The document outlines steps for evaluating stock selection using a Stock Selection Guide tool. Step 1 involves visual analysis of sales, earnings per share (EPS), and price graphs over 10 years to identify trends. Key aspects include sales and EPS growth lines that are upward, straight, and parallel. Step 1 also describes estimating future sales and EPS based on historical trends, analyst estimates, and a "preferred procedure." Step 2 involves evaluating management performance. The overall document provides guidance on using financial graphs and estimates to evaluate companies for stock selection.
2. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Stock Selection Guide (SSG) is a NAIC/BetterInvesting tool for evaluating growth stocks
Step 1 uses a 10 yr graph: Sales (green line), EPS (blue line), and Price (black bars)
Like to see sales and EPS growth lines that are up, straight, parallel
Visual Analysis
(Sales/EPS/Price))
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
4. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
SSG graph data comes from the income statement and balance sheet.
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
INCOME STATEMENT (Line Color Shown)
Net Sales (revenue)
- Cost of Goods Sold (materials, labor, overhead)
= Gross Profit (Pretax Profit)
- Operating Expenses (selling/store operating, admin, depreciation, amortization expenses)
= Operating Income (or EBIT=earnings before interest and taxes)
+ Investment Income + Interest Income - Interest Expenses
= Net Income Before Taxes
- Provisions for Income Taxes
= Net Income After Taxes (Earnings)
EPS = (Earnings - Dividends)/Common Shares
5. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Lets consider the 5 companies in the Medical Care and Specialized
Services Business Sector, which is part of the Healthcare Industry that our
portfolio is weak in.
ENSG, IPCM, MD, UHS, USPH
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
6. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
The Ensign Group (ENSG)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Note: sales are not cyclical,
looks like a growth stock.
Note: what happened to EPS
in 2013 and 2014?
7. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
The Ensign Group (ENSG)
Note: drop in EPS can be a
warning, back to back drops a
bigger warning, may need to dig
deeper (quarterly/annual report).
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
QUARTERLY
8. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
IPC The Hospitalist (IPCM)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Note: if you throw out 2005 to 2007,
it would be up straight and parallel.
Note: small drop in EPS last year?
9. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
IPC The Hospitalist (IPCM)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Note: here we threw out the 2005 to
2007 data.
Note: you can really see the drop in
earnings last year now. It affected price.
10. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
IPC The Hospitalist (IPCM)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
QUARTERLY
Note: quarter by quarter snapshot of the
annual EPS that affected stock price.
Note: looks like a recovery lately?
Note: what happened? Dig deeper in the
annual/quarterly reports.
11. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
United Health Services (UHS)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
12. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
United Health Services (UHS)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
QUARTERLY
15. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Mednax (MD)
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Note: looks like a classic up, straight, and
parallel growth stock.
16. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
QUARTERLY
Mednax (MD)
Note: very consistent sales and EPS… a
sign of good management.
17. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Note: this is the only Morningstar
competitor with a good SSG.
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
DaVita Healthcare (DVA)
19. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Are they all Growth Stocks (verses cyclicals)?
Do they have up, straight, and parallel growth trajectories?
How were the historical growth rates of these companies?
Were quarterly sales and EPS stable and positive?
20. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- FIRST JUDGEMENT: PREDICTING FUTURE REVENUE -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
- Remember: Sales drives Earnings and earnings drive stock Price.
First judgement: predict what the sales growth will be in the future.
Revenue (Sales) will then be used to estimate future EPS.
It’s a better predictor of earnings than other parameters including
the visual method. Its hard to manipulate sales.
Estimating revenue 5 years out is difficult though. Most analysts
provide a 2 year estimate. Use that.
Verify whether the historical track record is backed up by analyst
estimates (Morningstar, Value Line, Yahoo Finance, Zacks, etc.)?
21. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- FIRST JUDGEMENT: PREDICTING FUTURE REVENUE -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Where do you find analyst sales estimates?
Morningstar – shown in better investing SSG Tool
Value Line – free at most libraries
Yahoo Finance – free online
Zacks – free online
25. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- FIRST JUDGEMENT: PREDICTING FUTURE REVENUE -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Annual and Quarterly Reports may mention
expectations
Annual/Quarterly Conference calls will surely give
clues to what is going on and expected. They are
answering difficult questions by institutional
investors as well as analysts.
26. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- FIRST JUDGEMENT: PREDICTING FUTURE REVENUE -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Remember - sales drives earnings and earnings drive the stock price.
First judgement you make is to predict what the sales growth will be.
You now need to select a sales growth estimate to be used to estimate EPS.
Put this in the SSG
27. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- SECOND JUDGEMENT: ESTIMATING FUTURE EPS -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Remember - sales drives earnings and earnings drive the stock price.
Second Judgement you make is to estimate future EPS.
You can use the graphical method, analyst estimate, or preferred
procedure for estimating future EPS.
28. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- SECOND JUDGEMENT: ESTIMATING FUTURE EPS -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
BI recommends the “Preferred Procedure” for estimating future EPS.
It’s a mini-income statement of the future.
Your future revenue estimate is used.
Then select a profit margin, taxes, and shares outstanding.
Future EPS will be used later to calculate future prices of the stock
based on historic P/E ratios.
30. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- SECOND JUDGEMENT: ESTIMATING FUTURE EPS -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Compare “Preferred Procedure” EPS estimate to the graphical
method and choose the lower of the two.
Compare this EPS growth rate to the sustainable growth rate
[ROE x (1 - dividend payout rate)] as a reality check.
When EPS < Implied Growth Rate, profit margins are dropping or
share buy backs are being done to increase EPS or debt is being
paid back or management is not putting earnings to good use.
Compare to analyst EPS estimates.
31. STEP 1 – VISUAL ANALYSIS OF SALES/EPS/PRICE
- SECOND JUDGEMENT: ESTIMATING FUTURE EPS -
Visual Analysis
(Sales/EPS/Price)
Evaluate
Management
P/E HistoryRisk & Reward
5-Year Potential
Where do you find analyst EPS estimates?
Morningstar – shown in better investing SSG Tool
Value Line – free at the library
Yahoo Finance – free online
Zacks – free online