What are the SSG and PERT-A?

Would you like to know what is a good growth company to invest in? Are you puzzled by how to determine what is a reasonable price to pay?? How do you decide what’s acceptable in terms of Sales and Earnings growth, Price/Earnings (P/E) ratios, Pre-Tax Profit Margin (PTPM), and Return on Equity (ROE)???

This blog is about analyzing individual growth stocks using fundamental analysis. I use data about each company from S&P and my primary analytical tools are the SSG and PERT-A.

The SSG (Stock Selection Guide) is the primary method for analyzing stocks by the National Association of Investors Corp, sometimes called Better Investing. The SSG is a two-page form that tries to answer two, essential questions: (1) has this been a good quality growth company for the past 10 years; (2) is it currently selling at a reasonable price, one that will produce a 15% Total Return in the next 5 years with modest risk.

The SSG depends on judgment, hopefully good judgment that will lead to good results.

SSGers estimate future Sales and EPS growth, as well as project Hi and Lo P/Es, all for the next 5 years. Together, those facors produce a Forecast High and Low Price. To buy any stock, we seek an Upside/Downside (U/D) Ratio of 3 to 1, where the likehood of the reaching the High Price is three times greater than the Low Price. In addition, the Total Return (TR), including dividends, has to be at least 15% per year for the next 5 years on a compounded basis.

It is primarily these judgment issues I plan to discuss here. And, I will do this in the context of analyzing specific companies rather than abstract general rules.

The PERT-A (Portfolio Evaluation and Review Technique, Worksheet A) is a one-page form that displays fundamental, quarterly data for the past 10 years. PERT consists of several forms for portfolio monitoring, but I use the PERT-A worksheet to identify red flags or trends of individual stocks before they become disasters. The data is shown Quarter-by-Quarter (QbyQ) and Trailing Twelve Months (TTM).

My next two posts will analyze different aspects of Johnson and Johnson [JNJ]. Readers are invited to comment on my analyses and judgments, and also encouraged to submit their own SSGs on any growth company for discussion. Please use the following template:

____% = Future Sales Growth
____% = Future EPS Growth
______ = Projected Hi P/E
______ = Projected Lo P/E
$ ____ = Forecast High Price
$ ____ = Forecast Low Price
______ = U/D
____% = TR
____% = PTPM 5 yr ave & trend
____% = ROE 5 yr ave & trend

If you want to learn more about the SSG, etc, here are some links:

Better Investing (home page): http://www.betterinvesting.org

BiWiki (home page): http://biwiki.editme.com

BiWiki (SSG): http://biwiki.editme.com/TheSSG

Armin