Nancy Cray’s Making Judgments Simple

SSG is a guide, not a black box or crystal ball

It doesn’t replace judgment

It’s a tool to guide your judgments

Informed opinion based on your common sense evaluation of available information

Not using judgment is form of judgment

Information you use can be

Knowledge of company (Peter Lynch)

Knowledge of industry

Quantitative information in SSG

No need for complex analyses

Before you use judgment, you should understand the company and its industry

Understand products or services

Fads?

Potential new uses?

What is source of growth?

Increased sales?

New products?

Acquisitions?

Understand competition

Barriers to entry?

Potential pricing pressures?

Management

Change in management?

Management problems?

1. Analyze past

2. Estimate future fundamental performance of company

3. Accept or reject stock as potential buy. Can reject after any stage and not complete SSG. Don’t complete SSG just because you have a computer.

These stages are repeated in each section of SSG

Document Your Judgment

Use notes section in software

Analyzing History

First step in SGG is to analyze the history

Examine recent quarterly growth data on front of SSG

Is it acceptable?

If yes, proceed

If not, reject and go on to another company

Analyze historical growth - don’t just accept it

Eliminate non-recurring events

Don’t eliminate a year of data just because it is up or down - especially if there are several

Find out why it happened

Compare growth in recent years with those in past

Has growth moderated as company matured?

This drop in earnings and pretax profit occurred during the last recession.

You can eliminate a year of data in ITK by placing mouse pointer over the year and clicking when you see a minus sign next to the pointer

Eliminating those years results in more conservative growth trends

Compare recent and early years

Alt-G in ITK brings up a table showing growth over various numbers of years.

We can see the earnings growth has been moderating, so we might choose to eliminate the earlier years

When we eliminate the earlier years, growth of EPS is only 8.4%

Is that acceptable?

Will the growth turn around?

If so, why and how?

Stock Analyst Plus!

Can click on years to eliminate them as in ITK

Can also shorten and lengthen the trend line with the mouse and drag the trend line around

If historical trends are not acceptable, reject the company and discontinue the SSG

Estimating Future Growth

The next step is to estimate future growth based on the historical growth.

Sometimes straight forward, but sometimes not

Think about the kind of business it is, industry, etc.

What if growth rates are very high?

If growth rates really high

See if they moderating

Check growth in recent years, recent quarters

Compare them to industry growth rates

Find out what will fuel its growth

Expect them to moderate

If EPS is growing faster than sales

Can’t go on forever

Find out why it’s growing faster

Profit margin increasing?

Buying back shares?

Decreasing taxes?

None can continue forever

Could recent events affect the growth?

Internal

Patent expirations

Loss of customers/clients

Change in management or key personnel

Competition

Lower prices

Newer or better products

Industry problems?

Economy

Supplies

Sales of products

Government regulations

After you make your estimates of future growth, do a reality check

Compare to profit margin growth

Use preferred procedure or revenue based procedure

Look at the internal growth (SA+)

Compare to analysts’ consensus estimates

Is the projected growth acceptable?

If not, stop doing the SSG and look at another company