Page 5 - Evaluation - The Studies
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Individual Studies -
The four Studies
central to Equity Evaluator - the Stock Price, the Sales, the Cash
Flow, and the Earnings Studies, will now be reviewed individually. Four
general subjects will be covered as each is discussed:
The Stock Price Study
The price of
any individual Stock, and the levels of the Stock Markets in general , are
dictated by the many market participants expressing their opinions with
their buy and sells orders. The Stock Market's have a remarkably accurate record of predicting
economic conditions six to nine months ahead. When thousands of individuals
willing to risk their hard earned money, believe a Company will prosper, they
are usually on to something. Multiply those thousands times the more than five thousand publicly
traded Stocks, and you've got a Bull market. Bull markets provide the capital
necessary to grow companies, creating jobs, that increase spending, that perpetuates
growth. Some people are having a time trying to shake the nervousness leftover
from the recent recession but keep in mind that the
normal business cycle experiences nine or ten years of growth, followed by an
average nine months of recession. This is one reason timing the markets is
futile.
A Stock's price is influenced by many
outside factors and especially by the condition of the economy. So when
evaluating a Stock Price for the long term, don't be surprised by a less than
stellar performance during times of recession. Good growth Stocks may sputter a
bit during bad times and that's when the other three Studies take precedence over
the Stock Price Study.
Stock Price Study Controls and Graph Elements
On the Stock
Price Study, each year of a Stock's high and low is represented by a vertical
blue bar. The dashed blue lines running between these bars is an approximation of
the standard deviation (STD). The parallel red dashed lines in the future
projection area are based on the average STD from the historic data. Standard
deviation is a statistical measurement indicating the likely range of values
that can reasonably be expected.
If the user entered 'Today's Stock
Price' during data entry, it will be represented as a white dot as
illustrated on the Stock Price
Study below. If the user entered the first period date on the
Data
Entry page, the white dot is located horizontally using today's date in relation to
the Company's fiscal year. If the first period was January of this year, or if the user did not
enter a first period date, the current Stock price is placed relative to this
calendar year.
Evaluating the Stock Price data
The Stock
Price Study as presented above is exactly as it appeared when initially opened.
Prior to the year 1999, the Trend Line runs very close to the mid range of all
the years plotted. The years 2000 and 2001 seem to counter balance one another,
while the last two years appear to bring the Trend Line back into sync. All in
all this original positioning appears to be a reasonable estimation of the Stock's price trend. Please note
that this is the exception, usually some adjustment is necessary in
arriving at a Trend Line position that looks acceptable. By leaving the Trend
Line location as is, the assumption is that the Stock of Johnson Controls
is very likely to continue growing at an annualized rate of 15.55% for the next five
years.
Today's Stock price is
located above the Trend Line. Does this mean that it is over priced? It could
be, but the goal of evaluation is finding a Stock that can be bought periodically for
an extended period of time, if the shares were being considered for a lump sum
purchase, especially with the intent of selling them anytime soon, being
hesitant due to today's price may be wise. Seeing how consideration is being
given to establishment of a
long term, dollar averaging account, the price looks to be within a prudent
range. This will be more obvious when we examine these two different investment
styles in the next section.
Future Projections
from the Stock Price Study Evaluation
Equity
Evaluator's Future Projection feature is common to all four Studies and will be
a part of each Study's discussion. The discussion below will cover all general aspects of Future Projections. In the other
Individual Study's, the Future Projections discussions will concentrate on aspects unique to that Study.
The
Future Projections feature displays the results of calculations based on
projected Stock Prices determined by the position of the Trend Line on the Study being
viewed. Other than the single Lump Sum purchase made at Today's Stock price, all the values displayed in the Future Projection feature are based on the
future share prices that will occur if the Share Prices continue on the trend arrived at through
evaluation of the Stock Price Study. In the upper right hand corner of the Study, click
the control that looks like a Crystal Ball with the '$' and '?' symbols in
it, this will open the Future Projections feature. The calculation results displayed are divided
between two investment styles - the 'Dollar Averaging Purchase Method', on the
top, and the 'Lump Sum Purchasing Method' on the bottom. When a dividend is paid
on the Stock, each of the two styles is subdivided according to how the future
dividends will be received, either in shares through a dividend investment
program, or in cash. Future dividend amounts are estimated using one of two
calculations, the first is based on the average historic growth of the dividend
being extrapolated into the future. The second is calculated by multiplying the
average historic yield times the projected Stock Prices. These are displayed adjacent to the
yellow dots on the Stock Price Study.
The results displayed under the
'Dollar Averaging ...' heading are based on the assumption that the same dollar
amount of shares will be purchased one time in each of the next five years at the projected
Stock Prices. Added to that
total will be any shares that are bought with dividends through dividend reinvestment. The
accumulated number of shares is then multiplied by the last projected
Stock Price to determine the value of the holdings at the end of the
future five year period. If dividends were taken in cash, this amount is added
to the share value total. The total amount invested is then subtracted from this end
value to determine total profit. Profit is then divided by the total sum
invested, and the result is displayed under the '5 Year' heading, in percentile
format. The values beneath the 'Annual' heading, when compounded are equal to
the adjacent '5 Year' values.
When calculating the projected
five year and annualized values using the 'Lump Sum Purchase Method', the only difference
is that only a single purchase is made at the beginning of the five
year period, using 'Today's Stock Price', rather
than using the first year projected Stock price. The only time any
additions are made to this one time share purchase is if dividends are paid. If the shares are held in a dividend
reinvestment program, any dividends are used to buy shares at the projected
share prices during each of the next five years. If the dividends are taken in
cash, the accumulated cash is added to the end value of the holdings. As with the Dollar
Average Method, the end value of the account is based on the final projected
share price. When a moderate or high Growth
Stock is being evaluated, the powers of compounding can be very impressive.
The
different purchase and dividend receipt methods are provided for the purpose of
comparison, the preferred method is using the Dollar Averaging method in
combination with a Dividend Reinvestment Program.