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Stock Comparison Guide (SCG) Suggestions for Interpretation and Presentation

GENERAL INFORMATION

Purpose of SCG: To compare stocks within the same industry and to identify those stocks that present the "best of the breed" -best prospects for long-term appreciation. Exception to the Rule: If you are comparing companies and the only issue is which company represents the greatest potential, then you can use the Stock Comparison Guide (SCG) as a "spreadsheet analysis."

All information on the SCG is taken from the Stock Selection Guides (SSG). Thus, two or more SSG's must be completed before running the SCG.

A six-part discussion on the Stock Comparison Guide from an I-Club workshop is available at the BetterInvesting website for members only.

IMPORTANT NOTE

The Stock Comparison Guide should be used with care. Resist the temptation to allow the software to draw conclusions for you. It will simply add up all of the circled items and consider the winning stock the one with the most circles. However, some factors are more important than others and should be given more weight. The computer doesn't know that. Turn off the feature that automatically circles or selects the best stock within each row. Make your own decisions.

It is recommended that you customize your criteria options by clicking on the Criteria button on the SCG toolbar. You can only select two of the six options. Several BetterInvesting educators recommend selecting Debt/Capital ratio for row 27 and Relative Value for row 28.

LAYOUT OF THE STOCK COMPARISON GUIDE (SCG)
The Stock Comparison Guide compares companies in four broad categories:

The stock that is "best" in each row is automatically circled by the Toolkit software. TIP: Turn off the feature that automatically circles the items. You should use your own judgment in deciding which stock is the "best" in each category.

INTERPRETATIONS:

GROWTH COMPARISONS (ROWS 1-4)

If historical rates of growth have been high, be careful. Most companies cannot sustain future sales and earnings growth rates higher than 15-20%.
Best stock: The company that has higher projected growth rates. Note: although one company may have the highest growth rate, other companies in this category may also have very acceptable future growth rates.

-Based on the results within this section/category, which stock would be the best to buy?

MANAGEMENT COMPARISONS (ROWS 5-7)
Best stock: The company in which both Profit Margins and Return on Equity (ROE) are going up. Decreasing values indicate a problem. Go back and examine the SSG's for each company. Toolkit compares the data for the most recent year to the five year average in order to determine the trend. The software's decision may not reflect the true trend.
Best stock: A company in which there is a high percentage of common stock owned by management. This signifies that company leaders have a vested interest in the company.

- Based on the results within this section/category, which stock would be the best to buy?

PRICE COMPARISON (ROWS 8-21)
Estimated Total Earnings Per Share (EPS) for Next Five Years (Row 8)
The Estimated Total EPS for the next five years is obtained by adding together the projected earnings at five-year intervals. Using the numbers on the SSG, Part 1, Visual Analysis chart, add together the five figures where the projected EPS trend line intersects each of the next five year time lines.
Best stock: The stock that has a current price closer to the total of the estimated EPS for the next five years. If the current stock price equals the sum of the EPS for the next five years, the stock price will increase 20% per year over the next five years. Note: meeting this standard may be difficult during some market periods. If neither stock comes close to having the Total Estimated 5-Year EPS equal to the current price, the best stock would be the one that has the smaller difference. To determine the difference percentage, use the following table as an example:

Price to EPS Comparison

Stock 1

Stock 2

Estimated Total EPS, Next 5 Years

$11.56

$13.26

Present price as of July 29, 2001

$19.00

$18.50

Difference, rounded off

$7.00

$6.00

Difference, percentage

60%

45%

Price/Earnings Ratio (rows11-16)
There are 6 rows in this section. The most critical information is in row 13. It is best to examine the average P/E in relation to the current P/E noted in row 16.
Best stock: The company that has a current P/E ratio (row 16) lower than its average P/E (row 13). Note: a very low P/E can signal trouble.

