SSG

1
SSG Sections 3, 4, 5

• Looking for Value

2
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.

3
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.

4
Recap of Quality Issues

• If the company does not pass the
• Quality Issuesdo not move on to
• Sections 3, 4, 5.
• Bad-Quality companies look great
• on the Value Issues!

5
On to Value!
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Section 3 P/Es and Outliers
First, remove any outliers that dont seem to
fit the pattern. Can you find them in this
grid?
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Section 3 (cont.)
Notice the change in the average high and low
P/Es when we remove the outliers.
8
Section 3 (cont.)
Compare the new average P/Es to the 5-year
average and the current P/Es.
9
Section 3 (cont.)
Now check your estimates on the front of the
SSG. Are your P/Es realistic? What is the
PEG? It shouldnt exceed 1.5x your 5-year EPS
estimate.
10
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.
11
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.
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Section 4 High Price
In this visual, weve capped the high P/E at 30
and multiplied it times our estimated future EPS
from Section 1. This gives us our high price.
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Section 4 Low Price
Toolkit uses the last full years EPS to
calculate the low price.
14
Section 4 Low Price (cont.)
But some prefer to use the next 4 quarters EPS
since we are looking into the future.
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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.
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Section 4 - Zoning
Toolkit automatically figures the zones, which we
have set to 25/50/25.
17
Section 4 Understanding Zoning
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Section 4 Relative Value
Once you have found a buy, always check the
Relative Value. Were looking for 85-110.
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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.

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Section 5 The Final Section

• Section 5 gives us the results of our efforts
• Total annual return, and
• Compounded annual return.

21
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.
22
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!
23
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.
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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.

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Summary of Sections 3, 4 5

• Always set the zoning for 25/50/25 to ensure we
  have a true 31 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)

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The End