ALL ABOUT TAKE $TOCK

Good morning!

This will probably be pretty tame, compared with the game yesterday. But, I'm pleased to have been asked to share some of the Take $tock story with you. Inasmuch as it, along with my book by the same name, pretty well defines what I believe to be my most important contribution to your investment lives, it's nice to be able to share with you a little more than just a "how to" article.

Take $tock: What is it, what does it do, and why?
Take $tock is a software program that enables anyone, no matter how little investment experience he or she may have, to invest successfully using the fundamental investment principles introduced by George Nicholson, CFA, founder of the National Association of Investment Clubs (NAIC), and taught by its thousands of volunteers for more than a half century. Nicholson’s methodology is deceptively simple to use—causing many to underestimate just how little or much “work” the software does in the instant it takes to produce a result.  It is remarkably effective.

A Little History
In March of 2002, Inve$tWare Corporation rolled out Take $tock, a new product that had been under active development for about a year and a half but which was the consummation of a dream I had for nearly a decade and a half.

Take $tock was not a new name for a product.  Version 1 of Take $tock actually saw the light of day in late 1989 when, at the request of NAIC’s National Computer Board, I demonstrated it at NAIC’s National Congress in Denver. Take $tock 1 was a fully menu-driven program, written entirely in Microsoft Excel’s macros.  It produced a perfect replica of NAIC’s Stock Selection Guide (SSG).   As a harbinger of what was to come, Take $tock’s production of the SSG form was merely a by-product. The focal point of the program was a page called the “Evaluator.” On this screen, which could be printed, most of the significant data appeared and the user could enter and tweak the “Judgment” items to produce a result.
 
Like the current version of Take Stock, Take $tock 1 gave the user a list of “Reasons to Buy,” “Items to Check,” and a simple statement as to whether or not the stock would be a good buy at the current price.

Because of the success of this early predecessor, NAIC invited Inve$tWare to develop their official stock analysis product, the Investors Toolkit, which was the definitive product for their mainstream membership from the moment it was released in 1992.

Thanks to Phil Keating, a CFA and my mentor, the early versions of Take $tock contained items that went above and beyond the basic methodology that appealed to the advanced investors in the NAIC organization. And, for a number of years, Take $tock was the program of choice for those individuals of whom there were relatively few. The direction we took in developing Take $tock 3 was toward even greater sophistication with even more metrics that would appeal to the “high-end” user but which, we later realized, would likely confound and befuddle the novice for whom the program had originally been intended.

In 1996 and 1997, having spent several years in the development of Take $tock 3.0 as a stand-alone product (not dependent upon Excel), we found that our core product, Toolkit, required all of our attention; and we put Take $tock 3.0 on the back burner. This was no easy decision because the product we had developed was nearly ready for final testing and release. (There are several people who were beta testers at that time who, even today, speak fondly of that “vaporware” product and keep it on their hard drives.)

By this time, my son, David, had come to work for Inve$tWare and, in a very short time, became not only indispensable as a highly skilled programmer, but also in gathering the reins and managing our resources—a task for which his 25 years in the industry had equipped him superbly. Had it not been for his skills and his early, objective detachment, I might well have made some very poor decisions. David’s contribution to what followed was enormous; and we could not possibly have had the successes we  enjoyed without it.

For the next few years, recognizing the needs of our mainstream market, we put all of our efforts into developing Toolkits 3.0 and 4.0 at the expense of Take $tock. And, in retrospect, that was the best thing we could have done. Not only did we serve our largest audience with an excellent set of products but, thanks to that experience, we also revised our views as to what was needed in the marketplace.

Rationale: Why did we develop another stock analysis product?

When came the boom of the late 1990s and the bust that followed, the membership in NAIC began to decline and our market also began to diminish with it. It became obvious that we would have to do something to help stanch the attrition and entice new members to join and remain as members. It was in an effort both to reverse the slide in NAIC’s membership and to create an additional market for our products that we decided to resurrect Take $tock, but with some significant philosophical changes.