Estimated Price Zones (rows 17-20)
Best stock: The stock with a price range in the buy zone (row 20). Note: Just because a stock has a price in the buy zone does NOT mean you should buy it. Toolkit software (version 5) automatically selects those stocks in the buy zone as the best stocks; however, this selection is ONLY based on the price range and does NOT take into account the values under GROWTH, MANAGEMENT, PRICE, OR OTHER categories. That is why it is important to turn off the feature that automatically circles the "best" stock in each row. The terms buy or sell are based only on the price and mean the stock is in the buy price range or the sell price range. It is not an endorsement to buy or sell the stock. Your decision to buy, hold, or sell as stock should be based on the values in all four categories on the SCG.

Upside/Downside Ratio (row 21)
Best stock: The stock with an upside/downside of 3 to 1 (shown as 3.00 or higher) but not higher than 10 to 1, according to Gary Ball, presenter at NAIC Congress, 2000. Ratios higher than 10 to 1 indicate that the low and/or high prices on the SSG are too high. Usually the low price is not low enough. Note: An upside/downside ratio of 99.1 to 1 is an invalid number, again indicating that the low and high prices are not realistic.

Current Yield (row 22)
This indicates how much is paid in dividends. Dividends are important if you are looking for income from your stock. Most investors do not expect growth stocks to pay dividends. They want the money put back in the company for future growth and higher returns.

Total Return (row 23)
A criterion for measuring the prospective return on an investment in a company at the current market price. Total Return is a compounded rate of return. Total return also includes an expected dividend yield.
Best Stock: Any stock with 15% Total Return will double the value of an investment in five years.

- Based on the results within this section/category, which stock would be the best to buy?

OTHER COMPARISONS (ROWS 24-30)
Common Shares Outstanding (row 24)

Percent Payout (row 26)
The projected dividends paid at the end of five years. Companies that pay high dividends have less money to put back into the company for other purposes, such as expansion, (R&D), etc.
Best stock: Stock with a lower percent payout. For growth stocks, it is not necessary to expect or want high dividends or a high percent payout However, with a "down" economy, some experts believe stocks that pay good dividends are an asset in a portfolio.

TOOLKIT ALTERNATIVES FOR LINES 27 AND 28
Toolkit's Customize Criteria command offers six additional criteria by which to compare your stocks. You can only select two. Several BetterInvesting educators recommend selecting the following two choices:

Debt to Capital Ratio (optional row 27)
This is one of the more highly recommended choices via Toolkit's Customize Criteria command.
Best stock: One that has a Debt/Capital ratio less than 40%. Note: the lowest ratio is not always the best. A company may have assumed a lot of debt in order to expand the business. Companies in some industries, such as utility companies, have high capital requirements so their Debt/Capital ratio will be high.

Relative Value or Projected Relative Value (optional row 28)
You have a choice between choosing Relative Value (RV) or Projected Relative Value (PRV) via Toolkit's Customize Criteria command. Choose RV or PRV, but not both. The following is an explanation of the two:

Relative Value expresses a relationship of the current P/E to the historical 5-year average P/E. When you use Relative Value, the current earnings is based on the trailing 12 months. Usually, the lower the Relative Value (expressed as a percentage), the higher the likelihood that the stock will increase in value.

Best stock: One in which the Relative Value (RV) is between 80%-110%. The stock is considered a good value at that price. Note: An RV less than 80% may indicate the company has problems.

The Projected Relative Value expresses a relationship of the current P/E to the projected earnings for the next 12 months. Some investors prefer using PRV because they believe that the current P/E should be calculated by using the earnings for the next 12 months instead of the trailing 12 months. The logic is that investors buy stocks for their future performance and in the expectation of those future earnings. The Projected Relative Value is always a lower number than Relative Value since the current prices is divided by a higher earnings figure.

Best stock: One in which the Projected Relative Value (PRV) is between approximately 80%-100%. The stock is considered a good value at that price. Note: A PRV less than 80% may indicate the company has problems.

- Based on the results within this section/category, which stock would be the best to buy?

Based on everything in the Stock Comparison Guide, which stock would be the best to buy?

Sources:
1. Stock Comparison Guide Workshop, EMC Corporation and Vishay Intertechnology, NAIC Online-SSG Workshop, EMC Corp. and Vishay Intertechnology, Sessions 1-4, BetterInvesting Website, www.BetterInvesting.org/educate/emcvshscg
2. Gary Ball, NAIC Presenter, NAIC Congress, Philadelphia, 2000.