keep in mind, volatility is not necessarily a bad thing! The other thing to keep in mind is that the stock market often reacts to rumors. If the stock surge temporarily for any reason during the past five years, the PE could hit a high never again to be revisited. Similarly, temporary bad news can drive a price down—the PE follows. It could be a short term or other extraordinary phenomenon that is nonetheless part of the PE history of the company.
The PE information shows that Oakwood Homes (the poor earnings machine) has had the highest and lowest historical PE ratios. It currently has a negative PE ratio due to the fact that it recently reported a loss.
The next section lists the projected price range, the current price, the upside/downside ratio and the current yield. The projected average return is also give on list 23.
Comparing lines 10 and 17 show that the current price in all cases is near the low point of the projected range. This fact supports the idea that something is happening in this industry—perhaps a shake out. Clearly, further investigation is required before investing in any of these companies. The current price is in the buy zone of each of the four companies as indicated on line 20.
All companies—with the exception of Champion—have an upside/downside ratio that’s much higher than 3:1. Generally, if the upside/downside gets too high—maybe greater than 7 or 8 to 1—it suggests that something else is going on. So far the SCG has indicated two reasons to investigate this industry further—there could be problems. The current price is near the projected low and the upside/downside ratio, in many cases, is extremely high.
Clayton Homes has the highest projected yield. The yield for Oakwood is actually negative—zero; for some reason, this fact is not reflected in the SCG shown above.
Other comparisons
The other factors considered next include the number of shares outstanding and potential dilution. The payout ratio is also considered. Lines 27 and 28 allow the analyst to take any other useful information from the SSG. In this example the stability of past earnings was selected as well as the projected relative value. Finally, the SSG completion date and analysts initials are provided.
The number of shares could be used to figure out the overall market capitalization. New, smaller companies tend to be more vulnerable—in the short term—compared to larger, well-capitalized companies. Larger companies can weather storms in the markets that swamp smaller businesses.
While small companies often have rapid growth, they have a lot of risk. Large cap companies on the other hand are often characterized by slower growth but much less risk. It’s interesting that very often mid-cap companies have risk that is similar to that of large cap, but with growth reminiscent of small cap. Very often mid cap companies have many years of growth ahead of them.
The payout ratio is another important measure of the company’s prospects. If the company appears to have a solid future, management will probably anticipate growth. For that reason, earnings will be retained rather than paid out in dividends. These retained earnings can help grow the company even further. Companies that pay out a high percentage of their earnings in the form of a dividend are, in essence, saying to the shareholder “we can’t think of anything to do with this money, you have it.” The company has already paid taxes on these dividends, now the shareholders have to pay taxes all over again. Many companies are using internal funds (cash flow) to buy back shares. With fewer shares outstanding, the EPS value would increase. It would be interesting to have a line in the SCG that would provide information on the share buy-back policy of the companies under consideration.
The two additional factors selected in the “other comparisons” section are (27) earnings stability and (28) projected relative value. Projected relative value has been discussed already. Champion has the highest projected RV; however, the first three companies are all pretty close. Oakwood has projected negative earnings, so the projected RV is less than zero—a negative number.
Earnings stability is a useful tool. The Toolkit program looks at reported EPS for the past ten years then develops a statistic to signal how predictable those earnings are. A result of 100% means perfectly predictable; 0% would mean completely random. Clayton Homes has had the most predictable historical earnings.
This statistic is calculated as follows. A growth rate for the EPS is first determined. We showed a number of ways that this rate could be calculated when section of the SSG was investigated. Using programs such as Toolkit, a straight line is calculated that most closely approximates the trend in the EPS. This straight line is drawn on the graph—it could be physically drawn on the screen or drawn somewhere in the “computer’s mind.” The distance of every reported EPS value to his line is calculated. If this distance is zero, then the EPS value reported by the company sits right on the line. If all ten data points sit on the line, you’ve got a perfect fit: the numbers are 100% associated with the line. The statistic, r², gives this measure. Anything with an r² greater than about 95% means that the numbers are pretty close to the fitted line—it’s a good fit. Anything less than 90% is not a good fit; as the r² value gets smaller than 90%, the fit gets worse and worse. This r² value is a good way to show stability in the past. If nothing else changes, it is probably reasonable to expect equivalent stability in the future.
Selecting a company using the SCG
The analysis of pricing information is appropriate if you are interested in making a single purchase of a company in this industry. If you are part of a DRIP or make regular purchases, then the pricing information, while important, is not as critical. In both cases, an NAIC investor looks for a growth company that’s well managed. The criteria for spotting a superior company, discussed earlier, should be determined.
The criteria for spotting a leading company have been discussed already. Suffice it to say that for those who buy regularly, the information contained in the growth and management comparisons are essential.
