GOALS IN SELECTING A STOCK

You want to look ahead five years by judging Management (1) Our goal is to find a company with able MANAGEMENT; and
capability and evaluating the Price you should pay for a stock. You (2) to buy a stock at a good PRICE.
should also look at Other Considerations and reach a Conclusion. Page Good Average Poor
Your findings are registered in the table at the right and your Judging Management
Conclusion below. Driving Force 3
Novice and professional investors to varying degrees may act hastily Earned on Sales 3
on new products, tips technical clues and short term factors rather Earned on Equity 3
than being methodical in their decisions. Thirty Years of experience
with this type of report tends to show that there is a RULE OF FIVE, Evaluating Price
which is this. If five companies are analyzed for their five year future, High in 5 Years 4
one may have unforeseeable trouble, three may be on target, and one Low in 5 Years 4
may have unpredictable good fortune. Upside-Downside Ratio 4
Current Yield 4
CONCLUSION: Total Return 4

Other Considerations
Industry Potentials 4
State of Business Cycle 4
Stock Price Trends 4
Quality of Stock 4
Capitalization and Finance 2

METHOD-DATA-INSTRUCTIONS
This report organizes data presentation in a concise professional this report are in the NAIC Official Guide obtainable from the
manner, avoiding among other things the agony of deciding what National Association of Investors Corporation, P.O. Box 220, Royal
factors to cover. Because writing is a chore, the cross-out-method Oak, Michigan 48068.
lets you report your judgments with ease. The data used comes from Other sources of data are annual and quarterly reports from
the Value Line and Standard and Poor’s Reports that are available on companies, broker reports and visits to company annual meetings.
many listed and unlisted companies. You may wish to check your 5 You may learn by yourself, or with several friends or by actually
year “high estimate” with Value Line’s estimated Target Price Range investing $20 or $50 a month through an investment club you have
for 3 to 5 years hence. Instructions for completing pages 3 and 4 of formed with friends.

1 WHAT DOES THE VISUAL ANALYSIS SHOW?

The trend of (sales) (revenues) is (up) (down) (sideways). Also for other reasons as follows:
The trend of earnings per share is (up) (down) (sideways).
The price trend of the stock is (up) (down) (sideways).
If sales trend is up, the increase seems to have come from (taking a
greater share of the market) (mergers and acquisitions) (new products
or new product applications produced by research).
In my opinion, the stock should be (investigated)(discarded) because
the trend of sales is (favorable)(neutral)(unfavorable);
the trend of earnings per share is (favorable)(neutral)(unfavorable);
the price is (favorable)(neutral)(unfavorable);

2 DOES THE COMPANY PASS THE THREE MANAGEMENT TESTS?

Investors lose money because of failing to test for good management. chronological order; ______%, ______%, ______%, ______%,
Instead they rely on outlook fore the industry, new products, or a ______%.
plausible story for protection and often lose. TEST III: EARNED ON EQUITY
TEST I: DRIVING FORCE OF MANAGEMENT The company has earned on invested capital from _____% to
Management as indicated by the past record has the necessary ability ______%. See 2B, Evaluating Management on page 2 at left.
to expand sales (yes) (no). The rate of sales expansion on the Earning on equity are (above)(below) 10%.
VISUAL ANALYSIS looks like _____% annually. The rate of sales
expansion is likely to be (better)(same)(worse) in the next five years. I conclude from these three tests that the company has (good)
TEST II: EARNED ON SALES (average) (poor) management and will be (stronger) (same) (weaker)
Management seems to have the ability to (maintain) (increase) profit in five years.
margins (see 2A, Evaluating Management on Page 2 at left). It shows
the Pre-Tax Profit Margins for each of the last five years as follow in Over a period of five years, a well-managed company will generally
gain ground while a poor one looses its earning power. Remember
this in making your decision.
continued...
3 WHAT IS THE PRICE RANGE LIKELY TO BE FOR THE NEXT FIVE YEARS?
Complete Section 3 of the Stock Selection Guide & Report (page 2). Two than its competitors? Have the average price-earnings ratios of the
considerations are important: (1) It is usually better to project sales and past five years been influenced by years when the ratio was
apply profit margins and taxes than to project earnings per share on the (unusually high) (unusually low)?
chart, because profit margins ten to have definite upside limits: and (2) it is
Over the next five years, the stock might be expected to reach a high
well to pay less attention to, or discard the much higher price-earnings
ratios existing in years of low earnings. Also avoid being misled by sales
price of _______ and also a low of ______ when the next depression
increases in early years of a new product, or attributable to government or comes. It now sells at ____, indicating (little) (average) (great) risk.
other types of contracts that may not be renewed or are due entirely to the Its suggested buy prices should range from _____ to _____, hold
upswing of a business cycle. from _____ to _____, and sell from _____ to _____.
Have price-earnings (P/E) ratios for the past five years been trending These are the zones calculated in the Stock Selection Guide and Report
(downward) (level) (upward)? Is the P/E ratio (higher) (same) (lower) (Section 4C, page 2). Be a careful buyer.

