Saturday, June 28, 2008

* Stock Analysis Update

To preserve the comparability, I do not like to make a lot of changes to my stock analysis template. However, I have identified a couple that I have considered and determined that they are worthy of being made. They are as follows:

Graham Number: In calculating the Graham Number I have traditionally used a trailing twelve months (TTM) EPS. it was suggested by some that I move to a trailing 36 months to mitigate the effect of any unusual item (positive or negative) over the last 12 months. A trailing 36 months would involve a lot of manual tracking. I have instead decided to err on the conservative side and use a minimum of the TTM or the last three full-year years average. Since I use tangible book value, my calculation of the Graham number is already more conservative than most. If a stock is selling below my version of the Graham Number it is a strong indication that it is undervalued.

NPV MMA Diff: In the past, I have made statement like "GE's NPV MMA Diff is less than the $10,000 I prefer. However, since GE is a Blue-Chip company with a long track record of success, I am comfortable with its NPV MMA Diff of $5,862." To bring a degree of consistency and order, I felt this needed to be quantified. Previously, a Star was awarded if the NPV MMA Diff was greater than $10,000. Now the $10,000 is lowered by $2,500 if the company is a member of the Broad Dividend Achievers™ (increased its annual regular dividend payments for the last 10 or more consecutive years). The $10,000 target is lowered an additional $5,000 if the company is a member of the S&P 500 Dividend Aristocrats (increased dividends every year for at least 25 consecutive years). Thus, a company that is both an Achiever and an Aristocrat, will only have to have a NPV MMA Diff of $3,000 to earn a Star. In effect this change is risk adjusting the target NPV MMA Diff. It will be higher for more risky companies and lower for those with a proven track record.

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