One issue that may not be apparent is that, even though the companies appear the same, they are almost always never identical. For example, in the manufactured housing market, one company may have a greater part of its business in financing. Another company may not even manufacture at all, but could be just a marketing body representing many different suppliers. These differences in business activities can result in differences in profit margins and growth rates. However, even if companies are not identical, the fact that they compete in the same market is the key criterion. The leading company has adopted the best business model, and this fact is reflected in higher margins and growth rates.
The example provided in this chapter helps to point to an important activity that must be done before purchasing a company—some fundamental analysis. Ideally, the analyst should, at a minimum, critically read the Value Line report and have access to the annual reports of the all companies in the SCG analysis. Reading the letters to the shareholder can give insight to the strategy of management. If there are problems within the industry, it is interesting to read how the different management teams (i) perceive the problems and (ii) address those problems. One excellent source of information is an analysts report. Organizations such as Merrill Lynch, Goldman Sachs, &c. have professional analysts who studied industries and companies in detail. These reports present a wealth of information and can help you better understand the structure and prospects of an industry. If you call the investor relations department of the company you’re studying and ask them for a copy of some recent analysts reports, you might be lucky—they might mail them to you!
Review
We covered a lot of ground in this chapter. We finished off the stock selection guide and the stock comparison guide. The projected price range was computed and risk of investing assessed. We calculated the overall return we should expect from dividends and price appreciation. We then challenged our company against others with which it competes and tried to determine which of them is best.
Questions
1 Section four of the SSG calculates
(a) EPS growth rates
(b) Future stock prices
(c) Total return
(d) The role of management
(e) None of the above
2 The five year high price is calculated with
(a) EPS growth rate
(b) The return on equity
(c) Dividend yield
(d) Payout ratio
(e) Low PE
3 If the high PE is 20 and the EPS is $2, the high price will be
(a) $10.00
(b) Depends on payout ratio
(c) $18.00
(d) $40.00
(e) $22.00
4. If the low EPS is $1 and the low PE ratio is 10, what is the low share price?
(a) $10.00
(b) $9.00
(c) $11.00
(d) $1.00
(e) None of the above
5. When investing for income, the
(a) PE ratio is most important
(b) The GTC is most important
(c) The dividend is most important
(d) All of the above
(e) None of the above
6. The dividend yield is calculated using
(a) the PE ratio and PEG
(b) stock price and high yield
(c) dividend and stock price
(d) high and low stock price
(e) payout ratio and stock price
7. When selecting a low price from the four options you should
(a) always average
(b) take the weighted average
(c) take a ten year average
(d) use a moving average
(e) never average
8. The low price should always be
(a) equal to the PE ratio
(b) higher than the high price
(c) lower than the current price
(d) higher than the current price
(e) both (a) and (d)
9. Zoning does which of the following:
(a) identifies the industry
(b) shows the range of PE
(c) shows the high/low stock price range
(d) all of the above
(e) none of the above
10. If a stock price ends up in the sell zone you’re being told to
(a) wait for a month
(b) always sell
(c) buy more
(d) sell half your shares
(e) none of the above
11. Relative value is calculated using
(a) the payout ratio and EPS
(b) the current and historical PE ratio
(c) the current PE and price
(d) the dividend and the price
(e) the dividend and the PE ratio
12. The upside/downside ratio is a measure of
(a) risk
(b) PE expansion
(c) EPS growth
(d) sales growth
(e) none of the above
13. In the Stock Comparison Guide, you should use companies
(a) in completely different industries
(b) that are cyclical
(c) in the same industry
(d) that have hit a recent high
(e) that have hit a recent low
14. In the Stock Comparison Guide there are
(a) growth comparisons
(b) price comparisons
(c) management comparisons
(d) other comparisons
(e) all of the above
15. The Stock Comparison Guide uses information from
(a) the Stock Selection Guide
(b) the Portfolio Management Guide
(c) the PERT
(d) PERT-B
(e) all of the above
16. If the projected low price is $10, the EPS is $2.50 and the PE is 12, what is the top of the hold zone?
(a) $10.00
(b) $16.67
(c) $23.33
(d) 30.00
(e) None of the above
17. If the top of the buy zone is $63 and the bottom of the hold zone is $45, what’s the low price?
(a) $36.00
(b) $45.00
(c) $63.00
(d) $54.00
(e) $1.40
18. For an investment to double in value within five years, the compound annual return should be around
(a) 8%
(b) 10%
(c) 12%
(d) 13%
(e) 15%
19. If the share price of a company is $20 and it doesn’t pay a dividend, what’s the dividend yield?
(a) 0.05
(b) 5%
(c) 0%
(d) 100%
(e) none of the above
20. For a good growth company, the projected relative value should be
(a) greater than the current relative value
(b) equal to the current relative value
(c) less than the current relative value
(d) equal to the dividend yield
(e) none of the above