4 HOW DOES THE STOCK MEET THE THREE SAFETY TESTS OF PRICE?
Unsuccessful investment clubs and investors make two mistakes; (1) TEST II: STACK THE ODDS IN THE INVESTORS FAVOR
selection of poorly managed companies, (2) pay too much for stocks. The upside-downside ratio from Section 4D, page 2 of the Stock
The second mistake is by far the most prevalent and most damaging, Selection Guide & Report is _____ to 1. This is (favorable)
and is easily corrected. Big losses have been taken in high grade (average) (unfavorable), indicating that we need to pay attention to
stocks because they were bought mainly, “because they were past price history (considerably) (some) (not much).
moving” or sold “because they went down”--not because of price. TEST II: THESE STANDARDS HELP INVESTORS AVOID
The best results have been obtained by investors that buy carefully. LOSS
TEST I: SHOWS PROBABILITY OF GETTING OUT EVEN The pay-off test is whether at least 100% appreciation is possible in
The stock under review has sold at its present price in (____)* (none) five years -- or in the case of cyclical stocks, 20% a year for the
of the last five years. The risk of loss seems (small) (average) number of years held. Analysis shows a high price of _____ is
(considerable) at the present price on the basis of price history. reasonable in _____ years, equal to _____ % a year.
* Three of five is a good standard
In the case of cyclical stocks, comment should include the number of
months the cycle has advanced and the dangers on this account.
5 WHAT ARE THE INVESTMENT CHARACTERISTICS OF THE COMPANY?
The Company is (well established) (new) and operates known) (average) (not known) to the investing public. Its common
(internationally) (nationally) (regionally). The product line or service stock is listed on (New York) (American) (other exchange) (unlisted)
is (diversified) (narrow) and sold to (consumers) (manufacturers) and has price records covering (five years) (only ____ years). It has
(government). The business cycle affects sales and earnings (not (a continuous dividend record dating from _____) (a spotty dividend
much) (severely) (average). The company is (largest) (in top 4) (a record) (no dividend record). Investment Characteristics are (good)
smaller factor) in its industry. The company and products are (well (average) (poor).
6 WHAT ARE THE CHARACTERISTICS OF THE COMPANY’S MAJOR INDUSTRY?
The ____________ industry is (established)(new) and has manufacture) (average -- like metal products manufacturing), making
(exceptional) (average) (below average) potential. The potential is it (easy) (difficult) for new competition to enter the business. Price
based on (population) (product development) (science) (international competition between companies is (no problem) (severe) (average).
expansion). Sales, profit margins and earnings per share fluctuate In my opinion, the major industry , everything considered is
with the business cycle (widely -- like the steel industry) (narrowly -- (favorable) (average) (unfavorable). The company being analyzed
like food) (average -- like oil). Capital Investment per dollar of sales will be (aided by the trend of the industry) or (will have to take
in the industry is (high -- like chemicals) (low -- like clothing business from competitors to grow).
7 WHAT ABOUT THE BUSINESS CYCLE?
About 33 months is an average business cycle, though variations stages of the cycle because of exposure to substantial drops in price,
from this norm are wide. earnings and sometimes dividends.
A well-managed company gains on marginal competitors in a The trend of business has been (up) (down) for _____ months.
depression of inflation as a general rule. In a period of business The current stage of the business cycle tends to (help) (not affect)
recovery, high grade stocks advance first, and marginal stocks last, (hurt) profits of the company. The present stage of the business cycle
as a general rule. Also, non-growth cyclical stocks are good suggests (no concern) (caution) (daring) for the stock under review.
purchases when business turns up and should be sold in the later
8 WHAT ABOUT THE STOCK MARKET AND YIELDS ON BONDS?
The price the stock is selling at is _______ and the Dow Jones You may also want to comment on the behavior of bond yields and
Averages are at: Industrials __________, Transportation _______, Treasury Bill rates. Yields tend to rise in the later stages of a
and Utilities ________. This provides a reference in case of review business cycle (attracting money from the stock market) and fall
of this stock in the future. when business slows and investors want safety.
From the Value Line, it is seen that the stock under review has Bond yields may (attract) (not affect) (discourage) investment in this
performed as compared relatively (better) (same) (worse). stock currently.

 1996, National Association of Investors Corporation; 711 West Thirteen Mile Road, Madison Hgts., Michigan 48071