We came to view the marketplace as a pyramid at the top of which were the few users who understood and might use the extra metrics that were beyond the ken of the average NAIC investor, much less the novice. This was the market to which Version 3 of Take $tock had the greatest appeal.

The middle of the pyramid represented the mainstream NAIC investor whose prior investment education permitted him or her to understand and make use of the mechanisms contained in the Investors Toolkit.

At the bottom was the very broad base of people who were either new to NAIC or who had yet to be introduced to investing as we knew it—a substantial and heretofore neglected market. This would include all of those with whom successful NAIC members had tried to share the benefit of their experience and couldn’t: family, friends and acquaintances, and others who were intimidated by the SSG and/or the education that was required to understand it.

This was to include, for example, fellow club members who wanted very much to make an intelligent contribution to their clubs’ stock studies but were unable to.

And, of course, it would include many current NAIC members who would admit only to themselves that they didn’t understand the SSG or the concepts as well as they should to be comfortable with them.

Our challenge, then, was to develop a product that was so simple to use that it would not require any of the investment education in advance to make use of it. And one so innovative that it would effortlessly perform all of the steps in the investment methodology we subscribed to, doing so as well as an educated user might.

It would have to contain the educational content that would enable the user to learn the simple investing concepts behind the methodology, and to understand why this investment approach worked.

And—this had been my dream—it would have to incorporate the necessary “intelligence” to automatically arrive at the same estimates and “judgments” that an experienced but cautious user would come up with, given the data that he or she had to work with.

Next session, we’ll talk about how we set about accomplished this.

Session 2

Take $tock: Meeting the Challenge

Our challenge: to come up with a program so simple anyone could use it, yet, “under the hood,” sophisticated enough to not only perform the mechanics of every step required by the methodology but to automatically come up with the estimates and forecasts—the judgment tasks—that heretofore have been the arcane domain of only the experienced.

The user interface—the “face” of the program the user must “talk to" for it to work—would be the key. The answer? What could be simpler than to ask the user to merely enter the name of the company she wants to study, or the ticker symbol, if she knows what that is?

But, another issue arose: knowing what you had to do was one thing. Being able to translate the results into a language anyone could understand was another. Were there not shades of grey? One company could be better than another, so it would not be enough to simply provide a “pass/fail” answer. There would have to be a way to easily quantify the different levels of "good" or "bad" if for no other reason than to permit investors to prioritize their selections—have an educated preference for one over another.

Analyzing the process, clearly its purpose could be summed up in two basic requirements: the first was to determine whether the company was a good enough company to warrant investing in it. The second, strictly contingent upon the first, was to determine whether the price was reasonable. Indeed, those two items could be presented to the user all at once.

But.... If the user was to be empowered as any experienced investor was, she should be able to not only judge whether the company met the tests for quality, but, if so, how well? Ask any experienced investor how good a company is, and she'll have to go into a great deal of detail, explaining how each parameter meshed with the others to cause her to say, “very good,” or maybe “just okay,” or some other shade of grey.

Let's use it!!

Well, weve said a lot about the program in the last couple of days and its time to put it to work. Funny thing is that, because weve been so successful in making it easy to use and straightforward in the way it delivers the results, there’s precious little to talk about when it comes time to use it.

An owners manual might go something like this:

• Type in the company's ticker symbol. (If you don't know  what it is, you may use the Advanced Search to look it up).
• Hit the [Enter] key.
• Read the result.

This is why we often get comments like, Why, theres nothing to it! How can such a program be anything but a novelty? I only use it for screening, or the like.

