Step 1) Analysts’ Ratings & Forecasts
Sentiment Index _____
Add one point if the Sentiment Index score is within the range of minus two to plus two. Subtract one point if the SI score is less than minus 2 or greater than 8.
Earnings Growth _____
Subtract one point if the forecast year-over-year earnings growth is less than 15%.
Earnings Forecast Trend
Disqualify candidate if the current or next fiscal year EPS forecast decreased three cents or more during the last 90 days.
Earnings Surprise History
Disqualify candidate if two of the last four earnings surprises were negative.
Step 2) Valuation
Implied Growth _____
Add one point if the implied growth is less than next fiscal year’s forecast year-over-year percentage earnings growth. Subtract one point if the implied growth exceeds 40%.
Step 3) Target Price
Current price vs. target buy price _____
Add one point if the current price is below the high target buy price. Subtract one point if the current price exceeds the low target sell price.
Step 4) Industry Analysis
Industry Growth _____
Add one point if the industry sales growth rate exceeds 20%. Subtract one point if the industry growth rate is less than 15%.
Industry Concentration _____
Add one point if the industry has less than four major competitors.
Step 5) Business Plan
Business Plan Score _____
Record business plan score.
Step 6) Management Quality
Key Executive & Board Quality _____
Add one point if you rated the key exec & board quality very good or excellent.
Clean Accounting/EPS Growth Stability _____
Subtract one point if the non-recurring charges percentage of sales averaged 3% or more over the past five years, or if you judged the earnings growth stability as poor.
Stock Ownership (not included in score)
Step 7) Financial Health
Financial health is a pass or fail test. Disqualify candidates that fail the appropriate test.
Step 8) Profitability
Sales Growth _____
Add one point if recent historical year-over-year sales growth exceeds 25%. Subtract one point if recent historical year-over-year sales growth is less than 15%.
Disqualify candidate if operating margins are deteriorating.
Return on Assets _____
Add one point if the recent annual ROA averaged higher than 14%. Subtract one point if the recent annual ROA averaged less than 6%
Operating Cash Flow
Disqualify candidate if its operating cash flow was negative in two of its last three fiscal years.
Step 9) Red Flags
Disqualify candidate if any red flags are detected.
Yellow Flags _____
Subtract one point for each yellow flag detected.
Step 10) Ownership
Disqualify candidate if less than 30% institutional ownership.
Total Insider Ownership _____
Subtract one point if insider ownership exceeds 55% of shares outstanding
Step 11) Price Chart
Share Price vs. Moving Average _____
Subtract one point if the share price is more than 50% above its 200-day MA
Total Score _____
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