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Stock Selection Guide


PURPOSE: The Stock Selection Guide (SSG) has two purposes.

OVERVIEW: The SSG is divided into five sections: the first two deal with the quality of the company being studied and the last three deal with value. The investor needs to determine if the current price is positioned to double its value in five years.

QUALITY OF THE COMPANY: Sections 1 and 2 of the SSG allow you to judge the quality of a company.

Section 1:

Section 2: Evaluating Management. Assuming that the growth is satisfactory, the second item is determining if management has the capability to sustain growth.

VALUE OF THE COMPANY: If – and only if – you determine from the above that the company is a good quality company, then the next issue is the price of its stock. In the next three sections of the SSG, the objective is to determine if the value of your investment has the potential to double in five years.

Section 3: Price-Earnings History. This section deals with the historical relationship between earnings and the price of the stock. It calculates historical averages that are used to develop estimates of future price ranges. It also deals with the company’s performance in paying dividends.

Section 4: Evaluating Risk and Reward. In Section 3 you determined what you believe to be the highest P/E and the lowest P/E that investors would be willing to pay for this company’s stock. You made a conservative forecast of the highest and lowest earnings per share that this company might make, assuming the company operates normally. These numbers are used in Section 4 to calculate the potential for risk and reward.

Section 5: Five-Year Potential. This section looks at the dividend income. Then it calculates the possible total return you might expect to receive on your investment when a company pays a dividend. The total return is based on the current market price.