Selecting the Low PriceSeptember 2010

Presented by Jackie KoskiAssistant Director, OKI Tri-State ChapterVP of Education, Cincinnati Model Investment Club

Portions of this presentation were originally created by: Gretchen Hurt, Dr. James Hurt and William Horton

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Disclaimer

The information in this presentation is for educational purposes only and

is not intended to be a recommendation to purchase or sell any of the

stocks, mutual funds, or other securities that may be referenced. The

securities of companies referenced or featured in the seminar

materials are for illustrative purposes only and are not to be

considered endorsed or recommended for purchase or sale by

BetterInvesting™ National Association of Investors Corporation (“BI”)

or the National Investors Association, or the OKI Chapter Board. The

views expressed are those of the instructors and do not necessarily

represent those of BetterInvesting™, or OKI. Investors should

conduct their own review and analysis of any company of interest

before making an investment decision.

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Our Purpose is to learn how to determine the best price to pay for a good company in which the price of the stock has a real possibility of doubling in value in the next five years.

Our Process is to analyze the criteria which determines how we calculate and project the low price for different types of stocks.

Our Payoff will be improved performance for our club portfolio as a result of better projecting the low price for the stocks we buy.

Selecting the Low Price

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Types of Stocks

We will review how to select the the low price for the following types of stocks:

1. Growth

2. Cyclical

3. Income

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Page 2 of the SSG

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Evaluating Reward & Risk over the next 5 years

We begin our search for finding the low price by studying Section 4B on page 2 of the SSG: Evaluating Reward & Risk over the next 5 years.

Here are the sections we will cover:

• 4B(a) Low price for growth stocks (for Growth Stocks)

• 4B(b) Average low price for the last 5 years (for Cyclical Stocks)

• 4B(c) Recent severe low price (for Cyclical Stocks)

• 4B(d) Price dividend will support (for Income Stocks)

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A Growth company is one that is growing its sales and earnings faster than the general economy. What are some examples?

Low price for Growth Stocks- 4B(a)

Selected Low P/E X Estimated Low Earnings/Share = Projected low price

For most growth companies this will be a good projection for a low price for the next 5 years.

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Low Price for Cyclical Stocks- 4B(b/c)With Cyclical companies, the sales and earnings will follow the general economy.

What are some examples?

When we study cyclical companies we have to consider the economy. When times are good, their sales and earnings will be rising. When money is tight, their sales and earnings will slow down.

Since we have to account for the state of the economy, you would want to use either:

• Average 5-Year Low Price– Section 4B(b)

• Recent severe Low Price– Section 4B(c)

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An Income company is one that pays regular dividends, and offers a yield that may generate a large part of overall returns.

What are some examples?

Low Price for Income Stocks- 4B(d)

Present Dividend / High Yield = Price Dividend will support

Investors who buy stocks for income look for companies that have a very high % payout ratio. They want to know, “What is the lowest price this stock could fall to and still support the current dividend?”

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More about Yields on Income Stocks

Yield is the percentage rate of return paid on a stock in the form of dividends. As the price of a stock goes up, the yield goes down.

Example of a stock that pays a dividend of $1.00:

1.If you bought a stock for $10 a share and that stock paid a dividend of $1 a share, your yield would be 10% ($1 divided by $10)

2.If you bought more shares of the same stock for $15 a share, your dividend would still be the same $1, but your yield would now be 6.7% ($1 divided by $15)

What yield should a stock have to be considered an Income Stock?

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Takeaway for Club Members

• Review the projected low price for the stocks you are watching for the club.

• Be sure to consider this analysis for the stocks you watch when making your recommendation each month and for any new stock presentations.

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Discussion/Questions from partners and guests

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