1. Mike Torbenson Puget Sound Chapter
172 Buy and Sell with PERT
Mike Torbenson
Puget Sound Chapter

2. Disclaimer
The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or its Puget Sound Chapter (“PSC”) or volunteers. The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or PSC. Investors should conduct their own review and analysis of any company of interest before making an investment decision.
Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations. 2

3. Portfolio Management Objectives
Use the knowledge, skills and resources needed to actively manage a portfolio of quality stocks to achieve a 5-year annualized return of 15% or better

4. Under-valued Today
Over-valued Today
Value

5. Value
Purpose – Find potential buys and sells demonstrating appropriate potential total return, P/E expansion and risk.
Resources
PERT

6. Buy Guidance Under-valued today (buy?)
Buy when the stock is historically underpriced, ideally at or near the bottom of your estimated business cycle (4B P/E)
Manage risk by insuring the projected Relative Value and PEG are below 5-year averages and U/D is acceptable (> 3)
Buy only when potential return improves your portfolio
Goal is to buy low enough to achieve the desired P/E expansion needed to realize returns at or above portfolio goals

7. Qualified to Buy Low?
Toolkit PERT - Right side provides valuation ratios
% Total Return shows potential reward
U/D and RV manage downside risk
PEG manages growth risk
Proj P/E vs. Proj 5yr High and Low manage P/E expansion potential

8. Qualified to Buy Low?
Improve the portfolio by buying stocks with a potential total return greater than the current portfolio average
Potential % Total Return > Average % Portfolio Total Return
For example …

9. 1. Qualified to Buy Low? Toolkit Portfolio Report Card provides …
[Potential %] Total Return
Upside/Downside Ratio
Use Total Return as first buy criterion

10. 1. Qualified to Buy Low?
Put all your stocks in a Toolkit portfolio

11. 1. Qualified to Buy Low?
Sort your PERT report by Total Return…(high to low)

12. 1. Qualified to Buy Low?
Draw a line showing your portfolio average total return (found on the report card)…
>14.3%
<14.3%

13. 1. Qualified to Buy Low?
All the companies above the line pass the potential reward screen…
>14.3%
<14.3%

14. 1. Qualified to Buy Low?
We can limit our view to only the companies “above the line”

15. 1. Qualified to Buy Low?
Only using the “top” stocks let’s test for DOWNSIDE RISK …
U/D > 3

16. 1. Qualified to Buy Low? 3 pass screen
Only using the “top” stocks let’s test for DOWNSIDE RISK …
U/D > 3
2 don’t pass

17. 1. Qualified to Buy Low?
Only using the “top” stocks let’s test for DOWNSIDE RISK …
U/D > 3 and
RV < 100

18. 1. Qualified to Buy Low? DOWNSIDE RISK … U/D > 3 and RV < 100
3 pass screen

19. 1. Qualified to Buy Low?
Only using the remaining companies let’s screen for GROWTH RISK
PEG < 100

20. 1. Qualified to Buy Low? 2 pass screen
Only using the remaining companies let’s test for GROWTH RISK
PEG < 100
1 doesn’t pass

21. 1. Qualified to Buy Low?
Last check for P/E EXPANSION
P/E near Low P/E

22. 1. Qualified to Buy Low? Last check for P/E EXPANSION 2 pass screen
P/E near Low P/E
2 pass screen

23. 1. Qualified to Buy Low? BUY GUIDANCE U/D > 3 and RV < 100 and
PEG < 100 and
P/E near Low P/E
BUY AMED & GILD

24. Sell Guidance Over-valued today (sell?)
Sell when the stock is historically overpriced, ideally at or near the top of your estimated business cycle (4A P/E)
Manage risk by insuring the projected Relative Value and PEG are above 5-year averages and U/D is less than 3
Sell when the potential return is less than the growth rate (typically < 10%)
Goal is to sell high enough to achieve the desired P/E expansion needed to realize returns at or above portfolio goals

25. 2. Qualified to Sell High?
Draw a line showing your portfolio average total return (found on the report card)…
>14.3%
<14.3%

26. 2. Qualified to Sell High?
>14.3%
All the companies BELOW the line pass the potential reward screen…
<14.3%

27. 2. Qualified to Sell High?
We can limit our view to only the companies “below the line”

28. 2. Qualified to Sell High? Manage for downside risk RV > 100 and
U/D < 3

29. 2. Qualified to Sell High?
Manage for growth risk
PEG > 150

30. 2. Qualified to Sell High?
Manage for P/E expansion
P/E near Hi P/E

31. 2. Qualified to Sell High? SELL GUIDANCE U/D < 3 and
RV > 100 and
PEG > 150 and
P/E near High P/E
SELL FAST, C, HOG

32. Result
Buy $50.04 on 5/17/2010
Lost 50%

33. Result
Buy $19.00 on 5/17/2010
+195%

34. Result
Sell $27 on 5/17/2010
+23%
-17%

35. Result
Sell $44 on 5/17/2010
+16%
-5%
-16%

36. Result
Sell $33 on 5/17/2010
+12%
-33%

37. Summary What is our strategy to optimize portfolio return?
Buy near the bottom; Sell near the top of the business cycle
What are we managing for buy and sell?
Total Return, P/E expansion and risk of loss and growth

38. Practice
Select a portfolio and determine which stocks are potential buys and sells using PERT

39. Questions?