Lets take a look "under the hood" and see what actually happens when you hit [Enter] Those of you who are experienced might wish to compare this with the steps you take when you do an SSG):

Assuming you’ve got a good connection to the Internet, heres what takes place:

• Armed with the company's symbol, the program accesses a proprietary database which is updated on a weekly basis (although most company data is updated only four times each year).
• It downloads 107 items of the company's data, including up to ten years of sales, earnings, pre-tax profit, return on equity, dividends, shares of stock outstanding, high and low stock prices, some significant dates, some identification information and more.
• It eliminates irrelevant data from the sales, earnings, and pre-tax data, performs a regression analysis on the remaining data and calculates the relevant historical growth rate and the R-squared for sales and earnings.
• From the relevant data, it estimates the future growth of sales and earnings, tempering the forecast according to the stability of the historical data (the less stable the historical plots are, the lower the forecast growth rate), capping it at no more than 20 percent.
• It calculates the Growth Index and it decides what color to display.[For the QI to be "desirable," (above 6.7) the historical and recent growth of sales and earnings must both be above 14.9 percent, the R-squared at or above 95 percent, and the Efficiency Indicator Green. If any of the historical growth values fall below the lowest required for the size of the company, the R-squared is below 85 percent, or the Efficiency Indicator is red, the QI will be "Unacceptable" (at or below 3.3), its indicator will be red, and no Buy Price will be calculated. Between is acceptable, though less than desirable. Companies in this category might be held if owned, but probably not purchased.]
• It calculates the value of sales and earnings five years in future, based on their estimated future growth.
• It does an alternative calculation of future earnings based upon forecast sales, multiplied by the average pre-tax profit margin, deducting estimated income taxes and other expenses, and dividing the result by the number of shares outstanding. And it selects the lower of the two estimates. [This is another improvement over past products which offer the “preferred procedure” only as an afterthought.]
• It analyzes the ten years of profit margins and return on equity and sets the Efficiency Indicator accordingly.
• Using the Efficiency Indicator and Growth Index, it then calculates the Quality Index.
• It analyzes historical PEs, high and low. Calculates the median, and uses that for the Signature PE. It calculates the current PE and, with the Signature PE, calculates the Historical Value Ratio (HVR) - the ten-year "Relative Value." And, it offers that result as the Mood Indicator to tell you how the current PE compares with the historical PE, telling you whether the stock is "Hot" or "Cold" or about right, in view of its "usual" selling point. And it cautions the user not to buy it until checking out why “the herd” is selling instead of buying.
• It averages the lowest half or majority of the historical high PEs and low PEs to provide a reasonable estimate of the high PE and low PE five years out, capping  it at 30 if the result is above that sustainable rate.
• It then calculates the forecast high price using the forecast earnings and High PE.
• Using the product of the earnings from the last twelve months, and the forecast low PE, it calculates the estimated low price in five years.
• It calculates the potential annual price appreciation using the current price and the forecast high price over the next five years.
• Using the current price and dividend, it calculates the current yield.
• Adding the potential appreciation and the yield together, it calculates the potential annual return from the investment, should it be purchased at the current price.
• Dividing the potential loss (the difference between the current price and the low price) by the price range (the difference between the forecast high and low prices), it calculates the Risk Index (yet another improvement over past practices and products).
• It then calculates the highest price the stock could sell for and still produce a hypothetical return of 14.9 percent.
• It calculates the highest price the stock could sell for and still produce a Risk Index of 25 percent.
• It selects the lower of the two and displays that as the "Buy Price."
• It compares the Buy Price with the current price and indicates whether the stock is currently selling at a price that will provide for the desired return and risk.
• It selects and displays the appropriate textual statements to best describe the Quality, the "Mood" of the "herd," and the reasonableness of the price.
• It prepares a completed "TSSW" to display and print. This is a comprehensive report of the result.
• Finally, it prepares a "Summary" to display and print, which offers a plain-language interpretation of the "Reasons to Buy" and "Items to Check."

And it does all of this in less than a second. Whew!

(If it takes longer, it's not because of the calculations; it's more likely because of the speed of your connection.)

Of course there’s much more to the program than just this mechanism. Tomorrow, we’ll take a closer look at the educational component, the “drill-downs” and other facets of this program.

Hi Ellis,

Thanks for your discussion of the online T$ program. I have found the historical development of the program to be quite interesting.

Let's say I buy a stock with a QI above 6.7 at a price below the buy price, how does T$ indicate when it should be sold?

