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  • Stock Picking
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  • Stock Valuation

Use single stock valuation
Now, we'll do a stock valuation and see if what we pick will work in our chosen strategy. This will also help you get familiar with the ValuEngine stock valuation model and the criteria that it uses, Click on the valuation tab on the home page. The default ticker symbol the valuation section will use is INTC. To change this in the future, click in the text box at the top of the page and hit the GO button.
The first page shows you how attractive INTC is to various types of investors its model price and valuation relative to that price, a thumbnail sketch of the company, a chart of its recent price history, and a forecast of the probable price trend in the future. The shaded gold area is the "envelope" within which the price could fall, and the red line is the trend forecast by the ValuEngine Stock Forecast Model. Note that the gold area becomes wider as we look farther into the future. That's only natural as variables have more time to shift and become less predictable. Now let's look a little deeper into INTC.
Click "detailed evaluation" on the first page. Here we see the breakdown of the variables in the ValuEngine stock valuation model. Let's match the rankings of these variables with the specifications of the balanced strategy: The numbers listed here were those of 9/26/00. They have changed today, but we'll discuss it as of 9/26 for purposes of illustration:
    1. INTC is undervalued by 42.12% and its valuation rank is 91. That's OK.
    2. The 12 month return of 59.77% gives us a momentum rank of 83. OK on that.
    3.The Sharpe ratio rank of 98 is excellent. All we needed was 50 or better.
    4. The size rank of 100 puts it at the top of the scale so that's definitely OK.
Intel is definitely a buy according to the blueprint laid out by the Balanced Strategy. Now let's try another. Go back to page 1, delete INTC and type in ABS. That's Albertson's, one of the largest and most successful supermarket chains in the West. Again, we'll use 9/26/00 numbers for illustration. Let's see what we have.
Uh oh. This doesn't look very good, does it? It's undervalued by over 49% all right, but that alone is not enough reason to buy a stock. In fact relying on any one variable is very dangerous. To use correctly, we must look at the whole picture. What's going on with ABS? Let's look at the details. The valuation rank is good at 94. The size rank is all right too at 96. but the other variables tell a different story. The Sharpe ratio and momentum ranks are way down. Despite being a quality company, ABS is not a stock for our strategy. This appears to be a company with a good history but that is working its way through some problems. We also note that the volume in the stock is light. The market appears to have lost interest in it for the time being. We'll pass on ABS.
Once again, we can't emphasize too strongly that you use ALL the information provided in ValuEngine. com as you make your choices for your portfolio. Each piece of data is there for a reason and it all comes together to produce a three dimensional view of each stock's situation.
Before we leave this page, take a look at the box on the lower left under Model Price Calculations. Here you can insert your own values for both EPS and the yield on the 30 year bond and come up with a new model price. Why do this? We call this box the "what if" box. Using it, you can see what would happen to the fair value of a stock if the bond yield moved up or down, or if EPS projections changed. The fair value you see is, of course, predicated on today's information, but it doesn't hurt to anticipate an interest rate change or an EPS change. Indeed, events could be occurring even as you read this that could produce changes. And, of course it gives you a chance to see the mechanics of derivation of the fair value in action.
In our next session, we'll look at the ValuEngine screening function and how it relates to your portfolio.

Alan Smith is a financial journalist and businessman with over 25 years of hands-on experience in both equity and credit markets.His articles have appeared in several western newspapers and in online mortgage information sources. He lives in Stamford.
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