ZETLOCK'S FINANCIAL PERFORMANCE ASSESSMENT

Analysis Process

Prequalify proces:

- Concentrate on the strongest candidates.

- Select a market cap of $100 M to $2 B.

- Find the valuation ratios using price / earnings or price / sales.
P/S of 2.5 and less are value stocks. P/S of 3 to 9 are growth stocks. P/S of 10 and over are momentum stocks.

- Select a float of 5 million to 30 million (+/-).

- Select a positive operating cash flow...

- Avoid companies with sales totaling less than $50 million during the most recent four quarters.

- Sales and earnings must be in an increasing mode. If the sales (MRQ) are less than the sales of the same quarter one year ago, disregard the stock as a growth stock.

- The 50 and 200 Day Moving Averages should be horizontally or moving upward.

The process:

Growth investing is about finding companies with exciting new products and services that are capable of growing at above average rates.

Step 1: Valuation:

Value a stock using GARP or PEG.

PEG = P/E / Forecast annual earnings per share growth

Let's say, the annual earnings estimates for EGY is 26.3 %. The forward P/E is 12.2. Is the stock undervalued or overvalued?

EGY is undervalued, since the stock is growing twice the P/E.

The PEG determines a stock's fair value. A fair value is a PEG = 1. In this instance, the P/E ratio is the same as the earnings growth rate.

Step 2: Target Price:

a) Forecast the target year's sales.
b) Estimate the profit margin of the target year.
c) Estimate net income for the target year. NI = sales x profit margin.
d) Estimate the OS of the target year.
e) Estimate the earnings per share of the target year. EPS = NI / OS
f ) Forecast the P/E range: Preview its historical trading range.
g) Find the target price. TP = P/E x EPS
High target forecast: Low P/E x EPS
Low target forecast: High P/E x EPS
Take the average of high and low targets.

Step 3: Growing Industry:

Understand your candidate's industry growth and concentration. You want companies in fragmented growing industries. By selecting a winning stock from a fragmented market, instead from a concentrated industry, you score the biggest profit. Then after selecting your stock, make sure to check the competitors.

Step 4: Business Plan:

Evaluate the company by the following factors: Brand identity, distributions, product price, number of customers, product cycle, product and market diversification, organic growth vs. acquisition growth.

Step 5: Management Quality:

Check the history of the management of the company. Find stocks with the following parameters:

A return on equity (ROE) of 15 percent or higher and a return on assets (ROA) of 8 percent or higher. Compare the company's recent performance to its own history, to find and increasing trend.

Step 6: Profitability:

- Sales growth: Sales and margins determine earnings, and earnings makes the share price go higher. Look for increasing sales.

- Margin Analysis: Deteriorating margins can have a negative outcome for the share price.

- Cash flow: The operating cash flow ( net cash from operating activities or OCF) should be greater than the net income, since depreciation and amortization are subtracted form net income. Accounts receivables and / or inventories increasing faster than sales are warning signals. Increasing recievables and inventories also reduces OCF. Slower growers, firms growing sales less than 30 percent annually, should be generating positive operating cash flow. Mature companies, growing sales between the 20 and 10 percent range, should be generating large operating cash flows.