How often should I be monitoring my holdings by entering their symbols in T$?

Thanks.

Stan Slater

Stan:

Thanks for your interest.

Your question about managing your portfolio will be answered in the last session; but, to give you a little preview....

The tasks required for portfolio management: defensive (checking your holdings to spot those that are no longer growing as you expected them to when you bought them and whose Quality criteria are not likely to improve any time soon) and offensive (checking your holdings to see if any are so overvalued as not to be able to produce an adequate return in the future) are best done with the advanced version of Take $tock. This is available as desktop software now; but is not yet available online.

You can, of course, do all that's necessary for your defensive chore with the novice version. All you need do is write down the name of each stock in your calendar four times each year. The dates should be 105 days following the end of the fiscal year and 60 days following the intermediate quarters. When those days come along, just plug in the stock and see if it's still of sufficiently good quality to warrant that you hold it. If the Quality Index is yellow or red, you know something has changed. If it's red, you will probably want to find out why and sell it if it seems to be something that is likely not to improve soon.

For your research, I recommend you look at the Reuters site.

Hope that helps.

Let’s look under the hood

I'll just bet that many who have merely put a ticker into Take $tock and produced a result think that's all there is to the program. Not so!

While there will be many who are content to do just that, taking for granted that there's some validity to the methodology even though they don't know why, there will certainly be others who want more. And, trust me, Take $tock has much more.

But, first, let me dispel some criticism we have had because someone can do just that: take the program at its word, without questioning, and use it mindlessly to invest.

Yes, there will always be people who are just looking for the easy way to be successful. When you stop to think of it, haven’t most who have joined NAIC in the past hoped that such would be the case? Indeed, the greatest attrition has occurred during the first year when disillusioned new members find out that more is required of them than they were led to expect. But, if our aim is truly to empower "a nation of investors" to invest successfully using this methodology, won’t we have gone a long way toward achieving that goal if more people simply invest in those companies that Take $tock says they should?

Those people will be fully as successful as those who have historically learned the SSG by rote and, just as mindlessly, bought the stocks that turned up a "Buy." In fact, they will likely be more successful than those who went through the classes and came out with less than a full understanding of the method. Why? Because Take $tock applies that method faithfully, conservatively, and with very few mistakes.

If you want some evidence of that, you can look at the ICLWager Portfolio, mechanically managed by Lowell Herr. [Download it at http://www.bivio.com/iclwc/files] It's been running now for three years and, with the buy and sell decisions being virtually made for him, the portfolio soars well above the S&P500 and the market as a whole—performance that eludes most professionals.

While we won’t necessarily achieve our educational goals with those who are uninterested in learning what we think they should know, at least we won’t lose them. However, there will be many others whose curiosity is aroused and who, at their own pace, will take advantage of the opportunities to have their questions answered.

Here's an example. You're a new investor and you have heard that Microsoft is a great company. Would it be a good investment? Ask Take $tock. [At this point, why don't you go ahead and click on the "Take $tock" tab at the top of this page and enter MSFT in the space provided.] What do you see? And what's your reaction?

Whoa! That's a kick in the head! And I thought it was a good company.

• WHY does it say it "doesn't meet your standards for quality at this time?"
• WHY does it say "The fundamentals don't justify a purchase at this time?
• WHY....?
• WHY....?
• WHY....?

The average user is not going to be content with what he or she sees there.

Pass your cursor over the "pillow" that displays the Quality Index or the "Buy Price" and you'll see a blue glow around it. That usually means that something will happen if you click on it. So you click!

And, you're on the way to learning more than you knew when you started. This is called "drilling down" and each time you do it, you're led to ask yet another question and look for the answer.

The first drill-down will tell you what comprises the Quality Index. It answers the question by displaying yet two more "pillows”: One displaying the "Growth Index," the other, the "Efficiency Indicator."

It's only natural to want to explore. And the average user comes away from each experience with a little more understanding—all the time being able to put these principles to work without yet knowing all that much about them.

