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Portfolio Management Using PERT

NAIC CompuFest 2004

Ralph Seger, CFA

Please turn off cell phones

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National Association of Investors Corp

This document is copyrighted© and may be used for NAIC educational

purposes only.

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Write down your investment objectives

What are you trying to accomplish? How much risk is appropriate for

your situation? What investment techniques are

you going to use to accomplish your investment objectives?

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What is (is not) a Portfolio?

Securities to accomplish your objectives

NOT helter-skelter collection

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Potential Investment Objectives

Provide for future financial security

Save for long-term goal

Save for short-term goal ( less than 3 years)

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Speculation vs Investing

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Investing to provide for your financial future:

Invest in common stocks of well-managed growth companies selling at a reasonable price

Invest on a regular basis Reinvest income and capital gains Diversify

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NAIC Tools Help Online Premium

Service (OPS) data SSG – to evaluate

and select growth stocks

PERT to help you manage your portfolio

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What is PERT? Why PERT?

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Characteristics Common to PERT and the SSG Growth stock oriented – sales, pre-

tax profits and EPS Evaluation of trend of pre-tax profit

margins P/E ratio evaluation Relative Value Total Return PEG – P/E as percent of growth rate

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PERT Reports are in Two Forms

PERT-A for a single company

PERT Report for a portfolio

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PERT-A Worksheet--Zebra

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Right hand side PERT

-A

Zebra

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PERT-A Worksheet Graph Zebra Technologies

Trailing four quarters trend is displayed

Percent pre-tax profit margin

Annualized rate of growth of sales, pre-tax profit dollars, EPS

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Zebra—PERT A Graph

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PERT Report - Example

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Partial PERT Report

Column B – dividend

Column C - name of co

Column D - yield

Column E - Est EPS for 12 months in the future

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PERT Report Column EVery Important!

Estimated earnings for next 12 months

Valuation aspects of PERT Report is forward-looking based on estimated EPS

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Estimated EPS Zebra Technologies--Default

16%

D EB C

$1.851.16 x 1.85 = 2.14

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Recommended Method for Obtaining Estimated EPS for

PERT

Use Barron’s Research for a company. Adjust estimated EPS to 12 months in future.

Better since it involves judgment of analysts, not mechanical projection.

Open PERT report, options, enter estimated EPS. Insert user estimated EPS for each stock.

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www.barrons.com/data

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Barons--Zebra… Est earnings….

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The Fundamentals

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Sales, EPS, Pre-Tax Profit Margin

How are they doing compared to your SSG?

Are sales, EPS and pre-tax profits growing? If not, why not? Find out why. Pre-tax profit margins have a major impact

on EPS. Avoid jumping to conclusions from short-

term results.

“The Big Three:” Sales, EPS, % Pre-tax

Income (% pre-tax profit)

Are they growing? Is the trend up? Are they growing at about the same rate? If one of the three shows a deflated growth

rate, find out why If sales are trending down, can earnings

continue to rise? How long can % pre-tax income decline

before it effects earnings? Remember, quarterly results are short-term

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Quarterly (short-term!) earnings per share

Columns F, G, H Date quarter ended $$ amount of quarterly EPS Percent change from a year

ago quarter

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PERT Report Column H Percent change of quarterly EPS

compared to a year earlier Compare with your judgment from your

SSG in column V. Is it comparable? Remember, one quarter is not a trend,

but it may be an alert signal to good or bad news. Look for reasons.

Look at the trend in PERT-A worksheet

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Compare Column H with V (Zebra)

16.0%

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PERT Report Column J

Percent change in quarterly sales from a year ago Are sales growing? Are sales relatively in tandem with earnings?

If top line sales falter, EPS growth will disappoint

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Look at Sales (Zebra)

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K, L, M often First Indicator of Future Problems

Declining pre-tax profit dollars and percent margins are quickly translated into declining EPS and stock price

Watch the trend on PERT-A worksheet and a giant SSG

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Partial PERTZebra

ColumnsK, L, M

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Pre-tax columns K, L, M are often the first indicator of future

potential problems

If you see pre-tax profit headed downward, watch out!

More than one quarter of downturn in pre-tax profit margin may indicate earnings will be going down; consequently, the price of the stock

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PERT Column N, O

Looks at the trailing last 4 quarters EPS

Compare Column O with Column V------your projected EPS rate of growth

The percent growth in column O (trailing) and my projected percent growth---pretty close?

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Compare Column O with Column V Is stock meeting your

expectations?

N O V

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Caution!

The Toolkit software calculates the average P/E ratio from decisions made in the SSG for Section 3, Columns D and E, High and Low

P/E Ratios. It does not use decisions made for P/E ratios used

for Sections 4A and B. It is necessary to calculate manually

the judgment of your future average P/E ratio by averaging P/E

ratios in Sections 4 A and B.

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Find Out WHY!

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PERT-A Chart -- Zebra

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Note difference between “annual data”

and“trailing four quarters

data”

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PERT Report Uses Estimated Earnings for:

Current P/E

Relative Value is projected RV

PEG Ratio

Upside/downside ratio

% Compounded Annual Rate of Return

Estimated High Price (4 years)

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Right Hand Side of PERT

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PERT: Columns P, Q, R

Current P/E

price used is the latest update you have put in the program

earnings figure used is estimated earnings for next four quarters (Column E)

Relative Value is projected RV

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Check Relative Value Monthly

Relative Value less than 100 or 110 may be a buying

opportunity if fundamentals of profitability and growth are ok

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Indications of a possible over valuation

If current P/E (P) is significantly higher than the average high P/E (S)

……and……

If current Upside/Downside ratio (Y) is one or less

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29.6 22.7

15.8

Compare 5 Year Average P/E with Current P/E

30.4

26.028.9

24.2 19.4

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On the other hand……

A very low P/E ratio can be a danger signal

What do others know that we don’t know?

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Column VYour

Projected Growth

Rate from SSG

Compare with actual growth rate

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PEG Ratio Column W

P/E as % of Growth Rate

Uses estimated growth rate

(V)

Is preferable to have below

110 or so for a buy

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190.1

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Upside/Downside Ratio (Y)Measures Risk

When we buy a stock, we want an upside of at least 3

When the upside gets below 3, but not below 1, it may be a “hold”

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0.7

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Estimated Total Return Column Z

Based on anticipated compound annual rate of appreciation

Plus dividend yield

“Compounded Annual Rate of Return”

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Total Return

Total return is average yield plus compound annual rate of price appreciation. These two

add up to total return.

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Columns AA and AB are the estimated low and

high prices

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Considerations for Evaluating the Data

Whether the percentage changed in quarterly and last 4 quarters’ data are performing as expected or at least satisfactorily

The trends of the percentage changes as well as the absolute values are performing as expected

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…..considerations

The pre-tax profit margin is consistent or rising

The tax rate is consistent

Try to understand the reason for any significant changes—if declining, find out WHY

Generally the last 4 quarters’ data smoothes the fluctuations in the quarter to quarter data

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When changes occur, find out

why!

Are the changes permanent or temporary?

Don’t sell a high quality stock because of one or two quarters of bad news.

NAIC experience shows that it is best to hold high quality stocks during periods of over-valuation and add to holdings during down periods.

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Questions?

Seminar ID CF 4404

Please fill out your evaluation form

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Speculation:

Too much risk Lack of system, logic Based on tips Foolish bet

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PERT Sorted by Ascending Relative Value

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Look at Fundamentals

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Look at Fundamentals