PERT-A: The First Step In Portfolio Management Cincinnati Model Investment Club Educational Segment 2004 January 17 James Hurt

NAIC Investment Philosophy 1.Invest Regularly. 2.Invest in well managed, growing companies. 3.Invest for the long term (Five years). 4.Diversify by size, industry, and sector.

Long Term is Not “Buy and Forget” ● As long as the company continues to be: – well managed and – is growing at least as fast as your expectations ● Then you do not sell. ● If the price is low, you may purchase more stock.

What do we need to watch? ● What needs watching in order to ensure that a company continues to be well managed and continues to grow? – Pre-tax profit margin (Row 2A) for management – Sales and EPS for growth

PERT-A ● PERT-A monitors one company: – Growth in sales – Growth in EPS – Pre-Tax Profit Margin ● PERT-A Graph shows us these results in a graph.

SSG When We Purchased OCA Projected Growth rates of 10%. Pre-Tax Profit Margins over 20%.

Quarterly Update to PERT-A 1. Enter EPS, Pre-Tax Profit, and Sales for this Quarter 2. Compute Q over Q growth rates and Quarterly Pre-Tax Profit Margin. 3. Add up TTM (Last Four Quarters) EPS, Pre-Tax Profit, and Sales 4. Compute TTM Pre-Tax Profit Margin and growth rates

Questions to Ask ● Are both Q over Q and TTM Pre-Tax Profit Margins as high as on the SSG? ● Are both Q over Q and TTM growth in sales at least as high as projected on the SSG? ● Are both Q over Q and TTM growth in EPS at least as high as projected on the SSG? ● If the answers to any of these questions is No, then investigate why not! ● Where do we think the company is going in the next FIVE years?

PERT-A Graph for OCA 1. Pre-Tax Profit Margin (Black line, %) is below values on SSG! Pre- Tax Profit Margin is still trending down! Why? 2. Growth in Sales (Green line, s) is MUCH below our projections of 10%! Growth has gone negative! Why? 3. Growth in EPS (Blue Line, e) is MUCH below our projections of 10%! Growth has gone negative! Why? 4. Where do we think OCA will be in FIVE years?

Reaction Time? ● Upon the first Quarter of poor performance, investigate as to why and decide how long you will give the company to recover. ● By the third or fourth consecutive quarter of poor performance, decide how brave you are. – This typically is a good time to sell as the price for many such companies suffers greatly with the fourth or fifth consecutive quarter of poor performance.

Conclusion ● Once you invest in a company, start a PERT- A for that company. ● Update the data on the PERT-A when each quarter's results are announced. ● Do not sell immediately when you first see signs of poor performance. Instead: – Investigate the reasons and decide how long. – Get more critical of the company with each quarter of continued poor performance.