I suggest you take a few minutes now and explore the drill-downs to see what's available as you do. Probably the most interesting of the screens is the one, under "Quality," labeled "Growth."

There you will find the individual components of the Growth Index and will be able to easily see which of the parameters was the one that resulted in the less-than-desirable score.

Pedagogy

Successful teaching has two components: the first is, of course, the imparting of knowledge. Most teachers are pretty good at that. The second is the stimulation of curiosity; and that is one facet of teaching that escapes many if not most.

If a teacher completes a class leaving the students eager to hear what comes next, or to learn how to apply the theory to practical use, or to find out more about the topic on his or her own, then that teacher has been truly successful.

We have approached Take $tock with that in mind and we like to think of it as a teaching “wolf” in non-threatening clothing. We've tried very hard to present a program that not only gives answers but stimulates the natural curiosity as well.

Off to the side of the screen, when the program is active, there is a hierarchical list of items. This operates as did the navigation map in the desktop versions. Clicking on an item enables the user to navigate from one part of the program to another after he or she has become familiar with what's contained in each "compartment."

Click on the "Help Menu" hyper link beneath that list. When you do, you will see "Take $tock Concepts" halfway down the page. Select the section that matches where you are in the program and find, in very easy-to-understand language, the concepts behind that aspect of the methodology. [We are trying to have that function available, as a large button, wherever you may be in the program so it will be a click away.]

Ellis,

In session 3, you stated "for the QI to be 'desirable' the historical and recent growth of sales and earnings must both be above 14.9 percent."

Does the program make any adjustment for company size? That is, can a large company ( sales more than $5 billion ) get a QI above 6.7 if it's historical or recent sales and earnings growth is less than 14.9 percent?

I ask this question because it is my understanding that one can double ones money in 5 years even if a company's sales or earnings growth is less than 14.9%, if ones adds in dividends and/or buys at a PE that is less than the Signature PE.

Thanks.

Stan

What does the future hold for Take $tock?

⎘:50PM: Sorry this didn't get up on the board sooner. Cable problems were just resolved.]

We've saved the exciting part 'til last. There's a whole lot that's coming in the online version.

As something of a disclaimer, I must acknowledge that my view of the future is offered with considerable confidence that these things (or functionalities similar) are indeed in the offing. But, because I'm not directly in the loop that schedules and prioritizes the resources necessary to produce them, I can't say for sure just when, or for that matter if, they will happen.

While the program will continue to be available for all as it is now, with the bugs discovered in this ongoing beta process laid to rest, those who want to make use of its advanced features can look forward to a premium version that will be useful to those who have taken advantage of the education and have grown into it.

In the first place, of necessity, the judgment values that have been applied are conservative. Not so conservative as to be unreasonable, but conservative enough not to lead the user into buying stocks that are overly risky.

The experienced use however, after learning enough to gain confidence in the reasons behind those decisions, will want to make his or her own judgment decisions and, in some cases perhaps, override those estimates and forecasts provided by the program.

In the advanced version, those judgments become just default values which can be overridden by the user. The mechanisms are there to:

• decide which data is irrelevant and eliminate outliers.
• override the calculation of relevant historical growth
• re-estimate future sales and earnings growth
• select different outliers for historical PE values and alter the "Signature PE"
• re-estimate the future high and low PEs
• override each of the elements of the Business Model and select your forecast earnings from the choice available

This will give you just about all the control over the result that will be found in the mainstream stock analysis products now available.

Of course, you'll want to bear the adage in mind, "Experience is a license to lower your standards." Indeed, the program in its novice mode sets pretty high standards for the choices itmakes.

Saving the results

In the coming versions, you'll be able to save your portfolio and watchlist and consult and access it when you like. You will then be able to add companies to, and delete them from, your personal database.

You'll be able to update the data for all of them with a keystroke, and you'll be able to sort them in order of quality, mood, or buy price. (They will not actually be sorted by the price. Rather, they will be ranked by how far the current price is above or below the buy price, which is more significant.)

