This document provides an overview and instructions for using the Stock Selection Guide (SSG) to evaluate stocks as potential investments. It describes the five sections of the SSG which analyze historical growth trends, management performance, price-earnings history, risk and reward, and five-year potential. Key steps include evaluating consistent performance, above-average margins and returns, relative value between 85-110%, an upside-downside ratio over 3:1, and an overall portfolio return target of 15% annually. Thorough research is emphasized to properly judge future growth rates.

1. Stock Selection Guide Overview
and
Historical Growth
Mizzenmast Investment Club
Ellison & Angi Clinton
September 2007

2. What’s this all About?
SSG Section 1: Visual Analysis of Sales, Earnings, Pre-tax
Profit & Price (pg. 19 & 61)
 The upward angle of the historical trend lines show the rate of growth
 Nearly straight lines indicate consistent performance of an excellent
management team
 The position of the price bars compared to the sales and earnings lines is a
relative indicator of the PE ratio
 The larger the gaps between the trend lines and price bars: the higher the
PEs…this may indicate overvalued shares
 Study historical trends lines…research the company…estimate future rate
of sales and earnings growth to determine the quality of your analysis
 STOP: if the visuals aren’t rail road tracks…find another train!
Question: If the top of the price bar is closer to the trend lines what
does this tell you about the PE?

3. What Drives the Valuation of a
Company?
SSG Section 2: Evaluating Management for Key Factors (pg.20
& 62-63)
 Pre-tax profit margins and percent earned on equity, both
test management’s mettle
 The numbers in Section 2 should be “above average” for the
industry
Stop: Do the numbers look good…if 2A and 2B aren’t
consistently trending up…what makes you think you will
make money?
Question: What is pre-tax profit ?
What is percent earned on equity?

4. Where’s the Beef…looking for
value!
SSG Section 3: Price Earnings History (pg. 21 & 63-64)
 The PEs you choose in this section help determine the rest of
the stock study including the forecast high/low price, upside-
downside ratio and the total return
 The PE history in this section provides the data to evaluate the
value of a stock as a potential investment
 Stop: It may seem odd that the judgment in section 3 would
be so important, it’s just a bunch of numbers and a few
calculations but it determines the value of your analysis!

5. Where’s the Beef…looking for value!
SSG Section 4: Evaluating Risk and Reward (pg. 21 & 64-65)
 This section uses the estimate values from sections 1-3 to
determine if the stock price can go high enough to offset the
risk of the price dropping
 Remember relative value uses the PE in section 3; while the
upside-downside ratio determines value from the forecast hi
and low prices
 Stop: Remember our price zones are 25-50-25; our upside
downside ratio minimum is 3:1; and the relative value we
target is 85-110%
 Question: Why is relative value important…what if it’s less
than 85% or greater than 110% ?

6. Where’s the Beef…looking for
value!
SSG Section 5: Five Year Potential (pg. 21 & 65-66)
 Evaluates total return from both price appreciation and
dividend for an investment if the stock is purchased at its
current price
 The goal for your overall portfolio should be 15% return
annually to double your money in 5 years
 Stop: Diversify your portfolio...small stocks for faster
growth and larger stocks for growth and dividends!

7. Recap
 The first two sections of the SSG focus on growth rates
and management performance
 The remaining three sections help identify a stock’s value
 Take off the rose colored glasses…use your judgment and
recognize the company’s weaknesses instead of trying to
make it look better than it really is
 Good management produces consistent performance by
taking advantage of the opportunities and mitigating the
hazards
 15 & 5

8. STOP!
(pages 85-90)
 Forecasting of future growth rate requires judgment
 Judgment requires knowledge
 There is no excuse for not doing your homework
 Sources include: Value Line; S&P; Hoovers
10K; Quarterly Reports;
Annual Reports; Internet
 Caution: don’t estimate sales and earnings growth over 20%...difficult
to sustain over time
 In ‘general’ don’t estimate eps growth higher than sales growth