Portfolio Management tasks

As you move from novice to experienced user, you will acquire a portfolio; and, it's fully as important to know when to sell your holdings as when to buy them.

Those tasks are conveniently divided into two familiar disciplines:

• defensive tasks (knowing when to sell companies that no longer meet the quality benchmarks of growth and efficiency that they did when they were purchased), and
• offensive tasks (replacing companies whose stocks are selling at a price that is so high that their potential return is no longer suitable)

Defensive management will consist of ranking your companies by the Quality Index and updating the data for them all. By simply watching the color of the indicators to see which of them turn yellow or red, you can select those whose fundamentals have slipped and make your decision whether to hold, sell, or buy more. This makes the task both simple and fun, actually—almost like watching a colorful pinball machine.

Offensive management will also be a piece of cake, ranking your holdings by "Mood," with the "hot" stocks first, and going down the list to see whether the return on each is adequate.

In either case, replacing the stocks becomes a simple matter of ranking your stocks by Quality and, starting from the top of the list, finding those that are selling at the right price and picking the one that suits your diversification needs.

Research

You'll have more convenient access to the Web to do your research, being able to click on a variety of URLs that provide you with the information you seek, and avoiding the inconvenience of having to enter the ticker symbols and click extra times to access the company-specific pages and sites.

All of these features are now available to those using the desktop versions of Take $tock. But, they are not yet available in the online version. They will, however, be coming online over the coming weeks and months and will be made available to members who subscribe to premium privileges.

On into the future

It's all up to you! ICLUBcentral has adopted a policy that will make Take $tock not only user-friendly but, in many respects, user-designed.

You will be able to send in your suggestions and often see some of the improvements that have merit and popular appeal appear almost overnight.

One of the advantages of an on-line product is that such enhancements are easier to accomplish when one must do them only once to affect the experience of all users.

As you can well imagine, the challenges presented in creating, testing, and distributing patches—as easy as the process has become in recent times—is very complex, compared with the process of upgrading a single instance of the program that's used by all.

Such things as a "Portfolio Sentry" to watch your portfolio for you and send you an e-mail when any of your holdings demands attention are in the cards. But, the further evolution of this program will be largely a product of your interest and contribution.

So, it's with a great deal of pleasure that I take this opportunity to welcome you all to the ranks of our “sidewalk software designers.” We hope you will get as much out of Take $tock as we intended thus far; and we look forward to you're getting even more out of it as you fashion it to your liking in the future.

Thanks for giving me the opportunity to offer a bit of a “stream of consciousness” rambling about my favorite program. I hope my enthusiasm for Take $tock has been contagious and you’ll look forward to the evolution of this software with the same excitement as do I.

Jonathan:

Thanks for asking. The explanation for the points that have been eliminated in the PE analysis on the back of the TSSW form will be found in the bulleted points explaining how we arrive at a reasonable, though conservative estimate of future PEs.

Quite simply, we are eliminating the top five or minority (if there are fewer than 10 data points) of each of the high and low PEs and averaging the lowest five or majority. Simply explained: if we have ten high PEs, we eliminate the highest five and average the lowest five. If there are but nine points, we eliminate the top four and average the lowest five. For eight points, it's four and four, etc.. If there are only five points in all, we eliminate the top two and average the lowest three.

We do the same for the low PEs, averaging the lowest half or majority of those as well, to arrive at our estimated low PE.

Hence there are at least ten points eliminated when we have ten years of data.

Thanks, Gene! It's amazing how many folks miss the depth of the program and feel that it's more trivial than the others.

I once wrote an editorial on our [Inve$tWare] Web site that used the analogy of the fella who had purchased a chain saw from Sears, having seen an ad that claimed that he would be able to cut a full cord of wood in an hour.

The guy came back to the store the next day with the saw in his hands and, thrusting it into the salesman's hands, started cussing him out and complaining that he had barely been able to cut three logs with the danged thing!

The salesman endured a few moments of the diatribe and said, "Just a minute, sir, let me see if I can figure out why you had so much trouble." And, with that, he gave the cable a yank whereupon the saw started up with a roar."

After a moment, the startled customer gasped, "...What's that?"

I'm sure the message is pretty clear: unless you take some time to learn about your tools, you can't very well expect to get the most out of them.

Patrick:

Thanks for your interest.

1.) Of course, Take $tock can be a sort of screening tool and many make it a point to run a candidate through Take $tock before doing a more detailed study of the company. They do it to a) see if it's worthy of consideration, and b) to see how the judgment the program applies might compare to their own when they subsequently do their study in one of the other analysis programs.

We would like folks to know, of course, that they can do most of the things they would otherwise do right within the advanced version of Take $tock (desktop version); but, if they don't have that, they can easily perform the screening function right here on StockCentral using the online novice version.

2) All of the mechanics of the software are the same, basically. The data is massaged the same way, the same regression analysis is used to ascertain the growth rates, etc. However, it's up to you to provide the judgment decisions with no defaults in the other software. You're on your own when it comes to eliminating the outliers and estimating future growth and multiples, etc.

The same, basic calculations are made with the modified data; but TK5 does not provide a buy price. (Oops! Yes it does. You have a "rogue key" - [Alt+b] which will give it to you. But it's not a part of the mainstream, supported program.)

Ruth Ann:

Thanks. That quotation is the clearest description of my attitude I've seen for a long time; but I did not come up with it myself. I read it somewhere but don't know to whom to attribute it. I believe the person who used it before me quoted it with no attribution as well. So far as I'm concerned, you're welcome to quote it, use it, ...and live by it!

Gene, see my comments to Jonathan, above, for a more detailed explanation of the process.

As for the rationale for doing that, I'm sure you've been taught to eliminate outliers by inpection and not as a mathematical process—outliers being any data that you can see would be irrelevant.

With respect to the process I describe here, the term "outliers" would be a misnomer because these data are not out of line at all, nor are they irrelevant. They are the highest numbers in a series from which we want to estimate within the lowest portion in order to be conservative.

It's a fine line, to be sure. But, the outliers are a part of the process in determining the "signature PE," because we want to eliminate the data that is irrelevant, which the obvious anomalies would be. Most often, those will be PEs that are skewed on the high side because the earnings which were reported well after the end of the fiscal year closed, were unexpectedly low and could not have affected the price investors paid for the stock prior to the end of that year.

Those are permanent eliminations and should remain eliminated in the calculation of the signature PE and, thus, the Historical Value Ratio (HVR) or Relative Value (RV).

The mechanics of estimating the future PEs is merely a matter of finding a mechanical way to estimate them consistently on the low side of the historical data.

I hope this helps and doesn't confuse.

Stan:

In reviewing my responses, I can see that I was more hasty than I should have been in surmising what you were getting at. My bad!

Yes, the program does make an adjustment for company size in that, when determining whether or not the growth rate is acceptable, the qualifying rate must be above the rate calculated based on the company's annual revenues. A company that generates relatively lower sales will not have an acceptable growth rate under the same circumstances as will a company with higher annual revenues.

As to whether a company with a growth rate below 14.9 can have a QI above 6.7, it cannot. But, you can still take a look at a company with a QI below 6.7 but for which a buy price is calculated and the current price places it in the money; i.e., the "buy price" is in the green. You'll probably find that such a company is either generating sufficient yield to qualify it for the return, or it is selling at a low enough price to make up the difference in PE expansion. It is especially important, under those circumstances, to select companies whose "mood" is green or even red. If the mood is red and the buy price is green, and the Quality is yellow, you may well find the circumstances will justify the higher price because, as you point out, a slower-growing company may be paying good enough dividends to make up for the slower growth.

I'm confused by the on-line version of Take Stock.  Its methodology, I thought, was to use either its Forecast EPS growth rate converted to dollars or its Business Model EPS in dollars, whichever is lower, to calculate its Forecast High Price. 

That is what Ellis wrote: << And it selects the lower of the two estimates....It then calculates the forecast high price using the forecast earnings and High PE >>

However, that is not what I found: